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Third Circuit Adopts DOL's Liberal Test for Determining Protected Whistleblower Activity under SOX

  • March 26, 2013

The U.S. Court of Appeals for the Third Circuit has became the first federal Circuit Court to adopt the liberal “reasonable belief” standard for determining protected activity under the whistleblower provisions of the Sarbanes-Oxley Act (“SOX” or the “Act”). Wiest v. Lynch, No. 11-4257 (3d Cir. Mar. 19, 2013). In doing so, the Court rejected case law requiring a plaintiff-employee’s internal complaint to relate “definitively and specifically” to a statute or regulation specified in Section 806 of the Act in order for the employee’s communication to be considered protected activity. The Third Circuit’s holding represents a significant, employee-friendly development in cases brought under the Sarbanes-Oxley whistleblower provision, which shields employees of publicly traded companies who report fraud. The Court has jurisdiction over Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands.

Jeffrey Wiest, a former accountant for the defendant company, filed a complaint alleging his former employer had terminated his employment in violation of SOX after he raised concerns to his supervisors about certain corporate expenditures. The U.S. District Court for the Eastern District of Pennsylvania granted the employer’s motion to dismiss Wiest’s claims. It found the concerns Wiest raised did not meet the “definitively and specifically” standard announced by the Department of Labor’s Administrative Review Board (“ARB”) in Platone v. FLYi, ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006). Under the “definitively and specifically” standard, to be protected, an employee’s communication regarding suspected fraud had to assert specific elements of securities fraud. 

On appeal, the Third Circuit reversed the dismissal of two of the Wiest’s SOX retaliation claims. In doing so, the Court adopted the “reasonable belief” standard first articulated by the ARB in Sylvester v. Parexel International, LLC, ARB No. 07-123, ALJ Nos. 2007-SOX-39, 42 (ARB May 25, 2011). Under the “reasonable belief” standard, employees making internal communication regarding questionable conduct need only believe the objectionable conduct violates a SOX provision, provided that a person with the same training and experience also would think the complained-about conduct could violate the Act.

Although Sylvester was announced in May 2011, no Circuit Court had adopted the decision or rejected the “definitively and specifically” standard — until now. In fact, even after Sylvester, many district courts continued to use the “definitively and specifically” standard in ruling on SOX whistleblower claims, leading even the Department of Labor to wrestle with the impact of Sylvester on new SOX claims. 

In a vigorous dissent, Circuit Judge Kent A. Jordan observed in Wiest that it would be difficult for an employer to know or suspect an employee has engaged in protected conduct if the employee does not adequately communicate his or her concerns in an understandable way to the employer. Judge Jordan echoed Platone when he observed that “[w]hat matters is not what is locked in the plaintiff’s mind or how the plaintiff may later describe his actions; it is what is communicated to the employer that counts.” 

Wiest represents a significant development in SOX jurisprudence. Moreover, it is an expansion of employee rights in this area of law that cannot be overstated. The decision makes an employer’s duty to investigate claims of corporate fraud more difficult and complicates an employer’s ability to take necessary employment action with respect to potential whistleblowers. The Jackson Lewis Corporate Governance and Internal Investigations practice can assist employers in defending whistleblower claims. Please contact your Jackson Lewis attorney if you would like assistance.


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