On April 24, 2013, the U.S. District Court for the Central District of California issued its final ruling that a SOX whistleblower complaint survived a Rule 12(b)(6) challenge.  Zulfer v. Playboy Enterprises, Inc., No. 12-cv-08263 (C.D. Cal. April 24, 2013).  The decision focused on Plaintiff Catherine A. Zulfer’s (Plaintiff) allegation that she “reasonably believed” her disclosures regarding certain of Defendant Playboy Enterprises, Inc. (Company) executives’ alleged attempts to  circumvent internal procedures concerning discretionary bonuses were related to a violation of SEC rules and regulations.    Although the court allowed her to proceed with a claim under Section 806 of SOX, it dismissed her claims under California state law pursuant to Rule 12(b)(6) because she did not sufficiently allege that accruing the bonuses would have been illegal. 

The Prior “Tentative” Ruling.  As we reported in our February 15th post (which sets forth the pertinent factual allegations in greater detail), the court issued a “tentative” decision on February 11, 2013, finding Plaintiff’s SOX whistleblower claim survived the Company’s Rule 12(b)(6) challenge, but that her claims under California labor law should be dismissed.   In that decision, the court found that Plaintiff adequately stated a claim under Section 806 of SOX by pleading that she had a reasonable belief that the Company violated internal controls regarding executive bonuses required by the Securities and Exchange Act, and also found that Plaintiff failed to state a claim for shareholder fraud, highlighting the absence of any allegation that the Defendants intended to communicate a misrepresentation to shareholders. 

SOX Section 806 Claim.  In the final decision, the court adhered to the rulings in its interim decision, but also  engaged in a more comprehensive discussion of the scienter requirement for SOX whistleblower complainants, in light of Defendants’ argument “that a SOX plaintiff should be required to ‘prove some level of scienter’ on defendants’ part in order to allege that she had a reasonable belief there had been a violation falling within one of the six categories enumerated in § 1514A(a)(1).”   Id. at 17, n.37.  It acknowledged that the first, fourth and sixth categories in Section 1514A(1)(a) specifically pertain to fraud, noting that in most cases arising under SOX, “a plaintiff will be required to plead a belief that the defendants acted with scienter because the intent to decide will be an element of the underlying violation.”  Id.  But the court found that scienter is not required to show a violation of “any rule or regulation of the Securities and Exchange Commission” — the fifth category enumerated in §1514A(1)(a).  Accordingly, it ruled that, “[b]ecause scienter is not a required element of a claim alleging an internal controls violation of the Exchange Act, see § 78m(b)(2), and because Zulfer has adequately alleged a reasonable belief that [the Company executives] attempted to circumvent internal controls in violation of that statute, her failure to allege that they acted with the intent to deceive shareholders is not entirely fatal to her SOX claim.”  Id. at 18, n.37.  The court ultimately ruled that Plaintiff adequately stated a claim based on the alleged disclosure of information covered by the fifth category of violations enumerated by Section 1514A(1)(a).

California Labor Code Section 1102.5(c) Claim.  Section 1102.5(c) of the California Labor Code, upon which Plaintiff separately relied, provides that “[a]n employer may not retaliate against an employee for refusing to participate in an activity that would result in a violation of state or federal statute, or a violation or noncompliance with a state or federal rule or regulation.”  Unlike Section 806 of SOX, 1102.5(c) requires a plaintiff to allege that the employer committed an illegal act.  The court found that, although Plaintiff alleged that she had a reasonable belief that accruing the bonuses without Board of Director approval would have violated one of the laws listed in Section 1514A(a)(1), she did not allege sufficient facts to show that actually accruing the bonuses would have been illegal.  Accordingly, the court dismissed this claim.

Implications.  Though concerning with respect to its analysis of whether a plaintiff relying on alleged internal control failures or violations needs to prove scienter to state a claim under Section 806 of SOX, the Court’s final decision should prove useful to employers in tag-along state retaliation claims, such as those under Section 1102.5(c) of the California Labor Code.  In fact, this decision serves the highlight how plaintiffs oftentimes face more lenient standards under SOX whistleblower claims than under state retaliation claims.

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Photo of Steven J. Pearlman Steven J. Pearlman

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular…

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular focus on defending companies against claims of employment discrimination, retaliation and harassment; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations. He has successfully tried cases in multiple jurisdictions, and defended one of the largest Illinois-only class actions in the history of the U.S. District Court for the Northern District of Illinois. He also secured one of only a few ex parte seizures orders that have been issued under the Defend Trade Secrets Act, and obtained a world-wide injunction in federal litigation against a high-level executive who jumped ship to a competitor.

Reporting to boards of directors, their audit committees, CEOs and in-house counsel, Steven conducts sensitive investigations and has testified in federal court. His investigations have involved complaints of sexual harassment involving C-suite officers; systemic violations of employment laws and company policies; and fraud, compliance failures and unethical conduct.

Steven was recognized as Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He is a Fellow of the College of Labor and Employment Lawyers.  Chambers describes Steven as an “outstanding lawyer” who is “very sharp and very responsive,” a “strong advocate,” and an “expert in his field.” Steven was 1 of 12 individuals selected by Compliance Week as a “Top Mind.” Earlier in his career, he was 1 of 5 U.S. lawyers selected by Law360 as a “Rising Star Under 40” in the area of employment law and 1 of “40 Illinois Attorneys Under Forty to Watch” selected by Law Bulletin Publishing Company. Steven is a Burton Award Winner (U.S. Library of Congress) for “Distinguished Legal Writing.”

Steven has served on Law360’s Employment Editorial Advisory Board and is a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is regularly quoted in leading publications such as The Wall Street Journal.

The U.S. Chamber of Commerce has engaged Steven to serve as lead counsel on amicus briefs to the U.S. Supreme Court and federal circuit courts of appeal. He was appointed to serve as a Special Assistant Attorney General for the State of Illinois in employment litigation matters. He has presented with the Solicitor of the DOL, the Acting Chair of the EEOC, an EEOC Commissioner, Legal Counsel to the EEOC and heads of the SEC, CFTC and OSHA whistleblower programs. He is also a member of the Sedona Conference, focusing on trade secret matters.

Photo of Noa Baddish Noa Baddish

Noa M. Baddish is a senior counsel in the Labor & Employment Law Department. She is a member of the Sports, Employment Litigation & Arbitration, Class and Collective Action, Wage & Hour and Whistleblower & Retaliation Practice Groups.

Noa’s practice concentrates on all…

Noa M. Baddish is a senior counsel in the Labor & Employment Law Department. She is a member of the Sports, Employment Litigation & Arbitration, Class and Collective Action, Wage & Hour and Whistleblower & Retaliation Practice Groups.

Noa’s practice concentrates on all aspects of labor and employment law. Her employment litigation practice in state and federal courts includes class and collective actions and defending claims of discrimination, harassment, breach of contract and violations of wage and hour laws. Noa represents Major League Baseball and its clubs in an ongoing litigation brought by current and former minor league players who allege minimum wage and overtime violations. In addition, Noa has represented clients in the media and entertainment and fashion industries in lawsuits brought by unpaid interns in wage and hour disputes.

Noa also provides significant assistance on counseling matters on a wide array of issues for clients in various industries, including, but not limited to, sports, law firms, financial institutions, media and fashion.

Noa has been recognized as a Rising Star by New York Super Lawyers since 2015. She has authored and contributed to several articles and newsletters on employment and labor topics, including “State Whistleblowing Laws Provide Whopping Verdicts,” New York Law Journal (January 2014). Noa is also a frequent contributor to the Firm’s Whistleblower Defense blog.

Previously served as Assistant General Counsel to the New York City Mayor’s Office of Labor Relations, Noa defended the Mayor and City agencies against both employee grievances at arbitration and improper practice petitions before the Board of Collective Bargaining. Prior to that, she was a Law Clerk to Judge Ellen L. Koblitz of the Appellate Division of the New Jersey Superior Court.

While in law school, Noa served on the Executive Board as notes and articles editor of the Fordham Urban Law Journal.