Whether the plaintiff is actually engaged in “protected conduct” is always a key question when defending a retaliatory discharge claim. This certainly is true when such a claim is brought under the Sarbanes-Oxley Act (SOX).
On August 8, 2014, , the Second Circuit Court of Appeals clarified the nature of the protected activity a successful SOX retaliatory discharge plaintiff must plead in order to survive a motion to dismiss. See Nielsen v. AECOM Technology Corp., Case No. 13-235-cv (August 8, 2014, 2nd Circuit).
Nielsen, a fire engineering manager, alleged that he was fired in retaliation for threatening to resign if the company continued to tolerate the conduct of one of his subordinates whom he claimed was allowing fire safety designs to be marked as approved without the subordinate actually having reviewed the plan.
In this case, the Second Circuit adopted the standard for protected conduct set forth by the Administrative Review Board (ARB) in 2011 which focuses on whether the employee “reasonably believed” that information provided by the employee related to a violation of law as required by SOX, with both a “subjective” and an “objective” requirement for such a “reasonable belief.” See Sylvester v. Parexel Int’l LLC, ARB No. 07-123, 2011 WL 2165854 (ARB May 25, 2011).
SOX prohibits an employer from discharging or otherwise retaliating against an employee because the employee:
Provide[s] information, cause[s] information to be provided, or otherwise assist[s] in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [bank fraud], or 1348 [securities fraud], any rules or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders…
The district court had relied on a previous non-precedential “summary order” by the Second Circuit which required the whistleblowing employee’s communications to “definitively and specifically relate to one of the listed categories of fraud or securities violations…,” as had been previously articulated as the standard by the ARB in Platone v. FLYi, ARB Case No. 04-153 (September 29, 2006).
Despite adopting the ARB’s “reasonable belief” standard, the Second Circuit still affirmed the dismissal of the complaint. Nielsen alleged that he “reasonably believed that defendants were committing fraud upon [their] shareholders and would likely continue violating the United States mail and wire fraud statutes by using telephone lines and emails in furtherance of the fraud.”
First, the court held that Nielsen had failed to adequately allege a “scheme to steal money or property” both of which are required to support a claim of mail or wire fraud. With respect to “fraud on shareholders, the court determined that Nielsen could not show that he had an objective belief that the failure of “a single employee…[to] properly…review fire safety designs” would constitute shareholder fraud because there was no claim that:
- such a fire safety review is required by any federal statute or regulation;
- the fire safety designs were ever submitted to an outside body; or
- any allegedly inadequate fire safety designs had posed a specific safety hazard.
Indeed, the Second Circuit held that Nielsen’s complaints concerned such a trivial matter with respect to shareholder interest that he could not have reasonably believed it to constitute fraud on shareholders. The court determined that the “bald” statement that the “practice had the potential of exposing the company to extreme financial risk” and “thus constituted potential shareholder fraud” was insufficient to state a claim and upheld the dismissal. In contrast, the Second Circuit offered, among others, the example of the plaintiff in Sylvester v. Parexel. Parexel conducted clinical trials for pharmaceutical companies and the plaintiffs claimed to have reported that the company was falsifying information used in such clinical testing of several major clients’ drugs.
While a SOX retaliatory discharge plaintiff in the Second Circuit may not need to claim to have raised issues that “definitively and specifically relate to one of the listed categories of fraud or securities violations…,” conclusory allegations of having raised concerns related to mail fraud, wire fraud or shareholder fraud remain insufficient to avoid dismissal.