E.D. Pennsylvania Limits Supreme Court’s SOX Whistleblower Decision

In a case of first impression, the U.S. District Court for the Eastern District of Pennsylvania ruled that the U.S. Supreme Court’s holding in Lawson v. FMR LLC, 134 S. Ct. 1158 (2014)—that the whistleblower protection provision in Section 806 of SOX protects employees of a private contractor to a publicly-traded company—does not cover an employee of a private contractor who claimed he was discharged for reporting that his employer committed fraud against a public company but did not allege that fraud was committed by the public company. Gibney v. Evolution Marketing Research LLC, No. 14-1913, 2014 U.S. Dist. LEXIS 79369 (E.D. Pa. June 11, 2014).

Background

Plaintiff Leo Gibney (Plaintiff) was employed by a private company, Evolution Market Research, LLC (“Company”), between October 2009 and November 7, 2011. He alleged that the Company terminated his employment after he reported to the COO and GC that he believed a plan approved by the Company’s principals would result in the fraudulent billing of a publicly traded client (the Company was a contractor to that entity).

Ruling

The Company moved to dismiss pursuant to Rule 12(b)(6), asserting that Lawson “does not support extending SOX protection to employees of private companies who, as here, report overbilling ‘fraud’ neither committed by the public company nor having any connection to fraud on shareholders.” Noting that this argument was one of first impression, the court determined that

SOX was not intended to reach the type of scenario... where there are allegation of fraudulent conduct between two companies who are party to a contract, and one of those companies just happens to be publicly-held.

The court distinguished Lawson, where the decision was partially influenced by the unique structure of the mutual fund industry, noting that denying coverage to Plaintiff would not insulate an entire industry from § 1514A protection under Section 806. The court ultimately dismissed the SOX claim because the public company was the victim of the fraud rather than the perpetrator and

[n]othing in the text of §1514A or the Lawson decision suggests that SOX was intended to encompass every situation in which any party takes an action that has some attenuated, negative effect on the revenue of a publicly-traded company....

And the court ultimately agreed with the Company that:

extending SOX’s protections in this way presents obvious “over breadth” concerns that risk ‘making SOX a general anti-retaliation statute applicable to any private company that does business with a public company.

Implications

As one of the first decisions to interpret Lawson, the district court limited its application to situations where the publicly held company at least had a hand in the complained-of fraud.  Now there is good authority for the proposition that employees of private contractors asserting claims under SOX need to do more than merely allege fraud and some attenuated link to or involvement of a public company.

Topics:  FMR LLC, Fraud, Lawson v FMR, Sarbanes-Oxley, SCOTUS, Whistleblowers

Published In: Civil Procedure Updates, Civil Rights Updates, General Business Updates, Labor & Employment Updates

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.

© Proskauer - Whistleblowing & Retaliation | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »