A recent panel decision from the U.S. Court of Appeals for the Third Circuit, Wiest v. Lynch, et al., lowers the federal pleading standards pertaining to claims brought by employees claiming whistleblower status under section 806 of the Sarbanes-Oxley Act.
Public companies, especially those that may be subject to the jurisdiction of the federal courts in the Third Circuit, ought to be mindful of this decision when taking adverse employment actions. Corporate conduct that seemingly bears no relationship to fraud and has no bearing on shareholder interests may nevertheless, under the panel majority’s opinion, qualify the employee for whistleblower status, and its accompanying protections, under section 806.
The popular image of the American corporate whistleblower, as depicted in Hollywood box-office smashes such as The Insider and Michael Clayton, is a courageous hero who reports corporate wrongdoing, often at the risk of retaliation by the whistleblower’s employer or fellow employees. Such retaliation may take the form of threats to the whistleblower’s reputation, career or personal safety.
For good reason, U.S. law contains protections for employees who report corporate misconduct. Most federal laws governing industry operations contain a provision that allows employees to sue their employer for monetary and/or injunctive relief if they believe they have observed serious wrongdoing by their company and suffered an employment-retaliation as a result of reporting it. Unfortunately, these laws do not provide much guidance to employers concerning whom and what to believe. Even a disgruntled employee motivated by nefarious purposes may use whistleblower laws to try to pry attention away from his own less-than-acceptable workplace conduct.
These legal protections afforded to whistleblowers have been liberalized further by a recent panel decision from the U.S. Court of Appeals for the Third Circuit. The ruling in Wiest v. Lynch, et al., No. 11-4257 (March 19, 2013), lowered the federal pleading standards for lawsuits brought by employees claiming whistleblower status under section 806 of the Sarbanes-Oxley Act (“SOX 806”). Arguably, if this decision stands, nearly every complaint made by an employee of a public company may be cloaked with SOX 806’s “protected activity” immunity. This would allow such complaints to survive a motion for dismissal pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, regardless of whether the employee had a reasonable belief that illegal activity occurred (or was about to occur). A petition for rehearing en banc has been filed and remains pending before the Third Circuit.
Jeffrey Wiest was employed in the accounting department of Tyco Electronics Corporation (“Tyco”) for over 30 years, some of them with what was then Tyco International during the infamous “Kozlowski years” of corporate financial excesses. In mid-2008, Wiest raised several concerns regarding proposed business expenses and Tyco’s internal process for approval of those expenses, including the treatment of three corporate meetings and events under federal tax law. Wiest claimed he had been concerned about the potential impact that such events may have on employee morale, in light of recent corporate downsizing. Ultimately, upon further review by Tyco’s tax department, two of the events were approved as corporate expenses, while the third was properly treated as an award, the value of which would be imputed to the attendees as income.
Following Wiest’s voicing his concerns about the corporate events, Tyco conducted standard assessments of Wiest’s performance and awarded him a bonus of nearly $10,000 for that year. In mid-September 2009, however, Tyco representatives informed Wiest that they were investigating allegations that he had made inappropriate comments to female employees, had an improper sexual relationship with another employee, and failed to report a gift of baseball tickets from a vendor. Approximately two weeks later, on September 30, 2009, Wiest, who was fearful of the investigation into his alleged misconduct, left work sick and did not return.
Proceedings Before the U.S. Department of Labor and U.S. District Court
Wiest blamed the termination of his employment on Tyco and filed a SOX 806 complaint against his former employer with the U.S. Department of Labor’s Occupational Safety and Health Administration (“OSHA”), claiming that he was constructively discharged. A significant premise of his claims rested on references to the “Kozlowski years.” Those references, however, were not made in his complaint to his employer about the expenses, but rather were set forth only in his complaint to OSHA and, ultimately, in his federal court complaint.
SOX 806 allows an employee to maintain an action against an employer if the employee reasonably believes that he has suffered an adverse employment action because of his “blowing the whistle” on a fraud implicating corporate shareholder interests. OSHA conducted its investigation into Wiest’s allegations and found them to be without merit, concluding that Wiest’s reporting of his concerns about the corporate events was not a contributing factor in the termination of his employment. Before OSHA reached this conclusion, however, Wiest initiated a separate action in federal District Court pursuant to a “kick out” provision in SOX. This provision authorizes a SOX claimant to re-file a complaint in federal district court if OSHA has not issued its findings on the initial complaint within 180 days.
Wiest re-filed his complaint with the U.S. District Court for the Eastern District of Pennsylvania. The District Court evaluated Wiest’s complaint in light of settled case law and held that Wiest failed to plead that he had been engaged in a “protected activity.” The case law from several different federal circuit courts of appeals requires a SOX 806 claimant to allege that the corporate conduct which is the subject of the employee’s report “definitively and specifically” relates to a violation of certain federal fraud statutes (such as those pertaining to mail fraud, wire fraud or securities fraud). This “definitively and specifically” standard was developed by the Department of Labor’s Arbitration Review Board (“ARB”) in 2006 and subsequently adopted as federal law in several federal circuit courts of appeals. The District Court found that Wiest’s concerns about Tyco’s corporate events related to federal tax law and employee morale, rather than any sort of fraud identified in SOX 806. Therefore, the District Court dismissed Wiest’s complaint.
Wiest appealed the dismissal of his claims to the U.S. Court of Appeals for the Third Circuit. He argued that the District Court improperly relied upon the “definitively and specifically” standard because the ARB had since jettisoned it, rendering the subsequent circuit court decisions relying on that standard unpersuasive. Tyco countered that allowing the ARB’s recent change of heart to dictate how federal courts must evaluate pleadings sets a dangerous precedent, poses constitutional separation-of-powers concerns, and places the Third Circuit in conflict with every other circuit court that had addressed this issue as of that time. More importantly, however, according to Tyco, was the fact that eliminating the ARB’s “definitively and specifically” standard would dramatically lower the pleading threshold for SOX 806 claimants to maintain an action in federal court against their employers.
In a split 2-1 decision, the Third Circuit agreed with Wiest, reversing and remanding the District Court’s decision and holding that Wiest had sufficiently pled that he had engaged in “protected activity” under SOX 806. The panel majority stated that it was constrained by the ARB’s recent reiteration of the SOX 806 pleading standard and, consistent with the most recent ARB precedent, that Wiest was not required to plead that Tyco’s corporate events “definitively and specifically” related to any of the fraud provisions set forth in the statute. In other words, an employee need not plead that his communication about the alleged corporate wrongdoing was somehow connected to any fraud. Further, the employee’s report does not have to plead the existence of fraudulent conduct by the employer; it is sufficient merely for the employee to believe that a violation “is likely to happen,” according to the panel majority.
Potential Impact on Public Companies
The Third Circuit panel has designated its decision in Wiest as precedential, which means it constitutes binding authority upon all lower courts in the circuit. The significance of this decision, however, will likely extend far beyond the boundaries of the Third Circuit. As one of the few circuit court decisions addressing the ARB’s recent departure from the “definitively and specifically” standard, and the only one of those few decisions designated as precedential, Wiest may be cited as persuasive authority by other district and circuit courts addressing similar issues arising under SOX 806. The panel majority’s expansive interpretation of the whistleblower protections in SOX 806 – again assuming that it is not revisited by the court en banc – presents a sea-change in the law and may give rise to an increase in whistleblower litigation in the federal courts.
Public companies, especially those that may be subject to the jurisdiction of the federal courts in the Third Circuit, ought to be mindful of Wiest when taking adverse employment actions, such as imposing discipline or demoting or terminating employment. Corporate conduct that seemingly bears no relationship to fraud and has no bearing on shareholder interests may nevertheless qualify the employee for whistleblower status, and its accompanying protections, under SOX 806. If an accountant who is merely performing his job duties in identifying supposedly questionable tax treatment of corporate business expenses for further review can successfully maintain that his reported concerns were “protected activities” under SOX 806, it is difficult to establish any bright-line standards to guide employers dealing with similar reports from their employees in the absence of a connection between the employee’s communication and fraud. Unfortunately, the panel majority’s opinion in Wiest provides little guidance in this regard.