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District Court Distinguishes Lawson v. FMR LLC and Dismisses Complaint




by:
Bryan B. House
Foley & Lardner LLP - Washington Office

Pamela L. Johnston
Foley & Lardner LLP - Los Angeles Office

Courtney Worcester
Foley & Lardner LLP - Boston Office

 
July 9, 2014

Previously published on July 2, 2014

After the United State Supreme Court’s plaintiff-friendly decision in Lawson v. FMR LLC, 134 S.Ct. 1158 (Mar. 4, 2014), we wrote regarding the “limiting principles” that the Supreme Court said might be applied in the future in interpreting Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”). See Client Update here. Not surprisingly, lower courts are now struggling to deal with the impact of Lawson. In Gibney v. Evolution Marketing Research LLC, 2:14-cv-01913-PBT (E.D. Pa. June 11, 2014), the district court distinguished Lawson and concluded that the plaintiff’s claims fell outside the scope of SOX, although the court said this was “a close question.”

The plaintiff was employed by Evolution, a private marketing and research company that has a contract to provide consulting services for Merck & Co., the public pharmaceutical giant. The plaintiff alleged that he learned that Evolution was fraudulently billing Merck in violation of the consulting contract. He objected to these billing practices and shortly thereafter was terminated. Evolution moved to dismiss on the grounds that the plaintiff was not a protected person under SOX because his complaint did not relate to the actions of a public company.

The district court first described the Supreme Court’s decision in Lawson and its focus on SOX’s goal of preventing fraud by public companies and the unusual structure of mutual funds. The court recognized that this case presented the possible need to apply a potential “limiting principle” that the Lawson court left for another day. The court recognized that the case “at least touches on” the need to protect shareholders because Evolution’s alleged fraud on Merck ultimately defrauds Merck’s shareholders. Nonetheless, the Court concluded that the allegations fell outside the scope of SOX because: (1) the unusual structure of the mutual fund industry was not present in this case and (2) more importantly, there was no allegation of fraud by Merck, but rather Merck was alleged to have been the victim. The court said nothing in SOX or Lawson suggested that SOX applies any time an action “has some attenuated, negative effect of the revenue of a publicly-traded company.” The court said SOX was not intended to reach the scenario here: “where there are allegations of fraudulent conduct between two companies who are party to a contract, and one of those companies just happens to be publicly-held.”



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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