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Volume XI, Number 104

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Third Circuit Confirms Limits on Scope of Protected Activity Under SOX

On July 16, 2020, the Third Circuit affirmed the dismissal of a former IT analyst’s whistleblower retaliation claim, holding that he lacked an objectively reasonable belief that his complaints implicated one of the enumerated forms of fraud in the SOX whistleblower provision.  Reilly v. GlaxoSmithKline, LLCNo. 19-cv-2897.

Background

Plaintiff was an IT analyst for the Company, where his duties included maintaining the Company’s AS/400 computer servers and addressing performance and security issues related to them.  Beginning in 2011, Plaintiff allegedly began complaining to his supervisor about performance issues caused by the decision to “uncap” the servers’ processors, which allowed them to share capacity.  In 2013, he allegedly voiced an additional concern that the servers’ access management plan provided certain users with more authority than they should be allowed.  Plaintiff was placed in charge of remediating both of the foregoing issues.  Plaintiff escalated his complaints to the Company’s compliance office in 2014, then to the CEO in 2015, adding that he believed these issues were not adequately disclosed in the Company’s 2013 SEC report.  In response, the Company conducted two internal investigations, both of which concluded that Plaintiff’s complaints were unfounded.

In 2014, due to a decision to outsource management of the AS/400 servers, Plaintiff was notified that his department would be reduced to one analyst position and one manager position.  Believing he was “protected” due to his complaints, plaintiff decided not to apply for the remaining analyst position and his employment was eventually terminated in June 2015.  One month later, Plaintiff filed a SOX whistleblower retaliation complaint in the U.S. District Court for the Eastern District of Pennsylvania.  The Court granted the Company’s motion for summary judgment (see our post here).

Ruling

On appeal, the Third Circuit, relying on its decision in Wiest v. Tyco Elecs. Corp., 812 F.3d 319 (3d Cir. 2016) (see our post on that decision here), reiterated that “Section 806 of SOX protects whistleblowing employees from retaliation for providing information regarding conduct which the employee reasonably believes constitutes mail fraud, wire fraud, bank fraud, securities fraud, a violation of any rule or regulation of the SEC, or fraud against shareholders.”  The court held that Plaintiff failed to show that his “belief” that the Company was committing one of the enumerated forms of fraud was objectively reasonable.  First, the court found that it would not have been objectively reasonable for Plaintiff to believe that the Company was perpetuating a fraud while, at the same time, assigning him to remediate the very issues he complained of.  Describing Plaintiff’s complaints as “workplace disagreements about routine IT issues,” the Court noted that the Company was not required to include such technical details in its SEC reports.  In fact, the court stated that in its annual SEC reports, the Company had sufficiently disclosed risks related to cybersecurity and its computer systems, which in any event, did not relate to fraud.  Finding that Plaintiff had failed to show that his complaints about internal controls “relat[ed] in an understandable way” to any of Section 806’s enumerated forms of fraud, the court affirmed the lower court’s ruling dismissing Plaintiff’s claim.

Implications

Reilly reinforces that employees complaining of alleged violations of internal company policies or controls must still state an objectively reasonable belief that those violations implicate one of the provisions specifically enumerated in SOX.

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© 2021 Proskauer Rose LLP. National Law Review, Volume X, Number 231
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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
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...

212.969.3074
Scott S. Tan Law Clerk Proskauer  Employment Litigation & Arbitration Group
Law Clerk

Scott Tan is a law clerk in the Labor & Employment Law Department and a member of the Employment Litigation & Arbitration Group.

Scott earned his J.D. from the UCLA School of Law, where he served as a problem developer and member of the Moot Court Honors Board. He also worked as a research assistant for Dean Jennifer Mnookin and Professor Hiroshi Motomura.

212-969-3858
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