On September 18, 2019, the U.S. District Court for the Southern District of New York granted a defendant-employer’s motion to dismiss a SOX whistleblower retaliation claim, finding that the plaintiff failed to adequately plead protected activity. Tonra v. Kadmon Holdings, Inc., No. 18-cv-9028.

Background

The defendant-employer is a publicly traded biopharmaceutical company that develops and produces several drugs. Around August 2011, Plaintiff was hired as the company’s Vice President of Preclinical Pharmacology. About six years after his hiring, Plaintiff met with Defendant’s upper management to present preliminary animal testing results for a new drug that was designed to treat a rare kidney disease. Plaintiff’s study allegedly showed that the drug had proven ineffective and potentially harmful. Two months later, Plaintiff received the final test results for the drug, which allegedly confirmed the effects Plaintiff had forecasted. Plaintiff allegedly proceeded to inform company representatives present at a regulatory compliance meeting that Defendant was required to report the negative test results to the U.S. Food and Drug Administration within the coming months. Defendant terminated Plaintiff’s employment one day later. Plaintiff filed suit in federal court claiming, inter alia, that he was retaliated against in violation of SOX for having drawn attention to Defendant’s alleged reporting obligations.

Ruling

Defendant moved to dismiss the SOX claim pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that the complaint failed to adequately plead protected activity. The court granted the motion, finding the complaint did not plausibly allege facts that would support a reasonable belief that Defendant was at risk of violating any of the enumerated securities laws. In particular, the court noted that Plaintiff’s allegations did not demonstrate a subjectively and objectively reasonable belief that the information at issue would be material to investors. According to the court, for information to be “material,” it must “significantly alter the ‘total mix’ of information made available” to potential stockholders. Additionally, the fact that Plaintiff recommended that the disclosures be made within multiple months after the information was first conveyed to management showed Plaintiff did not believe a securities violation to be imminent.

Implications

This decision favors defendant employers in cases where a plaintiff does not show that the complained-of violation would be material.