Alan Schorr’s Employment Case of The Week ending March 29, 2013

Weist v. Lynch, — F.3d. —-, 2013, 2013 WL 1111784 (3rd Cir., Mar. 19, 2013) (Published)

Last week the Third Circuit Court of Appeals, in a carefully watched case, reversed the dismissal of a whistleblower case which had been brought under Sarbanes-Oxley (“SOX”) and Pennsylvania State anti-retaliation. In doing so, the Third Circuit’s ruling in Weist v. Lynch supports SOX as an increasingly viable anti-retaliation statute against publicly-traded companies.

Jeffrey Weist worked in the accounting department of Tyco Electronics Corporation for 31 years. He alleges that the office was under a “high level of audit scrutiny” due to the well-known corporate scandal involving its former parent company, Tyco International, and its CEO. Around 2007, Wiest “established a pattern of rejecting and questioning expenses” that failed to satisfy accounting standards or securities and tax laws. Weist’s Complaint alleged that Tyco became frustrated with his persistence in following proper accounting procedures. In September 2009, two human resources employees met with Wiest and informed him that he was under investigation for incorrectly reporting the receipt of two basketball game tickets in August 2009, for having a relationship with a co-worker ten years earlier, and for allegedly making sexually-oriented comments to co-workers. After Wiest learned of the investigation, his health declined and he went on medical leave. Seven months later, Tyco terminated his employment.

Wiest filed suit in the Federal District Court for Eastern Pennsylvia, alleging violation of Sarbanes-Oxley, 18 U.S.C. § 1514A, and Pennsylvania common law. The Defendants moved to dismiss, claiming that Weist had not pled a prima facie case. The District Court dismissed the case, holding that Weist had failed to plead a “protected activity” that he engaged in, in that the Court required Weist to plead that his communications (a) “definitively and specifically” related to a statute or rule listed in Section 806; (b) expressed “an objectively reasonable belief that the company intentionally misrepresented or omitted certain facts to investors, which were material and which risked loss;” and (c) “reflect[ed] a reasonable belief of an existing violation.”

Although the District Court permitted Weist leave to amend his Complaint, Weist instead filed a motion for reconsideration, which was denied, and then appealed to the Third Circuit. At the Third Circuit, the parties were joined by amici National Whistleblower Centers for plaintiff and the U.S. Chamber of Commerce (represented by Eugene Scalia, son of Antonin) for the defendants. In an uncommon move, oral argument was permitted, including the amici. A good article describing the lively oral argument can be read here:

The Third Circuit reversed and reinstated the Complaint. In doing so, the Third Circuit clarified two areas of the Federal law that will make it easier for plaintiffs to bring actions under SOX. First, the Court rejected the Defendants argument that Weist was required to prove that he had complained about a “definitive and specific” violation of a statute protected by SOX. The Court, instead adopt a “reasonable belief” test. On the “reasonable belief” test, however, the Court compromised. While the plaintiff argued that Weist only needed to prove that he had a “reasonable belief” that there was a violation of law, the Court defined that test as requiring both an objective and subjective component:

[a]n employee must establish not only a subjective, good faith belief that his or her employer violated a provision listed in SOX, but also that his or her belief was objectively reasonable. A belief is objectively reasonable when a reasonable person with the same training and experience as the employee would believe that the conduct implicated in the employee’s communication could rise to the level of a violation of one of the enumerated provisions in Section 806 [18 U.S.C. § 1514A].

The judges questioned extensively at oral argument regarding the fact that these complaints were made as part of Weist’s official duties. In the end, however, the Court chose not to address those arguments in the opinion, reversing on other grounds. Clearly, Weist’s complaints were squarely within the scope of his duties. In New Jersey, under some recent opinions, New Jersey courts have denied CEPA protection where the complaints were part of the employee’s job duties. See, e.g. White v. Starbucks, 2011 WL 6111882 (N.J. App. Div. 2011), certif. den., 210 N.J. 108 (2012). The Weist case is the newest of a long line of cases that can be used by counsel representing the employees where whistleblower protection has been afforded to an employee whose complaints were subsumed in his official duties. Being a published Third Circuit case, it probably carries more weight than an unpublished State court decision, even if it is not exactly the same statute.

Judge Jordan’s lengthy dissent argued that Weist had not articulated a particularized violation of the statute, and therefore did not state a claim. As Jordan explained of his view, “Whistleblower statutes like SOX § 806 seek to protect people who have the courage to stand against institutional pressures and say plainly, ‘what you are doing here is wrong’—not wrong in some abstract or philosophical way, but wrong in the particular way identified in the statute at issue.”

New Jersey practitioners who have a whistleblower case involving a publicly traded company should give SOX some consideration in light of the Starbucks case and the broad protections that the Third Circuit and Federal Courts are affording SOX plaintiffs. Consideration should also be given to the fact that, even with the negative cases lately coming from the Appellate Division, State Court is probably still the better venue to be for plaintiffs for all of the reasons that I have discussed in previous blog articles.

Plaintiff-Appellant’s counsel: Richard C. Angino, Esq. (Argued), Daryl E. Christopher, Esq., Angino & Rovner, P.C.

Amicus Curiae National Whistleblowers Center: Stephen M. Kohn, Esq. (Argued), Kohn, Kohn & Colapinto.

Defendants-Appellees’ counsel: Michael A. Finio, Esq. (Argued), Amy C. Foerster, Esq., Cory S. Winter, Esq., Saul Ewing LLP.

Amicus Curiae Chamber of Commerce of the United States of America: Eugene Scalia, Esq., Gibson, Dunn & Crutcher LLP.

Judges: McKee, Chief Judge, Jordan and Vanaskie (majority opinion), Circuit Judges. Jordan dissenting.