- Third Circuit Lowers Bar For Determining Whether Internal Complaint Is SOX Protected Activity
- March 27, 2013 | Authors: Lloyd B. Chinn; Harris Michael Mufson; Steven J. Pearlman; Michael D. Spencer
- Law Firms: Proskauer Rose LLP - New York Office ; Proskauer Rose LLP - Chicago Office ; Proskauer Rose LLP - New York Office
In Wiest v. Lynch, No. 11-cv-4257, 2013 U.S. App. LEXIS 5345 (3d Cir. March 19, 2013), the Third Circuit gave Chevron deference to U.S. Department of Labor Administrative Review Board’s (ARB) interpretation of “protected activity” under Section 806 of SOX in Sylvester v. Parexel International LLC, No. 07-123 (ARB May 25, 2011), concluding that a whistleblower need only show that his or her communication reflects a reasonable belief that the employer has violated or will violate the law or rules of the SEC. We now see a circuit split on multiple issues, including whether the alleged misconduct “definitively and specifically” relates to one of the categories in Section 806, and whether the employee can engage in protected activity by complaining of potential future violations.
The plaintiff worked for approximately thirty-one years in Tyco Electronics’ (Employer) accounting department before his discharge in 2009. In 2007, he engaged in a pattern of rejecting and questioning expenses that he believed failed to satisfy accounting standards or securities and tax laws. He alleged that he routinely reported what he believed were improper expenditures to his supervisors, primarily asserting that improper reporting would either violate the Employer’s policies or federal tax laws. Notably, none of his communications indicated his belief that the Employer had engaged in fraud upon shareholders or had otherwise violated the statutes or rules listed in Section 806.
The District Court’s Decision
Plaintiff filed suit against the Employer and several officers and directors in the U.S. District Court for the Eastern District of Pennsylvania, alleging he was discharged for reporting improper expenditures. Defendants moved to dismiss, asserting that Plaintiff failed to establish a prima facie case under Section 806 by failing to engage in protected activity. Specifically, they argued that Plaintiff did not allege that his communications about improper expenditures “definitively and specifically” related to a violation of a statute or rule set forth in Section 806.
The district court determined that the plaintiff had to allege that his communications: “definitively and specifically” related to a statute or rule listed in Section 806; expressed “‘an objectively reasonable belief that the company intentionally misrepresented or omitted certain facts to investors, which were material and which risked loss;’” and “reflect[ed] a reasonable belief of an existing violation.” Wiest v. Lynch, No. 10-cv-3288, 2011 U.S. Dist. LEXIS 79283, 2011 WL 2923860 (E.D. Pa. July 21, 2011). Based on the facts alleged, the district court granted Defendants’ motion.
The Third Circuit’s Decision
In a 2-1 decision, the Third Circuit held that the district court erred in applying the “definitive and specific” standard, concluding that the ARB had abandoned this standard in Sylvester. In Sylvester, the ARB determined that a complainant can engage in protected activity even if he or she fails to allege or prove materiality, scienter, reliance, economic loss, or loss causation. The majority found the ARB’s interpretation in Sylvester to be reasonable. Additionally, the majority held that an employee’s communications about a potential violation will constitute protected activity as long as the employee reasonably believes the violation is likely to happen.
The dissent, however, stressed that the standard enunciated in “Sylvester provides no guidance as to what, if anything, a § 806 claimant is required to allege . . . and the ARB has provided little more than a recitation of what is not required for an employee to allege protected conduct.”
This decision is at odds with decisions out of the First, Fifth, Sixth and Ninth Circuits-namely: Day v. Staples, Inc., 555 F.3d 42, 55 (1st Cir. 2009); Allen v. Admin. Review Bd., 514 F.3d 468, 476-77 (5th Cir. 2008); Van Asdale v. Int’l Game Tech., 577 F.3d 989, 996-97 (9th Cir. 2009); Riddle v. First Tenn. Bank, N.A., No. 11-cv-6277, 2012 U.S. App. LEXIS 18684 (6th Cir. Aug. 31, 2012) (unpublished))-as to the viability of a “definitive and specific” standard, and employers are rightfully concerned that, at least within the Third Circuit, it may open the floodgates to claims that bear a highly attenuated relationship to the categories fraud and rules exhaustively listed in Section 806. Likewise, this decision is at odds with the Fourth Circuit’s decision in Livingston v. Wyeth, 520 F.3d 344, 352 (4th Cir. 2008), with respect to whether an employee can engage in protected activity under SOX by complaining of future misconduct.
The Tenth Circuit may address the standard applicabile to SOX claims in Lockheed Martin Corp. v. Dep’t of Labor, et al., No. 11-9524 (decision pending). Proskauer filed an amicus brief supporting the employer’s position in that matter.
Though there are solid bases for applying the standards from which the Third Circuit (and the ARB) departed, employers challenging protected activity in the Third Circuit should continue to focus closely on whether an employee had a subjectively and objectively reasonable belief, as that standard certainly remains in tact.