Fourth Circuit Determines Whistleblower Termination Not Retaliatory Discharge Under Sarbanes-Oxley

by Nexsen Pruet, PLLC

The U.S. Fourth Circuit Court of Appeals ruled recently that an employee’s termination after reporting his company’s potential connection to export violations and insider trading did not amount to a retaliatory discharge under the Sarbanes-Oxley Act (SOX).  Feldman v. Law Enforcement Assoc. Corp., No. 13-1849 (4th Cir. May 12, 2014). 

SOX protects whistleblowers of publicly traded companies from retaliation, and claims brought pursuant to the Act are analyzed under a burden-shifting framework.  An employee must first establish a prima facie case, including proof of causation, which requires that his protected activity be a contributing factor in the adverse personnel action.  If the employee meets his burden, the employer must then demonstrate by clear and convincing evidence that it would have taken the same personnel action in the absence of the protected activity. 

The causation requirement for a prima facie case of retaliation under SOX is somewhat light.  Indeed, a “contributing factor” is any factor that tends to influence the employer to take an adverse action. But in Feldman, the court emphasized that an employee must still meet his or her burden of proof before shifting any burden to the employer, holding that an employee’s termination at some point after whistleblowing is not automatically dispositive of the issue. 

Facts of Case

Paul Feldman was the president of Law Enforcement Associates (LEA), a surveillance equipment company.  Since at least November 2007, tension existed between Feldman and LEA’s board of directors over a variety of issues.  On January 14, 2008, Feldman reported to the board and the U.S. Department of Commerce (DOC) that a large stockholder was allegedly involved in the prohibited sale of exports.  Following these reports, Feldman also told the DOC he suspected LEA was involved in insider trading, in part because several prominent politicians were shareholders. 

Feldman’s employment was terminated August 27, 2009.  He sued LEA, claiming the termination was in retaliation for having reported LEA’s possible misconduct to the federal government. The U.S. District Court for the District of North Carolina granted summary judgment to LEA, finding Feldman failed to prove that his alleged protected activities were a contributing factor to his termination.  Feldman appealed to the Fourth Circuit Court of Appeals, arguing that the district court improperly placed a heavier burden of proof on him to show that his protected activities “solely or substantially” led to his firing.  The Fourth Circuit disagreed.

Court’s Decision

The Fourth Circuit agreed that Feldman need not show that the activities were a primary or even a significant cause of his termination, but determined that he had still failed to satisfy his rather light burden of showing by a preponderance of the evidence that the activities tended to affect his termination in at least some way. 

In its ruling, the court focused on a number of factors.  First, there was a significant lapse of time between Feldman’s protected activity in reporting to the federal government and the adverse employment action.  Feldman first complained to the DOC in January 2008, but he was not discharged until August 2009 – almost 20 months later.  The court noted that even a 10-month time lapse could preclude proof of the required causation.

Second, according to the court, Feldman’s conduct in meetings, among other things, constituted a “legitimate intervening event further undermining a finding that his long-past protected activities played any role in the termination.”  Feldman’s termination came a month after he encouraged shareholders to sue LEA over a contract dispute and personally wrote a letter to board members threatening that they would be sued if they refused to resign. The court also highlighted that another employee was actually asked to stay at LEA after he also participated in the same alleged protected activities as Feldman, undermining Feldman’s claim that his protected activity was a contributing factor in his termination.

Additionally, the court noted there was “acrimony” between Feldman and the board of directors that began “nearly two months before his first activity.”  Finally, the court rejected Feldman’s argument that his strong work performance and LEA’s successes during his tenure supported a finding of retaliatory discharge, emphasizing that it does not sit as a super-personnel department to second-guess employment decisions. 

Accordingly, the Fourth Circuit agreed with the district court’s conclusion that Feldman failed to establish a prima facie case of retaliation because he did not show his alleged protected activity was a contributing factor to his termination, and affirmed the grant of summary judgment to LEA.

Implication for Employers

The Feldman case is particularly valuable to employers defending SOX whistleblower claims, largely because the court’s analysis ended at the prima facie case stage without addressing 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. Nevertheless, it will be important for employers to show not only facts precluding proof of causation but also the non-retaliatory reasons for taking adverse action against a complaining employee.


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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