Second Circuit Clarifies SOX Whistleblowing Standard

In Nielsen v. AECOM Technology Corp. (decided August 8, 2014), the Second Circuit clarified the standard to be applied when evaluating whistleblower retaliation claims under Section 806 the Sarbanes-Oxley Act of 2002, codified at 18 U.S.C. § 1514A (SOX).

Congress enacted SOX “[t]o safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation”.

SOX provides that a publicly traded company or its subsidiary cannot “discharge, demote, suspend, threaten, harass, or in any other mannerdiscriminate against an employee in the terms and conditions of employment” because the employee

provide[s] information, cause[s] information to be provided, or otherwise assist[s]in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders. …

To prevail on a claim of retaliation under the statute, a plaintiff must show that

(1) he or she engaged in a protected activity;(2)the employer knew that he or she engaged in the protected activity; (3) he or she suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable action.

Plaintiff, who was employed by defendant(s) as a Fire Engineering Manager, alleged that he was fired after alerting managers that one of his reports “allowed fire safety designs to be marked as approved” without reviewing them.

The district court dismissed plaintiff’s complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), relying on an earlier Second Circuit (non-precedential) Summary Order for the proposition that a whistleblowing employee’s communications “must definitively and specifically relate to one of the listed categories of fraud or securities violations in 18 U.S.C. § 1514(a)(1).” (Emphasis in original.)

The Second Circuit, however, rejected this standard, deferring to a recent decision by the Department of Labor’s Administrative Review Board:

The statute does not specify what, in particular, a purported whistleblower must establish to demonstrate that criminal fraud or securities‐related malfeasance is afoot. But § 1514A’s critical focus is on whether the employee reported conduct that he or she reasonably believes constituted a violation of federal law. A reasonable belief contains both subjective and objective components. That is to say, a plaintiff must show not only that he believed that the conduct constituted a violation, but also that a reasonable person in his position would have believed that the conduct constituted a violation.

Thus, relief pursuant to § 1514A turns on the reasonableness of the employee’s belief that the conduct violated one of the enumerated provisions – which is contrary to the “definitively and specifically” standard. The objective prong of the reasonable belief test focuses on the basis of knowledge available to a reasonable person in the circumstances with the employee’s training and experience. Many employees are unlikely to be trained to recognize legally actionable conduct by their employers. Accordingly, the centrality of the belief of the whistleblower that her employer has engaged in wrongdoing leads us to conclude, in accord with the ARB’s interpretation in Sylvester, that the “definitively and specifically” requirement is not in keeping with the language of the statute.

The court nevertheless held that dismissal of plaintiff’s claim was appropriate:

Stripped of its bare and unsupported conclusions, Nielsen’s complaint wholly fails to allege that the misconduct he reported would have significant repercussions for AECOM or, by extension, its shareholders. Nor has Nielsen alleged any facts
plausibly suggesting that this supposed misconduct implicated any of the enumerated provisions in § 1514A.  We conclude that the complaint’s allegations fail to sustain this whistleblower suit under § 1514A because Nielsen has failed plausibly to allege that he reasonably believed AECOM’s conduct violated an enumerated provision. Accordingly, we deem Nielsen’s claim to be insufficient as a matter of law.

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