On June 12, 2020, the U.S. District Court for the Southern District of Texas granted a motion to dismiss in favor of the defendant in a SOX whistleblower retaliation case, finding that the alleged whistleblower – a contractor and advisory board member of the defendant – was not an employee of the defendant, as required by SOX.  Moody v. American National Insurance Co., No. 3:19-cv-00206 (S.D. Tex. June 12, 2020).

Background

Plaintiff brought suit against the American National Insurance Company (“ANICO”) after he was allegedly retaliated against for complaining about the company’s purported SEC violations and bringing a related shareholder-derivative suit.  Specifically, Plaintiff claimed that he experienced retaliation when ANICO: (1) removed him from his position as an advisory board member, (2) canceled contracts with his insurance company, and (3) announced the termination of an office-space lease in one of his company’s buildings.

ANICO filed a motion to dismiss, arguing that Plaintiff is not an employee, and therefore, not within the class of persons that SOX protects.  In response, Plaintiff argued that as “an Advisory Director of ANICO … [and] an insurance agent selling insurance for and on behalf of ANICO as a contractor,” he is a covered employee under SOX.  Plaintiff relied on the U.S. Supreme Court’s decision in Lawson v. FMR (2014) (discussed here), which extended the class of people protected by SOX to include not only those employed by the public company itself, but also potentially employees of contractors and subcontractors who perform work for the pubic company.  According to Plaintiff, Lawson held that SOX protects a public company’s contractors and agents – and that he was therefore protected from retaliation under the statute.

Ruling

The court sided with ANICO, holding that “retaliation plaintiffs must be employees of the defendant they sue, whether that defendant-employer is the public company itself or one of its contractors.”  In other words, according to the court, the employer-employee relationship is an “essential element” of a retaliation claim.

Because Plaintiff never asserted that he had an employment relationship with ANICO, he cannot state a SOX retaliation claim against the company.  Without further factual support of an employer-employee relationship, it is not enough that Plaintiff claimed that he is the “functional equivalent of an employee” in his role as “an agent, contractor, or subcontractor of ANICO.”  Plaintiff’s service as an advisory board member was also found insufficient to give rise to an employer-employee relationship.  Despite the fact that a corporate director is not disqualified from becoming an employee of the corporation, according to the court, “it is ‘hornbook law’ that a corporate director is not, simply by virtue of his position, an employee.”

Implications

Although Lawson greatly expanded the potential universe of companies covered by SOX’s whistleblower provision, this case is a reminder that there are meaningful limitations to its reach – including the requirement that an employer-employee relationship exist in order for a whistleblower to state a claim under the statute.

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Photo of Lloyd B. Chinn Lloyd B. Chinn

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative…

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd’s practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media, education and technology, he focuses a substantial portion of his practice on the financial services sector. He has tried to final verdict or arbitration award substantial disputes in this area.

Due to Lloyd’s litigation experience, clients regularly turn to him for advice regarding the full range of employment matters, including terminations, whistleblower policy and procedure, reductions in force, employment agreements, and employment policies. For example, in the wake of the financial crisis, he has counseled a number of firms through reductions in force and related bonus and deferred compensation disputes. Lloyd has also been retained to conduct internal investigations of allegations of workplace misconduct, including claims leveled against senior executives.

Lloyd has represented global businesses in matters involving Sarbanes-Oxley and Dodd-Frank whistleblower claims. He has taken an active role in the American Bar Association on these issues, currently serving as Co-Chair of the Whistleblower subcommittee of the ABA Employee Rights and Responsibilities Committee. Lloyd has spoken on whistleblowing topics before a numerous organizations, including the American Bar Association, ALI-ABA, Association of the Bar of the City of New York, and New York University School of Law. He has testified twice before Congressional subcommittees regarding whistleblower legislation and has also published blog postings, articles and client alerts on a variety of topics in this area, including the Dodd-Frank Act’s whistleblower provisions. Lloyd is a co-editor of Proskauer’s Whistleblower Defense Blog, and he has been widely quoted by on whistleblower topics by a number of publications, including the New York Times, the Wall Street Journal, the National Law Journal and Law 360.

Lloyd has also become active in the International Bar Association, presenting on a variety of subjects, including: the #MeToo movement, the COVID-19 pandemic and employment law, and cross-border harmonization of employment provisions in transactions. Lloyd also hosts a quarterly roundtable discussion among financial services industry in-house employment lawyers. He has also published articles and given speeches on a variety of other employment-law topics, including non-solicitation provisions, FINRA arbitration rules, cross-border discovery, e-discovery, and the use of experts.

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.