4th Circuit: SOX Whistleblower Failed To Establish A Prima Facie Case Regarding Causation

by Proskauer - Whistleblowing & Retaliation
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On May 12, 2014, the Fourth Circuit Court of Appeals affirmed summary judgment on a SOX whistleblower claim, concluding that the whistleblowers’ alleged protected activity was not a “contributing factor” in the challenged adverse employment action. Feldman v. Law Enforcement Assoc. Corp., No. 13-1849 (4th Cir. May 12, 2014). Armed with this decision, employers are apt to place greater emphasis on challenges to a SOX whistleblower plaintiff’s ability to establish a prima facie case.

Background

Plaintiffs Paul Feldman and Martin Perry were “Inside Directors” at Law Enforcement Associates (the Company), and Mr. Feldman also served as President and CEO. Since at least November 2007, there was a split between the “Inside Directors” and “Outside Directors” over various issues. On January 14, 2008, Plaintiffs reported to the Board of Directors and the U.S. Department of Commerce (DOC) that a large stockholder was allegedly involved in the prohibited sale of exports. Plaintiffs also reported to the DOC their suspicion that the Company was involved in insider trading because several prominent politicians were shareholders. Further, over the course of 2009, Mr. Feldman complained to shareholders regarding his negative view of the “Outside Directors” and belief that they were only loyal to the Company’s founder.

Mr. Feldman’s employment was terminated on August 27, 2009, and Mr. Perry’s employment was terminated on September 23, 2009. Thereafter, Plaintiffs filed suit in the U.S. District Court for the Eastern District of North Carolina under Section 806 of SOX against the Company, Outside Directors, the CFO, and the founder, alleging they were discharged in retaliation for: (i) reporting to the Board and the federal government about potentially illegal exports; (ii) objecting to allegedly falsified Board meeting minutes; (iii) objecting to alleged leaks of information by the Outside Directors; (iv) objecting to and refusing to pay legal bills; and (v) notifying the government of suspected insider trading. The district court granted the Company summary judgment, finding Plaintiffs failed to sufficiently prove their alleged protected activities were a contributing factor to their respective terminations.

Fourth Circuit’s Ruling

On appeal, Mr. Feldman argued that the district court imposed an improperly onerous burden on him to prove his protected activities “solely or substantially caused his termination.” The Fourth Circuit determined, however, that Mr. Feldman failed his burden under Section 806. First, it stressed that the gap of twenty months disconnected the protected activity—particularly Mr. Feldman’s reports regarding potentially illegal exports—from his termination. Second, according to the Court, Mr. Feldman’s conduct in meetings and negative letter to the Outside Directors “undoubtedly constitute a legitimate intervening event further undermining a finding that his long-past protected activities played any role in the termination.” The Court also noted that Mr. Perry was asked to stay at the Company after he too participated in the same alleged protected activities, which undermined Mr. Feldman’s claim that his protected activity was a contributing factor in his termination. Finally, to the court rejected Mr. Feldman’s argument that his strong work performance and the Company’s successes during his tenure are further proof that his termination was retaliatory, emphasizing that it does not sit as a super-personnel department to second guess the Company’s employment decisions. Accordingly, the Court affirmed the district court’s conclusion with respect to Mr. Feldman’s failure to establish a prima facie case by showing his alleged protected activity was a contributing factor.

Implications

Employers are bound to rely on this decision in mustering defenses to SOX whistleblower claims on causation grounds—particularly with respect to the prima facie elements a plaintiff must establish. This is particularly valuable to employers, as the Court’s analysis ended without any focus on whether the employer could show by clear and convincing evidence that it would have taken the same adverse action in the absence of protected activity.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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