October 21, 2019

October 21, 2019

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SDNY Dismisses SOX and Dodd-Frank Whistleblower Claims Against Private Company

On June 3, 2019, the U.S. District Court for the Southern District of New York granted a defendant-employer’s motion for summary judgment on SOX and Dodd-Frank whistleblower retaliation claims, finding that the alleged whistleblowing did not involve fraud related to a public company.  Tellez v. OTG Interactive, LLC, No. 15-cv-8984.

Background

Defendants operate restaurants and concession facilities in airports via iPad stations, which allow patrons to order food, access the Internet, and check their flight status.  Plaintiff was hired as President of one of the Defendant entities that develops and provides the software used by the iPad stations.  Shortly after Plaintiff was hired, Defendants decided to begin a “model test” to explore whether Defendants could generate additional revenue by offering video game accessibility on the iPads for a small fee.  The test began in a Delta Airlines concourse on devices displaying the Delta logo.

Approximately one month after the “model test” was implemented, Plaintiff allegedly learned that the paywall software responsible for launching the video games on the iPads created a potential violation of third-party licensing agreements with the game manufacturers.  Plaintiff alleged that he informed Defendants’ General Counsel, Chief Technology Officer, and Chief Executive Officer that the paywall was fraudulent and illegal.  Plaintiff’s employment was terminated shortly thereafter (two months after his hiring).  Plaintiff filed suit claiming he was retaliated against in violation of SOX and Dodd-Frank for reporting this allegedly fraudulent scheme.

Ruling

Defendants moved for summary judgment, arguing they are not covered by SOX because they are not publicly traded companies and were not acting on behalf of Delta (a public company) by implementing the paywall system on iPads displaying the Delta logo.  Plaintiff relied upon Lawson v. FMR LLC (2014)(discussed here), arguing that a private contractor need not act on behalf of a public company for SOX’s protections to apply and that Defendants’ contractual relationship with Delta itself was sufficient to warrant coverage under SOX.

The court disagreed with Plaintiff, however, and dismissed the SOX claim, holding that a contractual relationship alone is insufficient to impose liability upon a private company under SOX.  The court explained that while Delta stood to benefit from its contractual relationship with Defendants, Plaintiff offered no evidence that could lead a reasonable juror to infer that the paywall model test was undertaken on behalf of Delta, or that Delta had any specific involvement with the program.  The court added that imposing liability under these circumstances would be inconsistent with SOX’s purpose, since the alleged fraudulent activity did not relate to a public company.  Finally, the court clarified that Dodd-Frank only protects against retaliation for making disclosures required under SOX, and because Plaintiff made no such disclosures to the SEC, the Dodd-Frank claim should also be dismissed.

Implications

This decision limits the risk that private contractors would be subject to whistleblower liability under SOX merely because they engage in business arrangements with public companies.

© 2019 Proskauer Rose LLP.

TRENDING LEGAL ANALYSIS


About this Author

Steven J Pearlman, Labor Employment Law Firm, Proskauer Law firm
Partner

Steven Pearlman is a partner in the Labor & Employment Law Department and co-head of the firm's Whistleblowing & Retaliation Group, resident in the Chicago office. Steven’s practice focuses on defending complex employment litigation involving claims of discrimination and harassment, wage-and-hour laws and breaches of restrictive covenants (e.g., non-competition agreements). He has successfully tried cases to verdict before judges and juries in Illinois, Florida and California, and defended what is reported to be the largest Illinois-only class action in the history of the U.S....

312-962-3545
Law Clerk

Jacob Hirsch is a law clerk in the Labor & Employment Law Department, and assists his clients in a wide range of labor and employment matters. Prior to joining Proskauer, Jacob interned at the Lawyers Alliance for New York, where he contributed to various business transactions carried out on behalf of nonprofit clients across the New York metropolitan area.   

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Pinny Goldberg Labor and Employment Lawyer Proskauer Rose Law Firm
Associate

Pinny Goldberg is an associate in the Labor & Employment Law Department. Pinny represents employers in a broad array of matters before federal and state courts, FINRA and other arbitration panels, and administrative agencies, including the EEOC and its state equivalents, and in pre-litigation negotiations. Matters he works on include discrimination and harassment, wage and hour, wrongful discharge, whistleblowing and retaliation, covenants not to compete, breaches of fiduciary duty, unjust enrichment, and tort and contract claims. 

In...

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