Section 806 of SOX prohibits publicly traded companies, as well as their subsidiaries, contractors, subcontractors, and agents, from taking adverse personnel actions against employees for reporting activity that they reasonably believe constitutes mail fraud, wire fraud, bank fraud, securities fraud, or a violation of any Securities and Exchange Commission (“SEC”) rule or federal law relating to fraud against shareholders. In recognition of the legislative intent underlying SOX—to provide strong and broad-based protections for employees who report suspected securities violations and financial fraud—courts are increasingly applying lenient standards that favor employees in assessing the viability of a SOX retaliation claim in the face of a motion for pretrial dismissal. Fortunately for employers, however, recent decisions demonstrate that even in today’s whistleblower-friendly environment, courts will readily dismiss SOX retaliation claims that lack adequate evidentiary support.
For example, the U.S. Court of Appeals for the Second Circuit ruled in Nielson v. AECOM Tech Corp. that, in dismissing the plaintiff’s complaint, the district court incorrectly applied the “definitively and specifically” standard to find that the plaintiff had not engaged in activity protected by SOX. Under this originally well-accepted standard, an employee’s communications about a suspected violation are not protected unless they relate “definitively and specifically” to one of the categories of fraud or securities violations listed under Section 806 of SOX, and the employee must reasonably believe that each of the legally defined elements of a suspected violation occurred. Applying this standard, the district court held that the plaintiff’s complaints to his managers (that certain fire safety designs were not properly reviewed) were not protected.
On appeal, the Second Circuit deferred to evolving interpretations of SOX articulated by the Department of Labor’s (“DOL’s”) Administrative Review Board during the Obama administration. The Second Circuit jettisoned the “definitively and specifically” test in favor of the more relaxed “reasonable belief” standard, under which the plaintiff has engaged in protected activity as long as (i) he has a subjective belief that the reported conduct violates a law covered by SOX and (ii) his belief is objectively reasonable for a person in his position. Nevertheless, the Second Circuit affirmed the dismissal because, although the plaintiff alleged that he reported what he believed constituted, inter alia, shareholder fraud, he did “not plausibly allege, on the basis of assertions beyond the trivial and conclusory, that it was objectively reasonable for him to believe that there was such a violation[.]” As a result of the Nielson decision, district courts sitting in the Second Circuit now apply the more relaxed “reasonable belief” standard in determining whether a plaintiff has engaged in protected activity under SOX.
The U.S. Court of Appeals for the Third Circuit released a decision in Wiest v. Tyco Elecs. Corp. on February 2, 2016, that affirmed the dismissal of a plaintiff’s claim that he was unlawfully terminated in violation of SOX for reporting suspected securities fraud pertaining to improper accounting practices. Notably, the Third Circuit had previously reversed the district court’s prior dismissal of the plaintiff’s claim because the district court erred and applied the “definitively and specifically” standard to find that the plaintiff had not engaged in protected activity. On remand, the district court, affirmed by the Third Circuit, dismissed the plaintiff’s SOX claim on summary judgment because, regardless of whether the plaintiff had engaged in protected activity, there was no evidence that it was a factor contributing to his termination. The Third Circuit discussed the leniency of the contributing factor test, which requires only that the plaintiff show that his protected activity affected in any way the decision to terminate. Nevertheless, the Third Circuit found that the plaintiff failed to meet even this low threshold and that the defendant established that it would have terminated the plaintiff in the absence of any protected behavior.
On January 4, 2016, the U.S. District Court for the Southern District of New York in Yang v. Navigators Group, Inc., dismissed a plaintiff’s claim that she was terminated for complaining to her superiors about improper risk control procedures that she believed constituted shareholder fraud and violated securities regulations. The court initially denied a motion to dismiss the claim on the pleadings, rejecting the defendant’s contentions that the allegations were insufficient to show that the plaintiff had engaged in protected activity or reasonably believed that the complained-of conduct was unlawful. In reviewing the evidence subsequently proffered at the summary judgment stage, however, the district court found that some of plaintiff’s communications to her superiors were not protected because they failed to indicate in any way that she believed a violation under Section 806 of SOX had occurred, and, in any event, that the plaintiff was clearly fired for poor performance and there was no evidence that the concerns she raised contributed to the decision to terminate her.
In sum, the number of SOX whistleblower retaliation claims is on the rise, and relaxed legal standards have made it more difficult for employers to obtain pretrial dismissal of these claims. Yet, as the above rulings indicate, employers are not left defenseless. Armed with a properly mounted legal defense, they are frequently prevailing against whistleblower retaliation allegations in the very same cases that are applying more lenient pleading standards.
A version of this article originally appeared in the Take 5 newsletter “Five Employment Law Compliance Topics of Interest to Financial Services Industry Employers.”