3rd Circuit Rejects Citigroup Effort To Force SOX Whistleblower Claim Into Arbitration

The Sarbanes-Oxley Act of 2002 (“SOX”) provided employees of companies registered with or reporting to the SEC (and employees of certain contractors to such companies) with protection against retaliation for reporting violations of certain federal laws, including the securities laws, to the Securities and Exchange Commission (“SEC”), Congress, or the employer. In 2010, Congress strengthened this protection by banning employment contracts that require SOX retaliation claims to be presented to an arbitrator, rather than filed in court. On August 6, 2019, the Third Circuit reaffirmed this important protection, holding that Citigroup cannot keep a whistleblower plaintiff out of court by relying on an arbitration agreement entered prior to the 2010 amendment. Jaludi v. Citigroup, No. 16-3577 (3rd Cir. August 6, 2019).

This case arose after a long-time Citigroup employee, Abdul Jaludi, was terminated in 2013. Jaludi filed suit in federal court alleging that he was fired because he internally reported Citigroup’s mishandling of hundreds of “problem tickets,” including some that identified issues that should have been reported to the Comptroller of the Currency. Beginning in 2010, Jaludi reported these and other concerns to senior officials at Citigroup, including Citigroup’s CEO. Jaludi thereafter suffered demotions, transfers, and other adverse actions, and he was fired in 2013.

Jaludi filed suit in federal court, alleging that he was terminated in violation of the SOX anti-retaliation provision, 18 U.S.C. § 1514A(a). Citigroup asked the court to dismiss Jaludi’s complaint on the ground that Citigroup’s 2009 Employee Handbook incorporated an arbitration agreement requiring that all employment-related disputes must be resolved by a private arbitrator, rather than in court. Prior to 2010, employers were free to impose such forced arbitration agreements with regard to SOX retaliation claims.

Jaludi opposed Citigroup’s motion, arguing that the 2009 version of Citigroup’s Employee Handbook and arbitration provision had been superseded by a 2011 version that did not require mandatory arbitration of his SOX claim. However, the federal trial court found that the 2009 arbitration agreement still governed Jaludi’s claims and dismissed Jaludi’s case. Jaludi then appealed the dismissal of his SOX claim to the Third Circuit. (The district court also dismissed a claim asserted by Jaludi under RICO, but that portion of the district court decision was not appealed.)

On August 6, 2019, the Third Circuit ruled unanimously in Jaludi’s favor, finding that the SOX retaliation claim could be resolved by the courts rather than through arbitration. Three factors were particularly important to the Third Circuit’s reasoning. First, the Court recognized that in 2010 Congress amended SOX to provide that the SOX anti-retaliation protections, including a whistleblower’s right to sue for retaliation, “may not be waived by an agreement, policy form, or condition of employment, including by a predispute arbitration agreement.” 18 U.S.C. § 1514A(e)(1). Congress further provided in 18 U.S.C. § 1514A(e)(2) that any agreement requiring arbitration of SOX retaliation claims was invalid: “No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.” The Third Circuit concluded that not only did the language of Citigroup's 2011 agreement not require arbitration, but also that such a requirement would have made the 2011 agreement invalid.

Second, the Third Circuit emphasized that Jaludi alleged that the retaliation occurred in 2013 when he was terminated, not when he suffered earlier adverse actions. Thus, the facts as alleged left no doubt that Jaludi’s claim arose (i) after the 2010 amendment to SOX barring forced arbitration, and (ii) after Citigroup had issued the 2011 version of its arbitration agreement (the version that did not require arbitration of SOX claims). Consequently, the Court had no trouble dismissing the trial court’s concerns regarding retroactive application of the 2010 SOX amendments.

Third, the Court concluded that Citigroup’s 2009 arbitration agreement was superseded by the 2011 arbitration agreement. The Court reasoned that although federal law determines whether a particular claim is subject to an existing arbitration agreement, state contract law determines whether there is an arbitration agreement exists. Further, the Court concluded that determining whether the 2009 agreement was superseded “is tantamount” to determining whether there is an existing agreement. Consequently, the Court found that identifying the governing agreement was a question of state law, which in this case recognized the subsequent (2011) agreement as in effect and determinative.

In sum, the Third Circuit concluded that Jaduli’s SOX claim was not subject to mandatory arbitration. Consequently, the Third Circuit reversed the district court’s order regarding Jaludi’s SOX claim and remanded for further proceedings.

The Jaludi decision is a valuable reminder that employers cannot use employment contracts, personnel policies, human resource handbooks, or arbitration agreements to force SOX retaliation claims out of court and into private arbitration. Any document issued since 2010 that attempts to impose such a barrier is invalid and unenforceable. Further, this case should be particularly helpful to whistleblowers and their counsel when employers attempt to rely on arbitration provisions issued prior to the 2010 SOX amendments. In the most such cases, the pre-2010 arbitration agreement is likely to have been superseded by documents that do not require arbitration of SOX claims, as was the situation in Jaludi.

However, whistleblowers heartened by the Jaludi decision must remember that it does not address arbitration of retaliation claims under the Dodd-Frank Act. Although it was Dodd-Frank that amended 18 U.S.C. § 1514A in 2010 to prohibit mandatory arbitration of SOX claims, that legislation lacked a similar provision regarding claims under Dodd-Frank itself. This was probably an inadvertent omission. Nevertheless, most courts that have addressed this issue have held that employers may still require employees to arbitrate claims under the Dodd-Frank anti-retaliation provisions. Indeed, in 2014 the Third Circuit itself held that 18 U.S.C. § 1514A(e) does not prevent employers from using mandatory arbitration agreements to force Dodd-Frank retaliation claims into arbitration. Khazin v. TD Ameritrade, 73 F.3d 488, 495 (3rd Cir. 2014).

Whistleblower Aid

The foregoing discussion is provided by Whistleblower Aid for general information purposes and is not intended to be, and should not be, taken as legal advice. For guidance on how to contact Whistleblower Aid, see