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.
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.
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.
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.