In a recent decision issued by the First Circuit Court of Appeals, Day v. Staples, Inc., No. 08-1689, 2009 WL 294804 (1st Cir. Feb. 9, 2009), the Circuit Court affirmed the lower court’s dismissal of a former Staples employee’s claim that Staples violated the whistleblower protection provision of the Sarbanes-Oxley Act of 2002 (“SOX”). In doing so, the Court of Appeals set forth the specific criteria necessary for such a claim to succeed.
The plaintiff alleged that he reasonably believed Staples had committed securities fraud by manipulating certain accounting data, and had violated Section 1514A of SOX, the whistleblower provision, by firing him after he brought the issue to the company’s attention. The District Court and First Circuit disagreed. As the Court of Appeals discussed, Section 1514A of SOX was enacted to “‘encourage and protect [employees] who report fraudulent activity that can damage innocent investors in publicly traded companies.’” Day, 2009 WL 294804, at *8. The employee has the initial burden to make a “prima facie showing of retaliatory discrimination because of a specific act.” Id. at *9. Pursuant to Department of Labor regulations, the complaint must allege
the existence of facts and evidence showing that: (i) the employee engaged in a protected activity or conduct; (ii) the [employer] knew or suspected, actually or constructively, that the employee engaged in the protected activity; (iii) the employee suffered an unfavorable personnel action; and (iv) the circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action.
Id. (quoting 29 C.F.R. § 1980.104(b)(1)). The Court of Appeals determined that to be actionable, the plaintiff must have had a reasonable belief that Staples’ conduct constituted securities fraud, which has components that are both subjective (did he bring the complaint in good faith) and objective (the employee’s theory comports with the basic elements of the law the employee states was violated). The Court of Appeals discussed that SOX protects employees related to three broad categories of conduct by employers: “(1) a violation of specified federal criminal fraud statutes . . . ; (2) a violation of any rule or regulation of the SEC; and/or (3) a violation of any provision of federal law relating to fraud against shareholders.” Id. at *10. The Court of Appeals concluded that the plaintiff’s allegations for securities fraud “do not meet the basic components” for this type of claim. Id. at *10-*12. Thus, although he may have had a subjective belief that fraud occurred, his claim for fraud was not objectionably reasonable. Id.
The Court of Appeals also held that the plaintiff’s belief was objectively unreasonable for additional reasons, including the fact that his claim of an accounting irregularity did not amount to accounting fraud, and required evidence beyond the mere belief that such an irregularity occurred, which the plaintiff was unable to allege in his complaint. Id. at *12. Moreover, his belief was objectionably unreasonable because the plaintiff was unable to show in his complaint that the inaccuracy complained of was material to shareholders. Id. at *13. Last, the Court of Appeals held that the company’s explanations after investigation of the employee’s complaints were important for purposes of determining objective reasonableness, and here plaintiff’s “beliefs were not initially reasonable as beliefs in shareholder fraud and they became less reasonable as he was given explanations.” Id. Accordingly, the Court of Appeals affirmed the District Court’s ruling granting Staples’ motion for summary judgment.