Second Circuit Strays From “Definitively and Specifically” Standard But Still Dismisses SOX Claim

by Proskauer - Whistleblowing & Retaliation
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On August 8, 2014, the Second Circuit affirmed the dismissal of a SOX whistleblower retaliation claim brought by a former AECOM Technology Corp. (“Company”) employee, holding that he did not engage in protected activity because he lacked a reasonable belief that the alleged conduct of which he complained violated one of the enumerated federal provisions in Section 806 of SOX. Nielsen v. AECOM Technology Corp., No. 13-0235-CV (2d Cir. August 8, 2014). Notably, however, the court abandoned the stricter standard – previously used by courts in the Circuit – that focuses on whether the employee’s protected communications “definitively and specifically” related to one of the listed categories of fraud or securities violations in Section 806.

Background

As a Fire Engineering Manager for the Company, Plaintiff’s duties included reviewing subordinate engineering plans to ensure compliance with “applicable fire safety standards.” Plaintiff alleged that the Company engaged in “fraudulent business practices” because it allegedly failed to take action and terminated his employment after he reported a subordinate for approving fire safety designs without actually reviewing the designs. After Plaintiff’s termination, he filed a SOX whistleblower complaint.

In dismissing that claim, the District Court determined that he had failed to engage in protected activity because he did not demonstrate that his claims “definitively and specifically” related to the enumerated provisions in Section 806 of SOX – i.e., mail fraud, wire fraud, bank fraud, securities fraud or any rule or regulation of the SEC or any provision of federal law relating to fraud against shareholders.

Decision

The Second Circuit affirmed the dismissal, but rejected the “definitively and specifically” standard applied by the lower court, embracing the ARB’s decision in Sylvester v. Parexel Int'l LLC, ARB No. 07-123, 2011 WL 2165854, at *14-15 (ARB May 25, 2011) (adopting less strenuous reasonable belief standard). Applying that standard, the Second Circuit still held that Plaintiff failed to sufficiently allege that he held a reasonable belief that the Company committed mail, bank, securities or wire fraud.

The Court also determined that Plaintiff’s complaints about un-reviewed fire safety designs did not constitute “shareholder fraud” because his concern was “trivial” and “too tenuous” in terms of its relationship to shareholder interests. It noted that there was “no claim that this fire safety review is required by any federal statute or regulation, that these designs had ever been submitted by AECOM for approval by any outside body, or even that the allegedly inadequate fire safety review posed any specific safety hazard.” Thus, the Court concluded, Plaintiff failed to plead facts establishing that his complaint related to any significant company venture or that the complained of activity would impact the company’s business in the United States or overseas. Accordingly, the court held that the Plaintiff’s allegations failed to establish that he engaged in protected whistleblowing activity under Section 806 of SOX.

Implications

This decision is significant because the Second Circuit has articulated for the first time that it will apply the “reasonable belief” standard to analyze whether a plaintiff engaged in “protected activity” under SOX. While the new standard technically may be less taxing than the prior “definitively and specifically” standard used by courts in the Circuit, the Nelson decision underscores the high burden plaintiffs still must surmount in alleging complaints of “shareholder fraud” to establish 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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