Second Circuit Rejects Definitively and Specifically Standard But Upholds Dismissal of SOX Whistleblower Complaint in Nielsen v. AECOM

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Last week, the Second Circuit upheld a district court’s dismissal of a plaintiff’s Sarbanes-Oxley (“SOX”) whistleblower claim – but not before rejecting the “definitively and specifically” standard on which the district court’s decision relied. Nielsen v. AECOM Tech. Corp., No. 13-235-cv (2d Cir. Aug. 8, 2014).

Nielsen brought a whistleblower retaliation claim under SOX Section 806 (codified at 18 U.S.C. § 1514A), alleging that AECOM terminated his employment as a result of his complaints that a subordinate employee allowed fire safety designs that had not yet been reviewed to be designated as approved.

District Court’s “Definitively and Specifically” Standard “Invalid”

The Second Circuit first addressed whether the “definitively and specifically” standard was appropriate for analyzing the plaintiff’s reasonable belief that a violation of one or more of the statutes enumerated under § 1514A had occurred. The district court had relied on the standard, which stemmed from a 2006 Department of Labor Administrative Review Board (“ARB”) decision. However, the ARB later reversed course and rejected that standard in a 2011 case, Sylvester v. Parexel Int’l LLC.

The Second Circuit held that the ARB’s revised interpretation of § 1514A, which focuses on the “reasonable belief” of the whistleblower, more closely aligns with the text of the statute and is persuasive. In so holding, the court abrogated an earlier, nonprecedential order in Vodopia v. Koninklijke Philips Elecs., N.V., 398 F. App’x 659, 662-63 (2d Cir. 2010), in which the court had adopted the “definitively and specifically” standard. Several other circuits, including the First, Fourth, Fifth, and Ninth, have not yet squarely revisited the “definitively and specifically” standard since Sylvester, and the Sixth Circuit adopted the standard after Sylvester, but without addressing the ARB’s decision.  In contrast, the Third and Tenth Circuits have adopted the ARB’s reasoning in Sylvester and rejected the “definitively and specifically” standard. The Second Circuit’s decision potentially creates a split in the circuits that might be ripe for Supreme Court review.

Skidmore Standard Sufficient to Adopt ARB’s Interpretation of § 1514A

In adopting the ARB’s new standard, the Second Circuit declined to decide whether it merited Chevron deference, noting that the Supreme Court declined to resolve the Chevron deference issue in Lawson v. FMR LLC,134 S. Ct. 1158, 1186-88 (2014).  Instead, the Second Circuit concluded that the ARB’s standard deserved, at a minimum, the “lesser” deference of Skidmore v. Swift & Co., 323 U.S. 134 (1944); that is, “respect according to its persuasiveness.”

The Second Circuit explained that it was “less certain” it agreed with the ARB’s conclusions in Sylvester that SOX complaints “need not even ‘approximate specific elements’” of the violations alleged to have been violated, nor allege that such violations were “material.” The court pointed out that § 1514A does require a potential whistleblower to plausibly allege that he or she reported information “based on a reasonable belief that the employer violated one of the enumerated provisions” set forth in § 1514A(a)(1).  Thus, according to the court, the statutory language suggests that a whistleblower’s reasonable belief “cannot exist wholly untethered” from the enumerated provisions set forth in the statute.

Court Affirms Dismissal of SOX Claims

Applying this analysis, the Second Circuit held that Nielsen failed to plausibly allege that he had an objectively reasonable belief of mail or wire fraud at the time of his reports, “as both require a scheme to steal money or property – allegations that do not appear in the complaint.”

Nor could Nielsen show a reasonable belief of shareholder fraud. Citing Sylvester, the court explained that “it may well be that a complainant’s complaint concerns such a trivial matter in terms of its relationship to shareholder interests, that he or she did not engage in protected activity” under SOX. Here, the court noted, Nielsen had made “no claim that the improper activity… was related to any specified AECOM venture, much less an important one, nor is there any nonconclusory claim that this activity would negatively affect AECOM’s operations either in the United States or Dubai.” Thus, the connection between Nielsen’s claims and supposed fraud against shareholders was “simply too tenuous.”

Changing the Course for Seeking Dismissal of Whistleblower Claims Pursuant to 12(b)(6)?

At first glance, the Second Circuit’s rejection of the “definitively and specifically”standard appeared to signal a more difficult path for employers to succeed on SOX claims. But because the court looked in part to whether Nielsen alleged the elements of enumerated violations under SOX, as well as to the materiality of the concerns he raised, the Second Circuit has left significant inroads for employers to attack SOX complaints in the future.

Topics:  Dismissals, Sarbanes-Oxley, Whistleblowers

Published In: Civil Procedure Updates, Labor & Employment Updates, Securities 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.

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