Jottings By An Employer's Lawyer

Wednesday, January 23, 2008

5th Cir. Upholds SOX Decision of No Protected Activity

There are two ways a claimant's Sarbanes Oxley whistleblowing case can make it to the 5th Circuit. One is an appeal from a district court if a claimant had foregone the administrative route and chosen to file directly in federal court (permitted if the administrative proceedings are not concluded within 180 days).

The other is an appeal of a ruling from the Administrative Review Board. That is what led to yesterday's decision in Allen v. Administrative Review Board (5th Cir. 1/22/08) [pdf]. The plaintiffs alleged that their complaints about their employer's failure to report problems with its software that calculated payoff amounts was protected activity under SOX.

Unfortunately for the plaintiffs, both the ALJ and the ARB had disagreed. And on appeal, the 5th Circuit noted the deferential standard of review -- whether the ARB's decision was “arbitrary, capricious, an abuse of discretion, or otherwise contrary to law.” Here the Court found it was not.

Given the relative paucity of circuit level decisions under SOX, the Court did provide some helpful guidance for construing protected activity under SOX:

  • 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;
  • an employee’s reasonable belief must be scrutinized under both a subjective and objective standard;
  • 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;
  • the “objective reasonableness” standard applicable to SOX whistleblower claims is similar to the “objective reasonableness” standard applicable to Title VII retaliation claims;
  • while that can sometimes be decided as a matter of law, if there is a genuine issue of material fact it cannot be;
  • perhaps most importantly, in 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.

The Court did not decide about the requirement for scienter on the first 5 categories since the "issue [was] not before [them]" but perhaps tellingly noted that several ALJ's had made such a finding.

The Court also held that since one of the plaintiffs was a CPA, an "expert standard" had to be applied in reviewing the "objective standard."

An important opinion for those handling SOX claims, not to mention continued good news for Stewart Enterprises, the employer.


This seems to mark a trend in bringing cases that suggest the Plaintiff's lawyer may not grasp the law involved. How on earth could the "Spankee-lawyer" hope to hang on to a illusory victory-where the jury was not instructed on the core issue-the harassment was sexually motivated?

Another odd case: Estrada v. Delhi in Orange County: thrown out on January 11, '08 for refusing to produce tape recorded telephone calls and before that her emotional distress claim had been precluded after Plaintiff had her home computer's hard-drive erased after it had been formally requested! How could that lawyer think Plaintiff was entitled to with hold that information?
Something not mentioned was the fact the Court held that the Burlington decision applies to SOX claims. Furthermore, it is not clear that there was a belief that the CPA had to be an "expert" in any defined sense. In this case, they ruled against the plaintiff because 1. he/she should have known that SAB 101 only applied to financial statements submitted to the SEC (the plaintiff only complained about violation of SAB 101 to internal financials) and 2. the plaintiff did not make an effort to determine if SAB 101 was being applied correctly to the financial statements submitted otthe SEC.

If the prevailing interpretation is that any plaintiff that is a CPA must be held to an expert standard, the SOX protections just got even weaker (if that is even possible).
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