Financial Services Employment Law

News, Updates, and Insights for Financial Services Employers

Rule Changes Affect the Composition of Arbitration Panels in FINRA Disputes

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By Aime Dempsey and John F. Fullerton III

For financial services industry employers that participate in arbitrations administered by FINRA, the composition of the arbitration panel may have as much, or more, of an impact on the outcome of the dispute than the facts or the law. This is because FINRA arbitrators are not bound to follow case precedent or strictly apply principals of law and can render awards based on their own notions of “fairness” or “justice.” The important process of selecting an acceptable arbitration panel, however, can be opaque, as the information that FINRA provides about prospective arbitrators often gives limited assistance to employers trying to make informed selections. Further, recent changes to the rules affecting the composition of FINRA arbitration panels, particularly in customer cases, make it even less likely that the dispute will be heard by an experienced panel.

Current Selection Procedures

Traditionally, FINRA administrators provided all parties with three lists of arbitrators from which to select a panel: 10 “public” arbitrators, 10 “non-public” arbitrators, and 10 “public” arbitrators qualified to serve as the panel chairperson. The parties would strike a certain number of arbitrators from each list and rank the remaining arbitrators in order of preference. FINRA would then choose the highest-ranked arbitrator from the two lists to form the panel, which would consist of a “public” chairperson and two panelists, one “public” and the other “non-public.”

Pursuant to a rule change that took effect on February 1, 2011, and was modified on September 30, 2013, either side in a customer dispute can designate an “all-public” panel by striking all of the arbitrators on the “non-public” list. The change may negatively impact employers because “non-public” arbitrators generally have certain defined connections to, or experience in, the securities industry and can bring an insider’s perspective to bear on the dispute that may be useful in understanding an employer’s position. “Public” arbitrators, on the other hand, generally have limited knowledge of securities or financial services and are perceived as being more sympathetic to customers. In fact, according to Regulatory Notice 13-30, FINRA found that “customers were awarded damages significantly more often when an all-public panel decided their case.”

New Rules

On February 26, 2015, the SEC accepted proposed changes to FINRA rules 12100(p), 12100(u), 13100(p), and 13100(u),which set forth new definitions of “public” and “non-public” arbitrators in customer and industry disputes. The new definitions significantly limit the financial industry experience a person can have and still be permitted to serve as a “public” arbitrator. Further, the rules substantially limit the circumstances under which a “non-public” arbitrator can be reclassified as a “public” arbitrator. Under former rule 12100(p) of the Customer Code (and 13100(p) of the Industry Code), there was a “cooling off” period that prohibited an individual who was classified as a “non-public” arbitrator due to his or her affiliation with certain financial services entities from becoming eligible to serve as a “public” arbitrator until five years after he or she retired from the securities industry. Under the revised rules, the “cooling off” period is eliminated and the same individual may be permanently classified as “non-public” and, therefore, ineligible to serve as a “public” arbitrator.

Employers should be aware that these new rules will significantly reduce the number of individuals who can serve as “public” arbitrators and dramatically decrease the likelihood that an assigned “public” arbitrator will have the financial industry experience and understanding that employers in FINRA disputes often seek. For customer disputes in particular, the new rules, taken together with the “all-public” panel rule, greatly increase an employer’s chances of drawing a panel of inexperienced arbitrators with limited understanding of the industry. For industry disputes, where panels still must have one non-public member, the recent rule change further shifts the balance of the panel toward “public” arbitrators with no industry experience.

3 Key Points in OSHA’s Final Rule Governing Whistleblower Retaliation Complaints Under Section 806 of the Sarbanes-Oxley Act

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On March 5, 2015, the Occupational Health and Safety Administration (“OSHA”) issued its “Final Rule” establishing the procedures for handling retaliation complaints brought under Section 806 of the Sarbanes-Oxley Act (“SOX”). Section 806, as amended by Dodd-Frank, protects employees of publicly traded companies, as well as employees of contractors, subcontractors, and agents of publicly traded companies, from being retaliated against for reporting fraudulent activity or other violations of SEC rules and regulations. The Final Rule addresses the comments that OSHA received in response to its interim rule, issued in 2011, and sets forth the final procedures for retaliation claims under SOX, including the procedures and timeframes applicable to employee complaints and OSHA investigations. While the Final Rule does not differ substantively from the interim rule, it crystalizes the SOX whistleblower complaint procedures and reflects an increasingly whistleblower-friendly landscape.

Verbal Complaints

One of the most important aspects of the Final Rule—and a subject of considerable concern to commenters—is its adherence to the interim rule provision permitting verbal SOX complaints. Prior to the interim rule, complaints had to be in writing and include a full statement of the alleged wrongful acts or omissions. The interim rule eliminated this requirement and permitted complaints to be made verbally and reduced to writing by an OSHA investigator. Commenters argued that this procedure transforms the investigator into an advocate for the complainant, lacks any standard for the investigator’s written complaint, and increases the risk that the complainant may attempt to change his or her allegations by contending that the claims were not accurately recorded by the investigator. OSHA rejected these arguments, concluding that allowing verbal complaints is “[c]onsistent with OSHA’s procedural rules under other whistleblower statues.”

Preliminary Reinstatement

The Final Rule also adopted the interim rule’s provision on preliminary reinstatement, i.e., reinstating the complainant to his or her former position during the pendency of a dispute. Commenters had suggested—without success—that OSHA include a provision that preliminary reinstatement should not be granted if the complainant is a security risk and that OSHA articulate specific circumstances under which preliminary reinstatement is appropriate. Instead, the Final Rule provides that, if there is a reasonable basis to believe that a SOX violation has occurred, a preliminary order will be issued that provides the relief necessary to make the complainant whole, including reinstatement to the position that he or she would have had but for the retaliation.

Moreover, as an alternative to actual reinstatement, the Final Rule permits OSHA to order preliminary “economic reinstatement” during the pendency of a dispute, which allows the complainant to collect his or her same pay and benefits without having to return to work. Significantly, OSHA intentionally omitted any mechanism for employers to recover the costs of preliminary economic reinstatement if the complainant is ultimately unsuccessful on his or her claim.

Notice to Respondents

One helpful development for employers is OSHA’s decision to clarify in its Final Rule the notice that respondents must receive when a complaint is filed, as well as respondents’ right to receive the information that the complainant submits to OSHA during an investigation. The Final Rule expressly provides that, when a complaint is filed, OSHA must notify the respondent of the filing of the complaint, the allegations made, and the substance of the supporting evidence. The Final Rule also notes that OSHA “generally provides the respondent with a copy of its memorandum memorializing the complaint” and that the respondent can “request that OSHA clarify the allegations in the complaint if necessary.” In addition, the Final Rule makes clear that, during an investigation, OSHA will ensure that each party receives a copy of all of the other parties’ submissions to OSHA and is given an adequate opportunity to respond to those submissions.

In the light of these generally supportive and encouraging procedures for whistleblowers, it is more important than ever for employers to correctly identify, investigate thoroughly, and take appropriate steps to address internal whistleblower complaints before they become costly, full-blown whistleblower disputes.

April 22 Complimentary Webinar Concerning EEOC Wellness Regulations

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To register for this complimentary webinar, please click here.

I’d like to recommend an upcoming complimentary webinar, “EEOC Wellness Regulations – What Do They Mean for Employer-Sponsored Programs? (April 22, 2015, 12:00 p.m. EDT) presented by my Epstein Becker Green colleagues Frank C. Morris, Jr. and Adam C. Solander.

Below is a description of the webinar:

On April 16, 2015, the Equal Employment Opportunity Commission (“EEOC”) released its long-awaited proposed regulations governing employer-provided wellness programs under the American’s with Disabilities Act (“ADA”). Although the EEOC had not previously issued regulations governing wellness programs, the EEOC has filed a series of lawsuits against employers alleging that their wellness programs violated the ADA. Additionally, the EEOC has issued a number of public statements, which have concerned employers, indicating that the EEOC’s regulation of wellness programs would conflict with the regulations governing wellness programs under the Affordable Care Act (“ACA”) and jeopardize the programs currently offered to employees.

During this webinar, Epstein Becker Green attorneys will:

  • summarize the EEOC’s recently released proposed regulations
  • discuss where the EEOC’s proposed regulations are inconsistent with the rules currently in place under the ACA and the implications of the rules on wellness programs
  • examine the requests for comments issued by the EEOC and how its proposed regulations may change in the future
  • provide an analysis of what employers should still be concerned about and the implications of the proposed regulations on the EEOC’s lawsuits against employers

Who Should Attend:

  • Employers that offer, or are considering offering, wellness programs
  • Wellness providers, insurers, and administrators

To register for this complimentary webinar, please click here.

EEOC Issues Proposed Wellness Program Amendments to ADA Regulations

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My colleagues Frank C. Morris, Jr., Adam C. Solander, and August Emil Huelle co-authored a Health Care and Life Sciences Client Alert concerning the EEOC’s proposed amendments to its ADA regulations and it is a topic of interest to many of our readers.

Following is an excerpt:

On April 16, 2015, the Equal Employment Opportunity Commission (“EEOC”) released its highly anticipated proposed regulations (to be published in the Federal Register on April 20, 2015, for notice and comment) setting forth the EEOC’s interpretation of the term “voluntary” as to the disability-related inquiries and medical examination provisions of the American with Disabilities Act (“ADA”). Under the ADA, employers are generally barred from making disability-related inquiries to employees or requiring employees to undergo medical examinations. There is an exception to this prohibition, however, for disability-related inquiries and medical examinations that are “voluntary.”

Click here to read the full Health Care and Life Sciences Client Alert.

Chicago District Judge Issues Primer On Declaratory Judgment Actions Regarding The Enforceability Of Non-Compete Agreements

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My colleague Peter Steinmeyer published a post on the Trade Secrets and Noncompete Blog that will be of interest to many of our readers: “Chicago District Judge Issues Primer On Declaratory Judgment Actions Regarding The Enforceability Of Non-Compete Agreements.”

Following is an excerpt:

Last week, Chicago district judge Charles Kocoras dismissed a declaratory judgment action challenging the enforceability of a facially broad form non-compete agreement signed by all employees of the Jimmy John’s sandwich chain.  Judge Kocoras held that the dispute was not judiciable because the plaintiffs lacked the requisite “reasonable apprehension” of litigation against them and because they failed to allege that they had actually engaged in conduct that would violate the non-compete.  (Judge Kocoras’ memorandum opinion also addressed significant joint employer, franchisor/franchisee, and FLSA issues which are beyond the scope of this blog.)

As an initial matter, Judge Kocoras noted that “[t]he Seventh Circuit has not addressed whether a claim for declaratory relief is judiciable in the context of non-compete provisions.”  Nevertheless, borrowing from an analogous Seventh Circuit decision involving a patent infringement/declaratory judgment action, Judge Kocoras held that in order to establish the existence of an actual case or controversy sufficient to support a claim for declaratory relief in the non-compete context, the plaintiffs must clear two threshold procedural hurdles.  “First, the Plaintiffs must have a ‘reasonable apprehension’ that the Defendants are going to file a lawsuit against them for violating the Non-Competition Agreement. Second, the Plaintiffs must allege that they were preparing to engage or had engaged in conduct that would compete with the Defendants.”

Read the full blog post here.

FMLA Same-Sex Spouse Final Rule Enjoined in Some States

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One day before the U.S. Department of Labor’s Family & Medical Leave Act (“FMLA”) same-sex spouse final rule took effect on March 27, 2015, the U.S. District Court for the Northern District of Texas ordered a preliminary injunction in Texas v. U.S., staying the application of the Final Rule for the states of Texas, Arkansas, Louisiana, and Nebraska.  This ruling directly impacts employers within the financial industry who are located or have employees living in these four states.

Background

In United States v. Windsor, the U.S. Supreme Court struck down Section 3 of the Defense of Marriage Act (“DOMA”) as unconstitutional, finding that Congress did not have the authority to limit a state’s definition of “marriage” to “only a legal union between one man and one woman as husband and wife.”  Significantly, the Windsor decision left intact Section 2 of DOMA (the “Full Faith and Credit Statute”), which provides that no state is required to recognize same-sex marriages from other states.  Further to the President’s directive to implement the Windsor decision in all relevant federal statutes, in June 2014, the DOL proposed rulemaking to update the regulatory definition of spouse under the FMLA. The Final Rule is the result of that endeavor.

As we previously reported, the Final Rule adopts the “place of celebration” rule, thus amending prior regulations which followed the “place of residence” rule to define “spouse.”  For purposes of the FMLA, the place of residence rule determines spousal status under the laws where the couple resides, notwithstanding a valid out-of-state marriage license.   The place of celebration rule, on the other hand, determines spousal status by the jurisdiction in which the couple was married, thus expanding the availability of FMLA leave to more employees seeking leave to care for a same-sex spouse.

The Court’s Decision

Plaintiff States Texas, Arkansas, Louisiana, and Nebraska sued, arguing the DOL exceeded its authority by promulgating a Final Rule that requires them to violate Section 2 of the DOMA and their respective state laws prohibiting the recognition of same-sex marriages from other jurisdictions.  The Texas court ordered the extraordinary remedy of a preliminary injunction to stay the Final Rule pending a full determination of the issue on the merits.

The court first found that the Plaintiff States are likely to succeed on at least one of their claims, which assert that the Final Rule improperly conflicts with (1) the FMLA, which defines “spouse” as “a husband or wife, as the case may be” and which the court found was meant “to give marriage its traditional, complementarian meaning”; (2) the Full Faith and Credit Statute; and/or (3) state laws regarding marriage, which may be preempted by the Final Rule only if Congress intended to preempt the states’ definitions of marriage.

The court then held that the Final Rule would cause Plaintiff States to suffer irreparable harm because, for example, the Final Rule requires Texas agencies to recognize out-of-state same-sex marriages as valid in violation of the Texas Family Code.

Lastly, although finding the threatened injury to both parties to be serious, the court decided that the public interest weighs in favor of a preliminary injunction against the DOL.  The court found in favor of upholding “the stability and consistency of the law” so as to permit a detailed and in-depth examination of the merits.  Additionally, the court pointed out that the injunction does not prohibit employers from granting leave to those who request leave to care for a loved one, but reasoned that a preliminary injunction is required to prevent the DOL “from mandating enforcement of its Final Rule against the states” and to protect the states’ laws from federal encroachment.

What This Means for Employers

Although the stay of the Final Rule is pending a full determination of the issue on the merits, the U.S. Supreme Court’s decision in Obergefell v. Hodges likely will expedite and shape the outcome of the Texas court’s final ruling.  In Obergefell, the Supreme Court will address whether a state is constitutionally compelled under the Fourteenth Amendment to recognize as valid a same-sex marriage lawfully licensed in another jurisdiction and to license same-sex marriages.  Oral arguments in Obergefell are scheduled for Tuesday, April 28, 2015, and a final ruling is expected in late June of this year.

Before the U.S. Supreme Court decides Obergefell, however, employers in Texas, Arkansas, Louisiana and Nebraska are advised to develop a compliant strategy for implementing the FMLA—a task that may be easier said than done.  Complicating the matter is a subsequent DOL filing in Texas v. U.S. where the DOL contends that the court’s order was not intended to preclude enforcement of the Final Rule against persons other than the named Plaintiff States, and thus applies only to the state governments of the states of Texas, Arkansas, Louisiana, and Nebraska.

While covered employers are free to provide an employee with non-FMLA unpaid or paid job-protected leave to care for their same-sex partner (or for other reasons), such leave will not exhaust the employee’s FMLA leave entitlement and the employee will remain entitled to FMLA leave for covered reasons.  We recommend that covered employers that are not located and do not have employees living in one of the Plaintiff States amend their FMLA-related documents and otherwise implement policies to comport with the Final Rule, as detailed in EBG’s Act Now Advisory, DOL Extends FMLA Leave to More Same-Sex Couples.  Covered employers who are located or have employees living in one of the Plaintiff States, however, should confer with legal counsel to evaluate the impact of Texas v. U.S. and react accordingly, which may depend on the geographical scope of operations.

SEC Finds That Employer’s Confidentiality Agreement Unlawfully Silences Whistleblowers in Violation of the Securities Exchange Act

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The SEC has become increasingly vigilant and aggressive about what employers say in their confidentiality agreements and the context in which they say it.  We previously cautioned employers when FINRA issued a Regulatory Notice cracking down on the use of confidentiality provisions that restrict employees from communicating with FINRA, the SEC, or any other self-regulatory organization or regulatory authority.  The SEC has now followed suit in In re KBR, Inc., (pdf) the SEC’s first-ever enforcement action against a company for using overly restrictive language in one of its confidentiality agreements.  (See, e.g., “SEC Declares Open Season on Employee Agreements,” (Law 360) (subscription required).

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) amended the Securities and Exchange Act to include the whistleblower incentives and protections set forth in Section 21F.  Rule 21F-17 prohibits employers from taking any action to “impede” an employee from communicating with the SEC about a possible securities law violation, including enforcing or threatening to enforce a confidentiality agreement.  The SEC’s Chief of the Office of the Whistleblower, Sean McKessy, previously indicated that his office would be analyzing and looking to bring enforcement actions with respect to severance agreements, confidentiality agreements, and employment agreements that violate Rule 21F-17(a), part of the implementing regulations of the Dodd-Frank whistleblower incentive award program (i.e., the “bounty” program).Whistle_jpg

Interestingly, the SEC selected a very specific and particular type of agreement for its first publicized action: not a severance, employment, or general confidentiality agreement or policy, but rather an agreement that KBR’s compliance investigators required witnesses interviewed in connection with certain internal investigations to sign, warning them that they could face discipline or be fired if they discussed the substance of the interview with outside parties without prior approval from KBR’s legal department.  KBR had begun using the form agreement at issue prior to the promulgation of Rule 21F-17.

Although there was no evidence that any KBR employees were ever actually prevented from communicating with the SEC pursuant to the confidentiality agreement, or that KBR took any actions to enforce the terms of the agreement, the SEC found that KBR’s use of the confidentiality agreement was unlawful because it improperly restricted employees from communicating with the SEC about the subject of an interview without KBR’s permission, and it undermined the purpose of Section 21F by discouraging employees from reporting possible SEC rules violations through threat of discipline.

KBR has agreed to pay the SEC $130,000 to settle the charges and voluntarily amended its confidentiality statement to expressly provide that it does not preclude employees from reporting possible violations of law or regulations to any government agency or from making other disclosures protected under federal whistleblower laws.  The amended provision also makes clear that employees do not need KBR’s authorization to make such disclosures.

This should serve as a warning that blanket confidentiality provisions that arguably forbid employees from communicating with regulatory agencies, or require pre-approval to do so, unless carefully drafted to comply with Rule 21F-17, may run afoul of federal law.  The SEC is fully committed to prosecuting such violations.  Employers should therefore carefully review, and revise as necessary, all confidentiality agreements they use – whether in stand-alone agreements, employment agreements, separation agreements, or other policies or standards of conduct – so that they too do not become the targets of SEC enforcement actions or other regulatory scrutiny.

NLRB Issues Critical Guidance On Employer Handbooks, Rules and Policies, Including “Approved” Language

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It is important for financial services employers not to lose sight of the fact that the National Labor Relations Act applies to their non-supervisory workforce even though most employees in the industry are not unionized.  This means that employee handbooks and similar policies must comport with the statute to the extent that they govern the non-supervisory workforce.  In connection with these considerations, my colleagues Steven M. Swirsky and Adam C. Abrahms published a Management Memo blog post that will be of interest to many of our readers: “NLRB Issues Critical Guidance on Employer Handbooks, Rules and Policies Including “Approved” Language.”

Following is an excerpt:

On March 18, 2015, NLRB General Counsel Richard F. Griffin, Jr. issued General Counsel Memorandum GC 15-04 containing extensive guidance as to the General Counsel’s views as to what types employer polices and rules, in handbooks and otherwise, will be considered by the NLRB investigators and regional offices to be lawful and which are likely to be found to unlawfully interfere with employees’ rights under the National Labor Relations Act (“NLRA” or the Act”).

This GC Memo is highly relevant to all employers in all industries that are under the jurisdiction of the National Labor Relations Board, regardless of whether they have union represented employees.

Because the Office of the General Counsel investigates unfair labor practice charges and the NLRB’s Regional Directors act on behalf of the General Counsel when they determine whether a charge has legal merit, the memo is meaningful to all employers and offers important guidance as to what language and policies are likely to be found to interfere with employees’ rights under the Act, and what type of language the NLRB will find does not interfere and may be lawfully maintained, so long as it is consistently and non-discriminatorily applied and enforced.

Read the full blog post here.

Five Health Care Developments Important to Employers

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Our colleagues Adam C. Solander, August Emil Huelle, Stuart M. Gerson, René Y. Quashie, Amy F. Lerman, Frank C. Morris, Jr., Kevin J. Ryan, and Griffin W. Mulcahey contributed to Epstein Becker Green’s recent issue of Take 5 newsletter.   In this special edition, we address important health care issues confronting  financial services employers:

  1. Potential ACA Changes Impacting Health Care Employers Under the New Congress
  2. Pending Supreme Court Cases Involving the Affordable Care Act
  3. Telemedicine and Employers: The New Frontier
  4. Wellness Programs Under EEOC Attack—What to Do Now
  5. Employer-Sponsored, On-Site Health Care

Read the full newsletter here.

Fourth Circuit Applies Four Year Statute of Limitations, Approves Award of Emotional Distress Damages in SOX Claim in Federal Court

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By John F. Fullerton III

On January 26, 2015, in an issue of first impression at the appellate level, the United States Court of Appeals for the Fourth Circuit held that a federal catch-all four year statute of limitations applies to whistleblower retaliation claims filed in federal court under Section 806 of the Sarbanes-Oxley Act (SOX), rather than a two-year statute of limitations applicable to cases alleging fraud under the securities laws.  In addition, the Fourth Circuit joined the Fifth and Tenth Circuits in holding that emotional distress damages are available to successful plaintiffs as part of the “make whole” remedy under Section 806. The case, Jones v. SouthPeak Interactive Corp. of Delaware [pdf] affirmed various challenges to a jury verdict in favor of the former CFO of a publicly-traded company who alleged that she was terminated shortly after raising concerns to the company’s audit committee about information in the company’s quarterly financial report.  The decision represents another example of broad rather than narrow interpretation of the statute, in ways favorable to whistleblowers who claim retaliation.

Under Section 806 of SOX, a whistleblower who seeks to assert a claim of retaliation has 180 days to file an administrative charge with OSHA.  If the Secretary of Labor has not issued a final decision within 180 days of that charge (and it rarely does), the complainant has the right to file the claim anew in federal court.  SOX is silent, however, with respect to how long the claimant can wait before filing in federal court.

There is a four year “catch-all” statute of limitations for federal statutes that create a cause of action but are silent with respect to time limits on filing. 28 U.S.C. § 1658(a). With the passage of the SOX, however, Congress added a separate statute of limitations for private causes of action alleging “fraud, deceit, manipulation or contrivance in contravention of a regulatory requirement concerning the securities laws” of two years after the discovery of the relevant facts constituting the violation, or five years after the violation (i.e., a statute of “repose”). 28 U.S.C. § 1658(b). Jones waited almost two years after notifying OSHA of her desire to terminate the administrative process before she filed her federal lawsuit, which was almost three years after her termination.

The Court held that her claim was timely filed, holding that because her federal lawsuit did not directly assert and require her to prove securities fraud, but rather, that she was wrongfully discharged in retaliation for allegedly reporting securities fraud, the four-year statute applied.  Only two district court cases had considered the issue previously, one applying the two-year and the other applying the four-year statute.

The Court also held, among other things, that emotional distress damages are available under Section 806.  The statute provides that compensatory damages for violations of the Act include reinstatement, back pay (with interest), and “compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.”  18 U.S.C. § 1514A(c)(2).  Rejecting the employer’s argument that the word “including” limited the specific types of special damages to the three mentioned in the statute, the Court held that “including” was not intended to be exclusive: it “sets a floor, not a ceiling.” The Court also noted that the statute defines retaliation to include actions in which the primary harm would be noneconomic, such as threats and harassment.  Thus, “non-pecuniary compensatory relief, such as emotional distress damages, may be the only remedy that would make the complainant whole.”  In so holding, the Court agreed with the Fifth and Tenth Circuits, as well as the Department of Labor itself, in interpreting Section 806 to permit damage awards for emotional distress.