- Another Court Breathes Life Into SOX Protected Activity Defenses
- December 21, 2012 | Author: Steven J. Pearlman
- Law Firm: Proskauer Rose LLP - Chicago Office
The gap between how federal courts and the Administrative Review Board (ARB) define protected activity under Section 806 of SOX widened further this month when the U.S. District Court for the Southern District of New York granted a defendant-employer’s Rule 12(b)(6) motion to dismiss. Nielsen v. AECOM Tech. Corp., No. 12-cv-5163, 2012 WL 6200613 (S.D.N.Y. Dec. 11, 2012). This is a win for employers in a broad sense because the court required the complained-of fraudulent conduct to “definitively and specifically” relate to one of the laws exhaustively enumerated in Section 806, and it also used a “materiality” standard with respect to alleged shareholder fraud.
In 2010, Plaintiff Christian Nielsen began working as a Fire Engineering Manager for Defendant AECOM Middle East, Ltd. (“AME” or the “Company”). He was primarily responsible for ensuring engineering plans complied with applicable safety rules and regulations. According to Plaintiff, in March 2011, an employee he supervised had allowed numerous fire safety designs to be approved without following proper procedures. Plaintiff alleged that he raised his concerns to members of AME management. In June of 2011, the same employee allegedly approved another set of fire safety drawings without following the proper procedures. Plaintiff asserted that he raised the issue with AME management once again, and told two managers he would be forced to resign if AME did not resolve the fire safety issue. On June 23, 2011, Nielsen was informed that he was being discharged. A few weeks after his dismissal, Plaintiff contacted AECOM’s (AME’s parent) Global Compliance Department, which launched an investigation into his termination, and concluded that AME’s decision was justified.
Plaintiff proceeded to file a SOX whistleblower claim with OSHA, and kicked his complaint out to the U.S. District Court for the Southern District of New York after an ALJ at the DOL dismissed it.
The Court’s Ruling
Judge Forrest granted the Company’s motion to dismiss the complaint pursuant to Rule 12(b)(6) (and on other bases), ruling that Plaintiff failed to engage in protected activity. The court began by making it clear that:
The Second Circuit has found that to constitute “protected activity,” the employee’s communications must definitively and specifically relate to one of the listed categories of fraud or securities violations in 18 U.S.C. § 1514(a)(1).
(emphasis added) (citing Vodopia v. Koninklijke Phillips Elecs., N.V., 398 F. App’x 659 (2d Cir. Oct. 25, 2010)). The court also highlighted the need for an employee to have an objectively reasonable belief.
Having set forth those standards, the court rejected Plaintiff’s assertions that he reasonably believed that reporting procedurally improper approvals of fire safety designs amounted to shareholder fraud and violations of mail and wire fraud statutes. With respect to the securities fraud assertion, the court stated that Plaintiff’s theory “must at least approximate the basic elements of a claim of securities fraud” (citing Riddle v. First Tenn. Bank, Nat’l Ass’n, No. 11-cv-6277, 2012 WL 3799231) and thus he:
must have an objectively reasonable belief that the company intentionally misrepresented or omitted certain facts to investors, which were material and risked loss.
(emphasis added) (citation omitted). Yet, according to the court, there was no allegation that AME or AECOM represented anything about its approval procedures for fire safety drawings to its shareholders. The court further ruled that an objectively reasonable employee could not believe that Plaintiff’s complaints definitively and specifically related to mail or wire fraud or any of the other laws enumerated in Section 806 of SOX.
The Nielsen court did not buy into the ARB’s repudiation of the “definitively and specifically” and “materiality” standards (articulated in recent cases like Sylvester v. Parexel International LLC, No. 07-123 (ARB May 25, 2011)) that many federal circuit courts of appeal have embraced. Accordingly, this is a valuable decision for employers advancing defenses to protected activity - particularly in the 12(b)(6) context - that some feared to be in serious jeopardy. But, as a practical matter, employers need to appreciate that if a case is pursued through the DOL’s adjudicative structure, the first chance they may have to prevail on these defenses may be at the federal appellate court level (following an ARB final order). Thus, employers should preserve their defenses and recognize early-on that the road to victory will require perserverance and patience.