Financial Services Employment Law News, Updates, and Insights for Financial Services Employers

Sarbanes-Oxley Whistleblower Complaint Dismissed for Failure to Enumerate Basis of Statutory Protection

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An in-house patent attorney who protested that his employer knowingly assigned a $50 million value to acquire patents alleged to be worthless could not link his discharge to whistleblower activity protected by the Sarbanes-Oxley Act. Affirming dismissal in Vodopia v. Koninklijke Philips Electronics, N.V., et al., the Second Circuit Court of Appeals observed that: (1) the complaint clearly centered on the plaintiff’s concern that the patents were invalid, not on the value the company assigned to them; and (2) the complaint did not allege that the $50 million value assigned to those patents was ever reported to the public or to shareholders.

Sarbanes-Oxley Section 806 makes it unlawful for an employer to take an unfavorable personnel action by discharging, or in any other manner discriminating against, an employee in the terms or conditions of employment because of any lawful act done by the employee to provide information or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of certain enumerated federal laws. 

In order to state a claim pursuant to Section 806, a plaintiff must allege the following four elements: (1) that he engaged in protected activity; (2) the employer knew of the protected activity; (3) he suffered an unfavorable personnel action; and (4) circumstances exist to suggest that the protected activity was a contributing factor in the unfavorable action.

In Vodopia, the plaintiff, John Vodopia, a former in-house patent attorney for Philips Electronics of North America, alleged that his employment was terminated after various attempts to report that several patents acquired by defendants from an outside company had been obtained through fraud on the United States Patent Office and thus were likely to be declared invalid. Affirming dismissal by summary order, the Second Circuit faulted Vodopia’s complaint on the first element of a Section 806 claim, failure to “directly and specifically” show that he engaged in protected activity relating to statutorily enumerated mail fraud, wire fraud, bank fraud, securities fraud, any rule or regulation of the Securities and Exchange Commission, or any provision of federal law relating to fraud against shareholders.

Following decisions in the First, Fourth, Fifth and Ninth Circuits, the Second Circuit held that the Section 806 listing of protected activities is exhaustive and “the employee’s communications must definitively and specifically relate to [one] of the listed categories of fraud or securities violations” to qualify as protected activity. Based on a reading of the complaint in the light most favorable to Vodopia, the court found that the “complaint fails to allege that Vodopia reasonably believed that he was reporting potential securities fraud as opposed to patent-related malfeasance”; the complaint merely alleged that Vodopia communicated information relating to alleged fraud on the Patent Office and the potential invalidity of certain patents as a result.

With its summary order in Vodopia, the Second Circuit applies Ashcroft v. Iqbal, noted in our May 27, 2010 posting, to a Sarbanes-Oxley whistleblower claim. The continued and expanded application of Iqbal illustrates the vitality of the principle that complaints will be subject to dismissal, as a threshold matter, for failure to plead sufficient facts to state a claim.