Courts have recently rendered important decisions concerning the viability of the at-will employment doctrine and the jurisdictional scope of the whistleblower protections enacted under the Sarbanes-Oxley Act of 2002. We discuss, below, two decisions that have special import for U.S. employers operating in New York and internationally.

Smalley v. The Dreyfus Corp.: New York’s highest court reaffirms at-will employment standard

Smalley began with Mellon Financial Corporation’s 2001 acquisition of Standish Ayer & Woods, a fund management company. Mellon’s subsidiary, Dreyfus, maintained the Taxable Fixed Income Group (TFIG) with operations similar to those of Standish. In 2005, when Dreyfus merged TFIG into Standish and terminated all TFIG employees, five former members of TFIG sued Dreyfus, Mellon and certain officers alleging that, between 2001 and 2004, they were fraudulently induced to enter into, and remain in, the employment of Dreyfus by repeated assurances that TFIG would not be merged with Standish.

The trial court dismissed the complaint on the grounds that (i) the fraud claim requires reasonable reliance on the allegedly fraudulent statements, and any reliance the former employees – all at-will employees subject to termination at any time for any reason – placed on such assurances were not reasonable as a matter of law; and (ii) the former employees failed to allege any damages separate from their employment loss, which is not recoverable for termination of at-will employment. The Appellate Division, First Department, however, reversed and reinstated the fraudulent inducement claim. The defendants appealed to the Court of Appeals.

In reversing the First Department and reinstating the trial court’s dismissal, the court first reiterated New York’s strong at-will employment standard: “Absent a constitutionally impermissible purpose, a statutory proscription, or an express limitation in the individual contract of employment, an employer’s right at any time to terminate an employment at will remains unimpaired.” Moreover, the court held, at-will employees cannot be injured merely by the termination of their employment contracts because length of employment is not a material term of at-will employment. “Absent injury independent of termination, plaintiffs cannot recover damages for what is at bottom an alleged breach of contract in the guise of a tort.”

The former employees relied heavily on an earlier federal appeals court case (Stewart v. Jackson & Nash) that recognized a fraudulent inducement claim on facts similar to those in Smalley. Although the court chose to distinguish Stewart, rather than outwardly criticizing it, employers should be pleased that New York’s high court followed its own precedents and “refused to recognize exceptions to, or pathways around, these [at-will] principles.”

O’Mahony v. Accenture Ltd.: Whistleblower protection for overseas employees

In O’Mahony, the plaintiff, an Irish national, was a partner and an employee of Accenture LLP (LLP), a U.S. subsidiary of Accenture Ltd. (a Bermuda company) for 20 years – some 15 of which she spent working in France (until 2004). From 2004 through 2006 she worked for Accenture Ltd.’s French affiliate, Accenture SAS (SAS). Initially, LLP obtained a certificate of coverage exempting it from paying social security contributions to France on behalf of the plaintiff for five years. Thereafter, the plaintiff alleged that LLP failed to make the required payments. After her transfer to SAS, she alleged that certain colleagues told her that LLP intended to conceal from the French government that she had been working in France since 1992. When the plaintiff objected, she alleged that she was demoted. In response, the plaintiff filed a complaint with the U.S. Department of Labor (DOL) against LLP and Accenture Ltd., claiming that they violated section 1514A of the Sarbanes-Oxley Act of 2002 by demoting her in response to her protests of the alleged tax fraud. Section 1514A prohibits an employer from retaliating against employees who provide information and assist in investigations concerning the employer’s allegedly illegal conduct. The DOL dismissed the complaint on jurisdictional grounds, holding that section 1514A does not apply extraterritorially to cover acts that occurred in France, and the decision was upheld on appeal to the DOL Office of Administrative Law Judges. Thereafter, the plaintiff commenced an action, asserting substantially the same allegations, against Accenture Ltd. and LLP in New York federal court.

This time, however, when the defendants moved to dismiss on jurisdictional grounds, the court held that extraterritoriality was not an issue because the wrongful conduct alleged in the complaint actually took place in the United States. Specifically, the complaint alleged that the decisions to refuse to pay the required tax, to conceal from the French government the plaintiff’s employment in France and to demote the plaintiff in response to her objections were all made in the United States. These allegations created a sufficient nexus between the alleged wrongdoing and the United States to give U.S. courts jurisdiction over a section 1514A claim.

Employers with operations abroad should take note that O’Mahony expands the jurisdictional scope of retaliation claims under Sarbanes-Oxley beyond that of other U.S. antidiscrimination legislation. Generally, U.S. employment discrimination statutes (e.g., the Age Discrimination in Employment Act, the Americans with Disabilities Act, and Title VII of the Civil Rights Act of 1964) protect only U.S. citizens working in foreign countries for (i) U.S. companies; or (ii) foreign companies controlled by a U.S. company. In O’Mahony, however, the court exercised jurisdiction over a claim asserted by an Irish national who, at the time she alleges she was retaliated against, was employed in France by a French subsidiary of a Bermuda parent. Such an application of U.S. antidiscrimination law abroad is unprecedented and will likely be appealed.