September 27, 2020

Volume X, Number 271

September 25, 2020

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Westawski v. Merck & Co: Third Circuit Limits Protected Activity Under Sarbanes Oxley

In Westawski v. Merck & Co., No. 14-cv-3239 (E.D. Pa. Oct. 18, 2016), the Eastern District of Pennsylvania granted Defendant Merck & Co. (Company) summary judgment on Plaintiff Joni Westawski’s (Plaintiff) SOX whistleblower retaliation claim, concluding that her purported belief that the Company violated securities laws was not objectively reasonable.

Background

Plaintiff was a Market Research Analyst at the Company. She alleged that the Company terminated her employment after she raised concerns about irregularities relating to the Company’s retention of an outside market research firm that she believed contravened internal controls, including the Company’s vendor selection process and cost guidelines.  She filed suit under Section 806 of SOX, claiming her employment was terminated in retaliation for her complaints.

Ruling

The District Court granted the Company summary judgment on Plaintiff’s SOX whistleblower claim. The court ruled that Plaintiff could not show that she engaged in protected activity because no reasonable person in Plaintiff’s position could have believed that the concerns she raised amounted to a violation of one of the laws enumerated in Section 806 of SOX.

After noting that Plaintiff conceded at oral argument that could not show that a reasonable person in her position would have believed that the concerns she raised amounted to bank fraud or securities fraud, the court analyzed the remaining enumerated laws. It held that Plaintiff fell short of establishing that a reasonable person in her position would believe that the concerns she raised amounted to mail fraud, since she failed to identify any legal prohibitions on the practices she complained of and the record suggested they were common industry practice.  The court reached the same conclusion with respect to wire fraud, finding that Plaintiff failed to demonstrate a reasonable belief that the Company used interstate wires in furtherance of its retention of the outside market research firm.  The court also concluded that it was not objectively reasonable for Plaintiff to believe that the conduct she complained of constituted fraud on shareholders, since the project at issue cost the company just over $200,000, or 0.000004% of its sales revenue that year.  This amount could not meet the materiality requirement for an objectively reasonable belief of fraud on shareholders.

Implications

Westawski is valuable precedent for employers facing claims based on alleged breaches of internal company polices that do not amount to a violation of the securities laws covered by SOX, or claims of fraud on shareholders amounting to a very small percentage of the employer’s overall revenues.  Although the court adopted the employee-friendly standard articulated by the Administrative Review Board in Sylvester v. Parexel the court concluded (consistent with the Eighth Circuit’s recent decision in Beacom v. Oracle America, Inc.) that an employee lacks a reasonable belief of fraud on shareholders even under this more lenient standard where claims are based on amounts that would be immaterial to shareholders.

© 2020 Proskauer Rose LLP. National Law Review, Volume VI, Number 305

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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
Harris M Mufson, Class/Collective Action Attorney, Proskauer
Senior Counsel

Harris Mufson is a senior associate in the Labor & Employment Law Department and a member of the Employment Litigation & Arbitration and Whistleblowing & Retaliation Groups.

Adept at counseling clients at every turn of the litigation process, Harris represents employers in a variety of industries, including financial services, health care, entertainment, sports and legal, with respect to a wide range of labor and employment law matters. These include compensation disputes, employment discrimination and retaliation, whistleblowing, sexual harassment, wrongful discharge, defamation, breach of contract, non-competition agreements and wage-and-hour issues. He regularly appears in state and federal courts, as well as in proceedings before the American Arbitration Association, the Financial Industry Regulatory Authority, JAMS, the Equal Employment Opportunity Commission, and other federal and state agencies.

212-969-3794
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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