In Day v. Staples, Inc., the U.S. Court of Appeals for the First Circuit held that whistleblower protection is not available to employees under the Sarbanes-Oxley Act (SOX) where there is no objectively reasonable belief that an employer has engaged in securities fraud. The Court found that allegedly inefficient corporate processes do not amount to shareholder fraud under SOX, and that employee complaints about such practices do not trigger SOX’s whistleblower protection provisions.
Staples hired Kevin Day to work as an entry-level analyst in 2005. Shortly after he began work, he complained to his supervisors that Staples was processing customer returns improperly. His supervisors and other managers met with him to explain the reasons for its business practices related to returns and to assure him that the company was not engaged in any type of fraud. Despite these assurances, Day remained convinced that the conduct was unlawful. Staples later terminated Day for performance reasons unrelated to his complaint. Day then brought suit in District Court for whistleblower protection under SOX, breach of contract, and wrongful termination in violation of public policy.
The District Court granted summary judgment in favor of Staples, ruling that the SOX claim failed because Day’s “belief that he had uncovered fraud was not reasonable.” Day claimed that some company business practices related to the processing of returns resulted in manipulation of accounting information that defrauded shareholders and violated the code of ethics in Staples’s employee handbook. SOX prohibits employers from retaliating against employees for providing information to a supervisor “regarding any conduct which the employee reasonably believes constitutes a violation of [any of several enumerated laws] or any provision of federal law relating to fraud against shareholders.” Here, the Court found Day’s claims unreasonable because he lacked sufficient work experience to harbor a reasonable belief of fraud.
On appeal, the First Circuit held that “a company may legitimately decide that maximizing short-term profits is not its goal” and that “a complaint about corporate efficiency is not within the intended protection of SOX.” The Court further held that a “‘needless loss of revenue’ is not a claim of fraud” and that even if an employee’s complaints originally reflected a reasonable concern, such concerns may cease to be reasonable after the employer has explained the rationale for the processes.
The Court also rejected Day’s state law claim that his termination constituted a breach of contract because Staples’s code of ethics, which contains an anti-retaliation provision protecting employees who report legal or ethical violations to their supervisors, was an implied part of his employment contract. The First Circuit held that the code of ethics could not be considered part of the terms or conditions of his employment where other documents clearly indicated that he was an at-will employee and that the employee handbook containing the code clearly stated that it was not a contract of employment.
This case demonstrates that allegedly inefficient business practices do not necessarily constitute fraud. If an employer takes such complaints seriously and responds actively, it can provide a defense to whistleblower claims. This decision is significant in ruling that a stated code of ethics is typically not a contract under Massachusetts law. It provides further guidance to employers regarding the circumstances in which courts will consider policies included in handbooks or personnel manuals as part of an employment contract.