SOX Whistleblowers Protection

PROTECTED ACTIVITY; CHEMIST’S DISCLOSURE OF PURPORTED VIOLATION OF FDA CONSENT DECREE, FDA AND EU REGULATIONS, AND OTHER DRUG MANUFACTURING GUIDELINES FOUND NOT PROTECTED ACTIVITY UNDER SOX

In Portes v. Wyeth Pharmaceuticals, Inc., No. 06-CV-2689 (S.D.N.Y. Aug. 20, 2007), the court accepted as true (for purposes of the motion) that the terminated employee was a chemist, and the principle project manager for a “Sustainable Compliance Initiative” that was established as the result of a consent decree entered into with the FDA after the Defendant had failed to comply with certain FDA regulations, including good manufacturing practices for the production of pharmaceutical and biological products. The Plaintiff uncovered problems with his direct supervisor’s work, leading him to believe that the Defendant was in violation of the consent decree, and certain federal and EU regulations. He communicated his findings to a higher level supervisor, who allegedly retaliated against him. After being placed on a PIP, the Complainant filed additional complaints through various channels at the Defendant alleging violations of regulations relating to the manufacture of pharmaceuticals and complaining of “whistleblower” retaliation. The Plaintiff was eventually terminated as a result of those disclosures and complaints.

The Defendant moved for summary judgment based on a contention that the Plaintiff did not engage in protected activity under the SOX because none of his reports were sufficiently related to securities fraud or any violation enumerated in section 1514A(a)(1). The court agreed.

The court closely followed the analysis from Fraser v. Fiduciary Trust Co. Int’l, 417 F.Supp.2d 310 (S.D.N.Y.2006), which protected disclosures under SOX only when they “implicate the substantive law protected in Sarbanes-Oxley ‘definitively and specifically.’” Slip op. at 7 (citations omitted). The Plaintiff argued that if the Defendant had violated regulations, it faced fines and other penalties that might have significantly affected share prices. He also asserted that, in light of prior references to the consent decree in financial reports, he had a reasonable belief that the company was obligated to report the violations to the FDA, SEC, and shareholders. He did not, however, allege that he explicitly referred to fraud, shareholders, securities, statements to the SEC, or SOX in his disclosures to his superiors at the Defendant. The court stated that the purported violations involved the consent decree, FDA and EU regulations, and other drug manufacturing guidelines, and not federal law related to fraud against shareholders. Thus, the court found that the disclosures were not sufficiently related to shareholder fraud to constitute protected activity.

The Court found that the circumstances did not suggest a concern that the Defendant was being unfair to its investors, that its lack of compliance with FDA regulations might have implications for its reports to investors and the SEC, or that it was otherwise engaged in conduct that would have alerted it that the Plaintiff believed that the Defendant was violating a federal rule or law related to fraud against shareholders.

The court observed that the Plaintiff was employed as a chemist and project manager implementing standards for drug manufacturing, and not as an investment analyst. Thus, the court would not infer that the Plaintiff was concerned with shareholder fraud based on the nature of his job responsibilities or his work.

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PROTECTED ACTIVITY; CASE INVOLVING IN-HOUSE PATENT COUNSEL.

In Van Asdale v. International Game, Technology, No. 3:04-CV-00703-RAM (D.Nev. June 13, 2007), the Magistrate  concluded that under SOX, an employee’s act must implicate securities fraud definitively and specifically. The court found that “implicate” in this context does not mean merely to “imply,” but “‘to bring into intimate or incriminating connection’ See Webster’s Third New International Dictionary, Unabridged, 1135 (entry for ‘implicate’).” Slip op. at 10. The Magistrate Judge stated that a better synonym for “implicate” in this context would be “incriminate” or “accuse.”

The Magistrate found that:

• the whistleblower must “reasonably believe” that there has been a SOX violation,
• the reasonableness threshold is intended to include all good faith and reasonable reporting of fraud, and there should be no presumption that reporting is otherwise, absent specific evidence,”

• the “reasonable person” standard should be applied,

• in order for an employee to reasonably believe that a violation occurred, he or she must have a subjective and objectively reasonable belief that fraud occurred,

• under the subjective portion of the reasonableness requirement the employee must actually believe that the employer was in violation of the relevant law or regulations,

• under the objective portion of the reasonableness requirement the employee’s belief must be objectively reasonable,

• reasonableness is “determined on the basis of the knowledge available to a reasonable person in the circumstances with the employee’s training and experience.”

Slip op. at 14-15. In Van Asdale, the Plaintiffs, who were in-house intellectual property attorneys for the Respondent, alleged that they met with the Defendant’s General Counsel to express their views on the invalidity of a patent held by a company which the Defendant was considering acquiring by merger, and to express concern that fraud had occurred. In regard to the objectively-reasonable belief element, the Magistrate rejected the Defendant’s argument that fraud would have only occurred if the target company had intentionally failed to disclose documents bearing on the invalidity of the patent, and that the Plaintiffs therefore could have only had an objectively reasonable belief if they ruled out other non-fraudulent explanations for the non-disclosure. The Magistrate found that SOX does not require an attorney whistleblower “to investigate and rule out other possible explanations for what appears to be fraud before ever reporting the apparent fraud to any one at the company.” Slip. at 16.

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PROTECTED ACTIVITY; REASONABLENESS OF PLAINTIFF’S BELIEF IN ACCOUNTING VIOLATION; DEFENDANT’S INTERNAL INVESTIGATION AS A RESULT

In Johnson v. Stein Mart, Inc., No. 3:06-cv-00341 (M.D.Fla. June 20, 2007)  the Employee Plaintiff had been hired as a Buyer at the Defendant’s corporate headquarters, and was later promoted to be a Planner, in which capacity she complained to management about (1) the collection of markdown allowances from vendors, (2) the changing of season codes on older inventory, and (3) the accounting for the value of inventory.

The Defendant argued that the Plaintiff failed to establish a prima facie case on the element of protected activity because she did not have a reasonable belief that these practices were illegal because she had no accounting background and had no knowledge of the Defendant’s accounting practices. The Defendant argued that its vendor markdown allowances and season code changes were in line with general industry practices. The district court rejected Defendant Stein Mart’s argument because the Defendant had treated the Plaintiff’s complaints reasonable enough to have warranted an internal investigation. 

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O’Mahony v. Accenture 

 A New York Federal Judge has found that a former senior employee of a global consulting firm who was stationed in Paris can sue for damages under the whistleblower protection provision of Sarbanes-Oxley.Rosemary O’Mahony, a British citizen who worked for Accenture in France for 14 years, claimed the company demoted her after she accused it of withholding more than $3 million it owed in French social security payments.The Southern District of New York Judge rejected a motion to dismiss by co-defendants Accenture, which is based in Bermuda, and itsU.S. subsidiary. The co-defendants argued that the provision of  Sarbanes-Oxley did not cover employees outside theUnited States.The  Court determined that because the alleged “wrongful conduct and other material acts occurred in the United States … the exercise of jurisdiction by this Court to resolve the dispute before it would not implicate extraterritorial application of American law.”This appears to be the first case that applies Sarbanes-Oxley whistleblower protections to an employee working overseas.The Plaintiff in the case, O’Mahony, was a partner at Accenture’s U.S. subsidiary from 1984 through Aug. 31, 2004, and a partner and employee of its French subsidiary from Sept. 1, 2004, to Oct. 31, 2006.Around September 1992, she left the United States to establish and head a new office for Accenture in France. She worked in
France part time for a year, but in September 1993 her assignment was made full time.Accenture’s
U.S. subsidiary received a certificate of coverage exempting it from making contributions to the French social security system for five years. But since she worked in Paris for more than five years, O’Mahony claimed that Accenture was obligated to make payments to the system.O’Mahony alleged in her complaint that her former employer owed the French government “in an amount equal to approximately 36 percent of Ms. O’Mahony’s total compensation for the period September 1997 through September 1, 2004.”She said that she earned $10.4 million during that period, making the amount owed to the French $3.7 million.O’Mahony said that she notified American executives about the problem, but in September 2004 Accenture’s global financial controller in New York told her that the company had decided that its “‘interests’ would be better served by not making any of the French social security contributions and continuing to affirmatively conceal from the French authorities the fact that [O’Mahony] had been working in France since 1992.”O’Mahony said that she responded that she could not violate the law, and brought the matter to the attention to the French authorities. She claimed that Accenture responded by demoting her in November 2004 and reducing her salary by $670,000.O’Mahony filed a complaint on March 24, 2005, with the U.S. Labor Department, alleging that the company had violated §1514A of Sarbanes-Oxley by retaliating against her.The Labor Department dismissed the complaint in May 2005. It noted that O’Mahony’s “employment and each of the alleged elements of her complaint occurred in
France.” For that reason, it ruled that it had no jurisdiction over her claim.

After losing an administrative appeal, O’Mahony filed her action in the Southern District. Meanwhile, she had left the company on Oct. 31, 2006.

The New York Federal Court disagreed.

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AN EMPLOYEE’S   ASSISTANCE IN RESPONDING TO A SUBPOENA  BY A GRAND JURY WAS POTENTIALLY ”ASSISTING” A PROCEEDING AND THEREFORE POTENTIALLY  A PROTECTED ACTIVITY

In Miles v. Wal-Mart Stores, Inc.,No. 5:06-CV-05162, slip op. at n.4 and surrounding text (W.D.Ark. Jan. 25, 2008), the court found that the Plaintiff had created a geniune issue of material fact as to whether she engaged in protected activity under the SOX where she had provided assistance to the FBI and an Assistant U.S. Attorney in connection with Wal-Mart’s response to a grand jury subpoena calling for production of documents concerning union-related labor relations and the investigation of a former executive for suspected fraud. The Plaintiff  had objected to an instruction to shred certain documents being digitized in her labor relations department which might have been subject to the subpoena. Wal-Mart argued that the Plaintiff had only aided an “investigation” as opposed to a “proceeding.” The court found that under the circumstances, a genuine issue of material fact existed as to whether the Plaintiff  engaged in protected activity.

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Allen v. Administrative Review Board (5th Cir. 1/22/08)

Yesterday the Fifth Circuit Court of Appeals issued a ruling on a SOX Whistleblower’s appeal of a ruling by an Administrative Law Judge.  The opinion is attached.

The Fifth Circuit found that:

1)   an employee’s complaint must “definitively and specifically relate” to one of the six enumerated categories found in § 1514A: mail, wire, bank or securities fraud, any rule or regulation of the SEC, or any provision of federal law relating to fraud against shareholders;

2)   an employee’s reasonable belief of such a violation must be scrutinized under both a subjective and objective standard;

3)   an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six enumerated categories is protected;

4)   the “objective reasonableness” standard applicable to SOX whistleblower claims is similar to the “objective reasonableness” standard applicable to Title VII retaliation claims;

5)   while that can sometimes be decided as a matter of law, if there is a genuine issue of material fact it cannot be;

6)   as to the catch all provision (federal law relating to fraud against shareholders), the employee must reasonably believe that his or her employer acted with a mental state embracing intent to deceive, manipulate, or defraud its shareholders.

7)   since one of the plaintiffs was a CPA, an “expert standard” had to be applied in reviewing the “objective standard.”

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