Chicago Federal Court Rejects Retaliatory Discharge Claim Due To Existence Of SOX Whistleblower Claim

On April 23, 2018, the U.S. District Court for the Northern District of Illinois ruled that a plaintiff’s SOX claim precluded his claim for common law retaliatory discharge.  Cohen v. Power Solutions International, Inc., No. 17-cv-4385.

Plaintiff, a COO, claimed that in early 2016, he became suspicious of the Company’s financial dealings and believed the Company “had engaged in sham transactions, channel-stuffing, and other financial and accounting misconduct.”  Plaintiff reported his purported concerns to senior executives, employees at the Company and the Board of Directors and Audit Committee.  Shortly after his report to the Board, the CEO issued Plaintiff an “Action Plan,” dated the day before Plaintiff’s report to the Board and Audit Committee.  The Action Plan outlined areas of concern with Plaintiff’s performance and action items.  Plaintiff responded to the Action Plan in writing a few days later and again raised concerns regarding financial misconduct.  Plaintiff’s employment was terminated a few weeks later.

Plaintiff then filed suit claiming retaliation under SOX and Illinois common law.  The Company filed a motion for judgment on the pleadings pursuant to Rule 12(c), arguing that the Plaintiff’s “SOX claim provides an adequate alternative remedy, and so Illinois law precludes a common law retaliatory discharge claim for the same act of retaliation.”  The court agreed, finding that “Illinois courts do not permit common law claims for retaliatory discharge where there is an adequate alternative remedy available that renders the common law remedy superfluous.”  The court noted that where the act of retaliation violates a statutory right – such as SOX – “common law retaliatory discharge claims cannot stand.”

This case precludes Illinois plaintiffs from adding common law retaliation claims to SOX claims in hopes of raising the specter of punitive damages that SOX does not provide.

Federal Court Rules That Providing Testimony to FINRA Is Not Protected Activity Under Dodd-Frank

On April 19, 2018, the United States District Court for the District of New Jersey held that providing testimony to FINRA (which is overseen by the SEC) does not constitute protected activity for purposes of establishing a Dodd-Frank whistleblower claim.  Price v. UBS Financial Services, Inc., No. 2:17-01882.

Background.  Plaintiff, a former UBS Private Wealth Advisor, testified before FINRA regarding allegedly unlawful activities by company management.  After Plaintiff was terminated, Plaintiff brought anti-retaliation claims under Dodd-Frank and the Florida Whistleblower Act.  The Court denied the dismissal of the Florida Whistleblower Act claim, but stayed the Dodd-Frank pending the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers.  On February 21, 2018, the Supreme Court issued their decision, holding that the anti-retaliation provision in Dodd-Frank does not extend to individuals who failed to report the potential violation to the SEC.  Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767, 772 (2018).

Ruling.  Following the decision in Digital Realty Trust, Inc. v. Somers, UBS moved to lift the stay and dismiss Plaintiff’s Dodd-Frank claim with prejudice arguing that testifying before FINRA did not equate to providing information to the SEC.  Plaintiff opposed the dismissal, arguing that his disclosures were sufficient since the SEC oversees FINRA and its rulemaking process and disciplinary proceedings.  The court dismissed Plaintiff’s Dodd-Frank claim, holding that the Digital Realty decision makes clear that the “core objective of Dodd-Frank’s robust whistleblower program… is to motivate people who know of securities law violations to tell the SEC.”  Digital Realty, 138 S. Ct. at 777.  (internal quotations and citations omitted).  Accordingly, the Court determined that Plaintiff’s testimony to FINRA did not meet the statutory requirement to report information to the SEC.

Implications.  This decision demonstrates that federal courts may take narrow view as to the definition of “whistleblower” under Dodd-Frank’s anti-retaliation provisions and that plaintiffs must report misconduct to the SEC in order to be protected by Dodd-Frank.


SDNY Grants Summary Judgment Against Plaintiff in SOX Blacklisting Suit

The U.S. District Court for the Southern District of New York recently granted a motion for summary judgment against a Plaintiff claiming retaliatory blacklisting under SOX, holding that a former employer’s policy of refusing to conduct business with plaintiff was not actionable under the circumstances of the case.  Kshetrapal v. Dish Network, 2018 U.S. Dist. Lexis 48493 14-CV-3527 (PAC) (S.D.N.Y. Mar. 23, 2018). Continue Reading

DC Circuit Upholds SEC’s Denial of Dodd-Frank Bounty Award

On March 20, 2018, the DC Circuit upheld the SEC’s denial of a Claimant’s application for a Dodd-Frank whistleblower bounty award because the SEC did not rely on the information provided by the Claimant in pursuing an enforcement action against Management Solutions.   In upholding the SEC determination, for first time, the court identified the standard of review for an appeal of the SEC’s denial of an award in a whistleblower action, holding that the appropriate standard under 5 U.S.C.A. § 706(2)(E) is whether the SEC’s determination was based on “substantial evidence.”  Doe v. SEC, 2018 U.S. App. Lexis 7449 No. 16-1414 (D.C. Cir. Mar. 20, 2018). Continue Reading

Tenth Circuit Reverses Grant of Summary Judgment on SOX Whistleblower Claim

On February 22, 2018, the Tenth Circuit Court of Appeals reversed a district court’s grant of summary judgment against Plaintiff who claimed that his employment was terminated in violation of the SOX whistleblower protection provision.  The court concluded that genuine issues of material fact existed as to whether Plaintiff actually believed that the complained-of conduct was unlawful and whether the complaints were a contributing factor in Plaintiff’s termination. Genberg v. Porter, No. 16-cv-1368.

Background.  Plaintiff was an executive at a biopharmaceutical company.  In March 2010, he sent a pair of e-mails to the company’s board of directors, which alleged, among other things, that the CEO was engaged in insider trading.  The board hired an attorney to investigate, and the investigation found no evidence of insider trading but allegedly uncovered that Plaintiff had been involved in an attempt to acquire the company.  Allegedly on that basis, the board discharged Plaintiff.  Plaintiff proceeded to sue the CEO under SOX in the United States District Court for the District of Colorado, arguing that the e-mails constituted protected activity.  The district court granted the employer’s motion for summary judgment, holding that at least one of Plaintiff’s two e-mails had not been protected by SOX because it did not “definitively and specifically” relate to a violation of one of the laws enumerated in Section 806 of SOX.

Rulings.  The Tenth Circuit reversed the district court, ruling that the lower court had incorrectly applied the “definitively and specifically” standard when it should have applied the standard articulated by the Administrative Review Board in Sylvester v. Parexel, No. 07-123 (ARB May 25, 2011).  The court wrote, “[the district court’s] statement of the burden was incorrect, for the Administrative Review Board of the Department of Labor has explicitly disavowed the definitive and specific evidentiary standard… [and] [u]nder Chevron deference, we follow the Administrative Review Board’s interpretation if it is based on a permissible construction of an ambiguous statute.”  Further, the Tenth Circuit found that genuine factual disputes existed as to whether Plaintiff’s e-mails contributed to the decision to terminate his employment.  The court reasoned that the temporal proximity between the e-mails and the board’s decision to discharge the Plaintiff meant that a reasonable factfinder could potentially conclude that the e-mails had been a contributing factor in the decision.

Implications.  The Tenth Circuit’s opinion is another example of a court deferring to the ARB’s standard in Sylvester, which lowers the burden for a plaintiff who seeks to demonstrate that he or she engaged in protected activity under SOX.

Mississippi Federal Court Denies Summary Judgment on SOX Whistleblower Claim

On February 12, 2018, the United States District Court for the Northern District of Mississippi recently denied a motion for summary judgment in a SOX whistleblower claim where the defendant company alleged that it terminated the plaintiff pursuant to a reduction-in-force (RIF). Hendrick v. ITT Engineered Valves, LLC, No. 16-cv-204.

Background. Plaintiff began working as Operational Excellence Manager at a company that was considering a RIF to respond to a decline business.  Recognizing that he may lose his job, Plaintiff offered to management that he take off Fridays off to reduce expenses.  Later that month, Plaintiff allegedly observed fraudulent inventory figures.  Plaintiff photographed the proof of the alleged fraud and gave the pictures to a co-worker, who submitted an anonymous ethics complaint.  Three hours after the report was filed, Plaintiff was informed that his job was being restructured, and Plaintiff interpreted this as a demotion.  Plaintiff then e-mailed management about the alleged fraud.  He and his co-worker who submitted the anonymous ethics complaint were both terminated months later.  The organization cited a RIF as its reason for the layoffs.  Plaintiff filed suit alleging he was terminated because of his co-worker’s anonymous ethics complaint in violation of SOX.

Rulings. The company moved for summary judgment, arguing that because Plaintiff failed to identify any fraudulent activity that would qualify as a protected activity.  Specifically, it argued that Plaintiff never accused the company of any SOX violation and failed to articulate his fraud claim in deposition testimony.  But the court determined that there were questions as to whether Plaintiff’s purported beliefs were objectively and subjectively reasonable.  The company also argued that there was no materially adverse employment action, as the restructuring was not a demotion and because Plaintiff’s termination was planned prior to the whistleblowing activity.  For summary judgment purposes, however, the court found that Plaintiff established a prima facie case that the alleged demotion and termination were adverse actions. Notably, moreover, even though the organization provided a “first pass” of names to be included in the RIF, it was not deemed to be “clear and convincing” evidence that the organization would have terminated Plaintiff in the absence of his protected activity.

Implications. While a pre-planned RIF may in many cases provide a compelling explanation as to why one was not terminated for whistleblowing activity, this decision shows that this defense is not always an impenetrable shield to a SOX claim at the summary judgment phase.

U.S. Supreme Court Holds That Anti-Retaliation Provisions of Dodd-Frank Apply Only to Whistleblowers Who Report to the SEC

On February 21, 2018, the U.S. Supreme Court unanimously ruled that an individual is not covered by the anti-retaliation provision of the Dodd-Frank Act unless they have provided information regarding a violation of law to the U.S. Securities and Exchange Commission. Digital Realty Trust, Inc. v. Somers, No. 10-1276, 583 U.S. ___ (2018).

Somers was a Vice President of Digital Realty, a real estate investment trust, who filed suit alleging a claim of whistleblower retaliation under Dodd-Frank. Somers alleged that he was terminated for reporting suspected securities law violations to senior management.  Digital Realty moved to dismiss Somers’ claim on the basis that Somers did not qualify as a “whistleblower” because he never reported any alleged violations to the SEC.

The Dodd-Frank Act defines a “whistleblower” as a person who provides “information relating to a violation of the securities laws to the Commission.” The Dodd-Frank Act’s anti-retaliation provision protects a “whistleblower” in three situations, including when he or she makes disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.  Sarbanes-Oxley includes several provisions regarding internal reporting of securities laws violations.  In interpreting this provision, the SEC issued Rule 21F-2, which expressly allows an individual to gain anti-retaliation protection as a whistleblower without providing information to the SEC.

The District Court denied Digital Realty’s motion to dismiss, and the Ninth Circuit affirmed. In particular, the Ninth Circuit found the statutory scheme ambiguous and held that the SEC’s Rule 21F-2 warranted deference under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984).

In reversing the Ninth Circuit’s decision, the Supreme Court unanimously held that the anti-retaliation provision must be interpreted in accordance with the statute’s definition of a “whistleblower.” Because this definition was “clear and conclusive” and “Congress [had] directly spoken to the precise question at issue,” Chevron deference to the SEC’s Rule was not appropriate.  The Court reasoned that this interpretation is in line with Dodd-Frank’s core objective of prompting reporting to the SEC.

Proskauer represented the U.S. Chamber of Commerce in its submission of an amicus brief in support of Digital Realty and a reversal of the Ninth Circuit’s decision.

The Court’s decision settles a circuit split between the Second and Fifth Circuits on the issue. The Ninth Circuit had followed the Second Circuit’s decision in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015), holding that a whistleblower need not report a securities law violation to the SEC.  The Second Circuit concluded that the tension between the definition of “whistleblower” and the protection provided by Dodd-Frank’s anti-retaliation provision was sufficiently ambiguous to warrant Chevron deference to the reasonable interpretation of the SEC.  In contrast, the Fifth Circuit held in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), that employees must provide information to the SEC to avail themselves of the anti-retaliation safeguard. The Fifth Circuit held that Congress defined a “whistleblower” unambiguously and rejected the SEC’s more expansive interpretation of that term.

S.D.N.Y Dismisses Dodd-Frank Whistleblower Action

On February 5, 2018, U.S. District Court for the Southern District of New York granted Defendant Khan Funds Management America, Inc.’s Rule 12(b)(6) motion to dismiss a whistleblower retaliation claim under Dodd-Frank on the grounds that Plaintiff failed to state a claim upon which relief could be granted.  Polite v. Khan Funds Mgmt. Am., Inc., 17-cv-2988.

Defendant employed Plaintiff for approximately one year as its sole accountant.  In April of 2016, he allegedly reported to the Head of Financial Operations his suspicions of deceptive contracting and that the company’s founder was embezzling funds.  Plaintiff alleged that over the following months, he “repeatedly raised these issues,” including requesting “documents to support transactions” appearing on Defendant’s bank accounts, highlighting a failure to recoup on breached international contracts in July 2017, and other instances of underpayment.  Plaintiff alleged that these concerns were either ignored or he was told that because “he was not part of ‘management,’ he did not need to know about certain matters.”  In September 2016, Plaintiff’s employment was terminated.  Plaintiff then pursued a federal action under Dodd-Frank.

The district court dismissed Plaintiff’s complaint pursuant to Rule 12(b)(6).  The court first determined that Plaintiff did not have a claim under Dodd-Frank because he did not complain to the SEC.  (This issue is currently pending before the United States Supreme Court, as noted in our blog post here.)  The court also concluded that Plaintiff did not engaged in protected activity because he did not make disclosures that are “explicitly ‘required or protected’ under a rule or law within the SEC’s purview.”

This case is valuable to employers, as it underscores that one must specifically complain of securities law violations to state a claim under Dodd-Frank.

Court Precludes Parallel Cause of Action Where CEPA Violations Are Plead

On January 30, 2018, the U.S. District Court for the District of New Jersey granted Defendant Public Service Electric & Gas Co.’s motion to dismiss a New Jersey common law wrongful termination claim in a whistleblower retaliation suit after finding that once discovery closes, a plaintiff may not continue pursuing a wrongful termination claim under both common law and New Jersey Conscientious Employee Protection Act (CEPA).  See Hrinuk v. Public Service Electric & Gas Co., No. 2014-cv-00988 (unpublished).

Plaintiff allegedly reported to management that he was “forced and directed to sign off on work that he had not actually inspected” and improperly “charge repairs to capital accounts.”  Plaintiff claimed that after reporting the alleged inspection practices, he was wrongfully terminated.  Shortly thereafter, he filed suit alleging wrongful termination under CEPA and common law.

When discovery in the case closed, Defendant moved to dismiss the common law wrongful termination claim, arguing that, pursuant to a “waiver” provision in CEPA, when a plaintiff brings a suit under the statute, he or she is waiving other rights and remedies available in “contract, collective bargaining agreement, State law, rule or regulation or under the common law.”  N.J. Stat. Ann. Section 34:19-8.  Plaintiff responded that he should be permitted at the summary judgment stage to elect between moving forward with a CEPA claim or any other claim.  The court disagreed, determining that the waiver provision under CEPA activates at the close of discovery and, at that time, bars other causes of action that are based on the same conduct upon which the CEPA claim is based.

This decision benefits employers faced with complaints alleging multiple wrongful termination theories—including CEPA violations—as it enables them to put plaintiffs to an election when discovery closes.

Missouri Court of Appeals Upholds $1.5 Million Whistleblower Jury Verdict

On January 22, 2018, the Missouri Court of Appeals upheld a jury verdict awarding approximately $1.5 million in damages to a radiation oncologist after finding that she had been constructively and wrongfully terminated in violation of Missouri law (specifically, “Missouri public policy”) in retaliation for reporting alleged instances of substandard medical treatment and fraud. Kim v. Mercy Clinic Springfield Communities, Case Nos. SD34547 & SD34561.

Defendant employed Plaintiff as a radiation oncologist from 2006 to 2012. During Plaintiff’s employment, she reported suspected Medicare fraud and violations of patient care standards to Defendant.  Plaintiff claimed that, after raising these concerns, Defendant retaliated against her and ultimately forced her to resign.  Plaintiff filed suit alleging that she had been constructively discharged in violation of Missouri public policy.  The case proceeded to trial and the jury subsequently found that Plaintiff had been constructively discharged in violation of public policy.  The jury awarded her $720,821 in compensatory damages and $800,000 in punitive damages on her wrongful termination claim.  Defendant appealed, contending that the trial court erred in denying its motions for a directed verdict.  The Missouri Court of Appeals denied Defendant’s appeal and upheld the jury’s verdict and award.  The court held that Defendant failed to preserve the issues it raised on appeal.

This sizeable adverse jury verdict highlights the risks that employers may face in trying whistleblowing and retaliation suits to a jury.