Federal Court Rejects ARB’s Repudiation Of “Definitively And Specifically” Standard In SOX Whistleblower Actions

On November 16, 2011, the U.S. District Court for the Eastern District of Pennsylvania found that the Administrative Review Board’s (ARB) landmark decision in Sylvester v. Parexel Int’l LLC, Case No. 07-123 (ARB May 25, 2011), is not binding on federal courts, and continued to embrace the heightened requirement that complained-of conduct must “definitively and specifically” relate to one of the categories of fraud exhaustively set forth in Section 806 of the Sarbanes-Oxley Act of 2002 (SOX). Wiest v. Lynch, Case No. 10-cv-3288, 2011 U.S. Dist. LEXIS 132114 (E.D. Pa. Nov. 16, 2011).

In Wiest, the plaintiffs filed a complaint alleging retaliation under Section 806 after they reported concerns about certain corporate expenditures. The court dismissed the complaint on July 21, 2011, holding that the plaintiffs failed to adequately allege that they engaged in protected activity. 2011 U.S. Dist. LEXIS 79283 (E.D. Pa. July 21, 2011). In so holding, the court stressed that Section 806 only protects an employee who has provided information to a supervisor regarding conduct he or she “reasonably believes” violates one of the laws enumerated in Section 806, and that the complaint must “definitively and specifically” relate to such laws. (Our analysis of that decision can be accessed here.)

The plaintiffs moved for reconsideration, relying on the ARB’s decision in Sylvester rejecting the definitively and specifically standard. (Our analysis of that decision can be accessed here.) Siding with the employer, the Wiest court pointedly held that “[a]n ARB decision is not binding authority on a United States district court.” And in applying the definitively and specifically standard, the Wiest court referenced decisions from the First, Fourth, Fifth and Ninth Circuits taking that stringent approach to evaluating whether complaints of fraud are actionable under Section 806. In addition, the court reiterated that dismissal of the complaint also was warranted because the plaintiffs failed to establish that the report at issue conveyed an objectively reasonable belief that the employer engaged in fraud.

This decision is valuable to employers faced with SOX whistleblower litigation in federal courts, as it serves to restore the rigorous standard that myriad courts used prior to the Sylvester decision in determining whether a plaintiff has established a prima facie case. It is likely that other federal courts will follow suit, particularly given that the court in Kim v. The Boeing Co., Case No. 10-cv-1850, 2011 U.S. Dist. LEXIS 108635 (W.D. Wash. Sept. 23, 2011) recently took the same approach as to the non-binding nature of ARB in federal litigation. (Our analysis of that decision can be accessed here.) This apparent (or likely) trend is important because the ARB’s expansive interpretation of the scope of protected activity under Section 806 has led to a range of claims based on fraud theories that are far afield from the categories set forth on the face of SOX’s whistleblower provision. It is worth noting, though, that decisions like Wiest and Kim may encourage employees to pursue their cases through the U.S. Department of Labor’s adjudicative regime rather than through federal courts.

By: Steven J. Pearlman and Dawn Mertineit

Steven J. Pearlman is a partner in Seyfarth’s Chicago office and Dawn Mertineit is an associate in the Firm’s Boston office. If you would like further information, please contact your Seyfarth attorney, any member of the firm’s SOX Whistleblower Team, Steve Pearlman at spearlman@seyfarth.com or Dawn Mertineit at dmertineit@seyfarth.com.