On October 25, 2010, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a claim under the whistleblower protection provisions in Section 806 of the Sarbanes-Oxley Act (SOX) pursuant to Rule 12(b)(6). Vodopia v. Koninklijke Philips Electronics, N.V. (Case No. 09-cv-4767). The court found that an in-house patent attorney’s complaints relating to alleged fraud on the Patent Office and the potential invalidity of valuable patents owned by the employer did not constitute protected activity because he lacked a reasonable belief that he was reporting a fraud upon shareholders.
In Vodopia, the plaintiff claimed he was discharged for complaining that a fraud on the Patent Office resulted in the invalidation of company patents assigned a value of $50 million. The U.S. District Court for the Southern District of New York dismissed his complaint pursuant to Rule 12(b)(6), finding that the plaintiff failed to allege actionable protected activity under Section 806 of SOX. On appeal, the plaintiff argued that he appropriately alleged protected activity by asserting that the company committed a fraud upon shareholders by “knowingly assigning an eight figure value to worthless patents.”
The Second Circuit affirmed the district court’s order of dismissal, embracing the standards the Supreme Court articulated in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal. The court first observed that the complaint allegations center on the plaintiff’s concern that the patents were invalid, not the value that company assigned to them. The court then stressed that the plaintiff failed to allege that he reasonably believed he was reporting potential securities fraud, as opposed to patentrelated misconduct. In this regard, the court noted that the plaintiff did not allege that the $50 million value assigned to the patents was reported to the public or shareholders, or that this item would have been included in any public reporting or disclosures that could have misled investors.
This decision is valuable to employers defending SOX claims where plaintiffs claim they engaged in protected activity by complaining of issues that do not “definitely and specifically” relate to securities law violations or categories of fraud exhaustively identified in Section 806. As this case illustrates, an employee cannot demonstrate that he or she complained of a securities law violation under the rubric of Section 806 simply by pointing to conduct relating to the value a company assigns to assets where the assets are not reported to the public or shareholders. This is consistent with the Administrative Review Board’s pronouncement that “[a] mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld from investors, is not enough.” Robinson v. Morgan Stanley, Case No. 07-070 (ARB Jan. 10, 2010).
Vodopia also is noteworthy because it shows that courts may be willing to address the question of whether a plaintiff alleging that his or her employer violated securities laws or engaged in one of the categories of fraud listed in Section 806 had an objectively reasonable belief through an application of the Twombly/Iqbal standard. Indeed, this decision may encourage employers to explore opportunities to seek early dismissals in SOX whistleblower cases pursuant to Rule 12(b)(6).