On July 19, 2019, the U.S. District Court for the District of Rhode Island granted an employer’s motion to dismiss a SOX whistleblower claim, holding that the Plaintiff—an in-house attorney—failed to allege sufficient facts to show he had an objectively reasonable belief that fraud had occurred.  Colesanti v. Dickinson, No. 18-491.

Background

Plaintiff was an in-house patent and trademark attorney, hired to advise the company regarding intellectual property rights.  Between 2013 and 2016, the company allegedly asked Plaintiff four times to review royalty payments to a French physician patent holder pursuant to a patent license and advise when those payments no longer needed to be made.  On April 16, 2014, in response to one of these requests, Plaintiff provided the expiration date of the patent, but did not calculate the date on which the company could cease making royalty payments.  On February 25, 2016, Plaintiff informed the company that the obligation to pay royalties ended when the royalty agreement expired on March 1, 2014.  Upon further review, the company allegedly discovered that this alleged oversight caused it to pay between $800,000 and $1,000,000 in overpayments.  The company ultimately decided to permit the physician to keep the overpayments.

Plaintiff alleged that he engaged in his first act of protected whistleblowing in February 2016, when he informed his superiors of the overpayment.  After discovering that these overpayments were made, the company hired an accounting firm to conduct an independent internal audit.  With respect to what Plaintiff alleged to be his second act of protected whistleblowing, Plaintiff subsequently emailed several members of the company’s senior management, including the general counsel, indicating that his original analysis of the royalty agreement was accurate and that the company had “misconstrued the termination date of the royalty payments.”  In these emails, Plaintiff also alleged that the company’s contract management system had “become a significant risk to the business” and contributed to the oversight.  For his third act of alleged whistleblowing, Plaintiff alleged that around late November 2016, he discussed the royalty overpayments with the company’s compliance officer, and when the compliance officer indicated that he was not aware of any issues relating to royalty overpayments, Plaintiff sent him a copy of the auditor’s draft report.  Plaintiff’s employment was terminated shortly thereafter.

Plaintiff filed suit alleging his employment was terminated in retaliation for the foregoing alleged whistleblowing in violation of SOX.  In support, he asserted that the company’s “failure to accurately and properly keep track of or pay royalties that were due and owing resulted in a material misrepresentation of such royalties to [the Company’s] shareholders and in any Securities and Exchange Commission filings.”

Ruling

The court dismissed Plaintiff’s complaint pursuant to Rule 12(b)(6).  At the outset, the court noted that the First Circuit has not yet addressed whether fraud allegations in a SOX whistleblower claim are subject to the heightened pleading standard under Federal Rule of Civil Procedure 9(b), but held that because SOX protects an employee’s “reasonable subjective belief of fraud, and does not require proof of actual fraud,” it would not apply the requirements of Rule 9(b).

The court then noted that courts routinely hold that activity is not protected by SOX “where it involves disclosure of conduct that is innocuous or trivial, or where it bears only a tenuous relationship to shareholder interests, even if the plaintiff reasonably believed the activity to be a violation of federal law dealing with fraud.”  The court also noted that claims grounded in securities fraud have been rejected where the alleged fraud “does not rise to the level that would be material to the shareholders.”

The court ultimately held that Plaintiff’s complaint fell short of satisfying the pleading requirements under Twombly and Iqbal because a “plaintiff’s particular educational background and sophistication [is] relevant to the subjective component” and the complaint contained no facts that established or permitted an inference “that a person with [Plaintiff’s] legal training and experience could reasonably believe that the conduct he disclosed to his superiors involved ‘deceit or misrepresentation’ that approximates or implicates fraud or that the conduct is otherwise tethered to wrongdoing connected to ‘the fraud-prevention purposes of SOX.’”

Implications

This decision reaffirms the principle that sophisticated employees like in-house attorneys will be held to a higher standard in alleging that they had an objectively reasonable belief that fraud had occurred in light of their training and experience.

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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 Pinchos Goldberg Pinchos Goldberg

Pinny Goldberg is a senior counsel in the Labor & Employment Law Department. Pinny represents employers in a broad array of matters before federal and state courts, FINRA and other arbitration panels, and administrative agencies, including the EEOC and its state equivalents, and…

Pinny Goldberg is a senior counsel in the Labor & Employment Law Department. Pinny represents employers in a broad array of matters before federal and state courts, FINRA and other arbitration panels, and administrative agencies, including the EEOC and its state equivalents, and in pre-litigation negotiations. Matters he works on include discrimination and harassment, wage and hour, wrongful discharge, whistleblowing and retaliation, covenants not to compete, breaches of fiduciary duty, unjust enrichment, and tort and contract claims.

In addition to handling litigation and dispute resolution, Pinny regularly advises clients on a wide variety of employment issues, including drafting, reviewing and revising handbooks and workplace policies. He also addresses questions and concerns related to hiring, wage and hour issues, employee leave, performance problems, terminations of employment, and separation agreements and releases.

Photo of Tony S. Martinez Tony S. Martinez

Tony Seda Martinez is an associate in the Labor & Employment Law Department and a member of the Labor-Management Relations and Employment Litigation practice groups.

Tony advises clients on a range of labor and employment matters. As part of his employment law practice…

Tony Seda Martinez is an associate in the Labor & Employment Law Department and a member of the Labor-Management Relations and Employment Litigation practice groups.

Tony advises clients on a range of labor and employment matters. As part of his employment law practice, Tony has represented clients in lawsuits alleging breach of contract, discrimination, harassment, and retaliation before federal and state courts and administrative agencies. He also assists employers with complex investigations matters and provides day-to-day counseling on employment law matters. Tony focuses his labor practice on representing public and private employers in grievance arbitrations and collective bargaining negotiations. He counsels clients across a number of industries including financial services, health care, sports leagues, transportation, and media.

Tony earned his J.D. from Rutgers Law School in 2018 where he was a member of the Rutgers Law Review. From 2022 to 2023, Tony served as a judicial law clerk to the Honorable José R. Almonte in the District of New Jersey.