A recent district court's decision may provide some relief for companies that fear they will be accused of retaliating against whistleblowers.
A ruling by the Court for the Eastern District of Pennsylvania earlier this month sets a higher standard for employees to claim whistleblower protection under the anti-retaliation provision of the Sarbanes-Oxley Act of 2002 (SOX). The court ruled in favor of Tyco Electronics and dismissed a former employee's lawsuit against the company on the grounds that the employee was not specific enough in his claims that wrongdoing had occurred at the company and failed to demonstrate how the activity violated one of the statutes contained in SOX.
In its decision in the case of Wiest v. Lynch the court clearly stated that it takes more than just merely alleging that wrongdoing has occurred within the company to invoke the anti-retaliation protection offered to employees under SOX. Instead, the employee must convey "an objectively reasonable belief that the company intentionally misrepresented or omitted certain facts to investors, which were material and risked loss," and communicate to the employer "definitively and specifically" that the allegations are related to one of the statutes or rules listed in SOX. Generally, the whistleblower protection provisions of SOX only cover allegations of mail fraud, wire fraud, bank fraud, securities fraud, or fraud against shareholders.
The plaintiff, Jeffrey Wiest, a former accounts payable employee at Tyco Electronics, alleged that he was wrongfully terminated after he expressed concerns about certain company expenses. He sued the company and several Tyco Electronics executives, arguing that his termination was a result of managers' frustration over his challenges.
Wiest claimed that after he reported his concerns, the company's human resources department launched an investigation into allegations that he had failed to report some gifts he received and that he had made sexually suggestive remarks to coworkers. He then went on medical leave and was terminated seven months later.
The decision may reverse earlier decisions that had set a broader standard for protection under the anti-retaliation measures of SOX. For example in Sylvester v. Parexel, the Department of Labor Administrative Review Board, which reviews such cases, found similar allegations to be covered. “The Pennsylvania Court decision shows that it is not blindly following the Department of Labor Administrative Review Board's decision,” says Steven Pearlman, co-chair at law firm Seyfarth Shaw's National SOX Whistleblower Team. Referring to the case of Sylvester v. Parexel, he said the administrative board at the time of judgment had allowed the scope of protected activity under the SOX's whistleblower protection to be too broad. Plaintiffs in the Parexel case were granted protection despite absence of information directly linking the allegations of wrongdoing to specific violations covered by SOX.
Based on the court ruling in the Wiest case, legal experts agree it is an early indication that some courts are willing to set the “definitively and specifically” standard on future cases before offering the protection provided by the anti-retaliation provision. McGuireWoods Associate Eric Martin says the ruling may protect employers from retaliation claims by whistleblower who file complaints that are vague and overly general.
“Companies should focus their defense on the exact allegations by whistleblowers and evaluate if enough facts are being presented to prove the alleged wrongdoings.”
—Kevin Cloutier,
Partner,
Winston & Strawn
He says too many cases in the past have failed to provide a fixed guideline in which companies could apply a standard determinant to argue their cases. “Employers can take comfort that this indicates the standard will apply in the future,” he says.
Although employees do not have to cite specific provisions of SOX when filing their complaints, lawyers say the effect of the Wiest case may be that employees have the burden to link the alleged misconduct to what is covered by SOX. In many cases that will mean employees need to show that they reasonably believe wrongdoing occurred that was intentional and material and that would defraud shareholders.
The lack of information supplied by Wiest is another contributing factor in Tyco's victory. Wiest's complaint relied largely on three e-mails he sent to managers to prove his case. However, the e-mails didn't contain enough to allow anyone to conclude decisively that Wiest believed the company's conduct would result in defrauding shareholders, says William McGrath, litigation partner at law firm Porter Wright. “The complaint would likely have survived the motion to dismiss if he had more detail. Of course you cannot always control that,” he says.
The Wiest case also demonstrates how the lack of precision in language used by employees to report wrongdoing can be used to dismiss retaliation claims. The lack of precision is what caused some cases to be dismissed, said Kevin Cloutier, a partner at law firm Winston & Strawn. He said the magic word in dealing with whistleblower actions in court is “fraud.” “In the Wiest case, the outcome could have been different if the word “fraud” were used in the correspondence he submitted as proof,” he said.
SOX RETALIATION CLAIM
Below is an excerpt from Weist et al v. Lynch et al detailing Jeffrey's Weist's allegations and their dismissal:
Mr. Wiest alleges that the Defendants' investigation of the allegations of past misconduct by him was a retaliatory unfavorable personnel action taken by them in response to his alleged protected activities of challenging certain payment requests and refusing to process the challenged requests. Mr. Wiest further alleges that the manner in which the investigation was conducted led to his constructive discharge on September 30, 2009.
Under SOX, a covered entity and its agents may not
discharge, demote, suspend, threaten, harass, or in any other manner discriminate
against an employee in the terms and conditions of employment because of any
lawful act done by the employee –
(1) to provide information, cause information to be provided, or otherwise
assist in an investigation regarding any conduct which the employee
reasonably believes constitutes a violation of section 1341 [mail fraud], 1343
[wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or
regulation of the Securities and Exchange Commission, or any provision of
Federal law relating to fraud against shareholders, when the information or
assistance is provided to or the investigation is conducted by –
.... (C) a person with supervisory authority over the employee (or such
other person working for the employer who has the authority to
investigate, discover, or terminate misconduct).
18 U.S.C. § 1514A.
In order to state a prima facie case under § 1514A, a plaintiff must allege that (1) he
engaged in protected activity; (2) the defendants “knew or suspected, actually or constructively,” that he had engaged in the protected activity; (3) he suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable personnel action. 29 C.F.R. § 1980.104(b)(1)(i)-(iv) (2010). The Defendants argue that Mr. Wiest has failed to plead sufficient facts to establish any of the four required elements for a prima facie case. Because the Court concludes that Mr. Wiest has failed to plead sufficient facts to support a finding that he engaged in protected activity, the other three elements will not be discussed, and Mr. Wiest's SOX claim will be dismissed.
Source: Weist et al v. Lynch et al.
“Companies should focus their defense on the exact allegations by whistleblowers and evaluate if enough facts are being presented to prove the alleged wrongdoings,” says Cloutier.
Standard Reinforced
Another judgment may also narrow the standard for claiming whistleblower protections under SOX, even though the courts ruled for the employee plaintiff in the case. A Manhattan federal court adopted the same standard in the case of Sharkey v. JP Morgan Chase, when Judge Robert Sweet sided with the plaintiff, Jennifer Sharkey, in dismissing the motion filed by her former employer. Like Wiest, Sharkey failed to mention the specific codes of violations in relation to the employer's alleged wrongdoings.
However, observers said the court sided with Sharkey's claim due to the amount of information she included, which allowed the court to conclude decisively that the allegations made were in violation of provisions under SOX in addition to money laundering. “The difference between the two cases is the amount of detail Sharkey provided compared to the smaller set of facts in the Wiest case,” said McGrath. The 30 paragraph claims filed by Sharkey leave no doubt to the court there had been wrongdoing committed by her former employer, he said. Even though the outcome was different in the Sharkey's case, the Manhattan court did apply the “definitively and specifically” standard as set in Wiest case.
According to Pearlman, to ensure companies can justify actions they take that involve whistleblowers and not be mistaken as retaliating against employees, managers must conduct more detailed performance reviews. “Do not shy away from providing factual accounts of unacceptable performance that might not be well-received by employees,” he said. Reasons for demotion, termination, or other adverse employment action should be cited through objective and specific factual accounts. In addition, where a whistleblower's performance is being evaluated, have another supervisor and possibly human resources involved to ensure that the employee is not subject to any retribution, he said. “Companies have to show clearly the action taken against an employee has nothing to do with retaliation,” says Pearlman.
McGrath says that employers' best defense against whistleblower lawsuits is to have solid internal compliance programs. These programs should be in a better position to address whistleblower's issues when concerns were first raised to management. “If a whistleblower chooses to come to the company first, that is an opportunity to mitigate and address the problems and avoid a lawsuit altogether," he says. Even in cases where there is a lawsuit, he says strong compliance programs can help to limit the extent of unfavorable judgment and reflect a company's effort in trying to be a good citizen.
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