In a case of first impression, the U.S. District Court for the Eastern District of Pennsylvania ruled that the U.S. Supreme Court’s holding in Lawson v. FMR LLC, 134 S. Ct. 1158 (2014)—that the whistleblower protection provision in Section 806 of SOX protects employees of a private contractor to a publicly-traded company—does not cover an employee of a private contractor who claimed he was discharged for reporting that his employer committed fraud against a public company but did not allege that fraud was committed by the public company.  Gibney v. Evolution Marketing Research LLC, No. 14-1913, 2014 U.S. Dist. LEXIS 79369 (E.D. Pa. June 11, 2014).

Background

Plaintiff Leo Gibney (Plaintiff) was employed by a private company, Evolution Market Research, LLC (“Company”), between October 2009 and November 7, 2011.  He alleged that the Company terminated his employment after he reported to the COO and GC that he believed a plan approved by the Company’s principals would result in the fraudulent billing of a publicly traded client (the Company was a contractor to that entity).

Ruling

The Company moved to dismiss pursuant to Rule 12(b)(6), asserting that Lawson “does not support extending SOX protection to employees of private companies who, as here, report overbilling ‘fraud’ neither committed by the public company nor having any connection to fraud on shareholders.”  Noting that this argument was one of first impression, the court determined that

SOX was not intended to reach the type of scenario . . . where there are allegations of fraudulent conduct between two companies who are party to a contract, and one of those companies just happens to be publicly-held.

The court distinguished Lawson, where the decision was partially influenced by the unique structure of the mutual fund industry, noting that denying coverage to Plaintiff would not insulate an entire industry from § 1514A protection under Section 806.  The court ultimately dismissed the SOX claim because the public company was the victim of the fraud rather than the perpetrator and

[n]othing in the text of §1514A or the Lawson decision suggests that SOX was intended to encompass every situation in which any party takes an action that has some attenuated, negative effect on the revenue of a publicly-traded company . . .  .

And the court ultimately agreed with the Company that:

extending SOX’s protections in this way presents obvious “over breadth” concerns that risk making SOX a general anti-retaliation statute applicable to any private company that does business with a public company.

Implications

As one of the first decisions to interpret Lawson, the district court limited its application to situations where the publicly held company at least had a hand in the complained-of fraud.  Now there is good authority for the proposition that employees of private contractors asserting claims under SOX need to do more than merely allege fraud and some attenuated link to or involvement of a public company.

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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.