August 2009
SARBANES-OXLEY ACT ATTORNEY-CLIENT PRIVILEGE AS DEFENSE TO SOX WHISTLEBLOWER CLAIM
In Van Asdale v. International Game Technology , No. 07-16597 (9th Cir. Aug. 13, 2009), the Defendant-Appellee argued that the court should affirm summary judgment against the Plaintiffs-Appellants, who were both licensed as attorneys solely in Illinois, because (1) they allegedly were prohibited from maintaining the action under their ethical obligations as Illinois-licensed attorneys and (2) notwithstanding the particular requirements of Illinois law, they could not establish their claim without using attorney-client privileged information. The court found that Illinois law does not bar retaliation suits by in-house attorneys where the suit is based on non-Illinois law.
Moreover, the court held that confidentiality concerns alone did not warrant dismissal of the Plaintiffs-Appellants' claims. The court did not find it clear to what extent the lawsuit would actually require disclosure of the Defendant-Appellee's confidential information. The court found that the district court could limit any testimony regarding the meeting in which the allegedly privileged discussion took place to the question of whether the Plaintiffs-Appellants' raised claims of shareholder fraud, while avoiding testimony regarding any litigation-related discussions that also took place. The court found that "[t]o the extent this suit might nonetheless implicate confidentially-related concerns, the appropriate remedy is for the district court to use the many 'equitable measures at its disposal' to minimize the possibility of harmful disclosures, not to dismiss the suit altogether." Slip op. at 11074, citing Kachmar v. SunGard Data Systems, Inc. , 109 F.3d 173, 182 (3d Cir. 1997).
The court also found that the text and structure of SOX does not indicate that in-house counsel arer not also protected from retaliation, noting that Section 1514A(b) expressly authorizes any "person" alleging discrimination based on protected conduct to file a complaint with the Secretary of Labor and, thereafter, to bring suit in an appropriate district court. The court found that "… Congress plainly considered the role attorneys might play in reporting possible securities fraud. See, e.g. , 15 U.S.C. § 7245." Slip op. at 11074-11075.
PROTECTED ACTIVITY; COMMUNICATIONS MUST RAISE SOX FRAUD OR SECURITIES VIOLATION "DEFINITIVELY AND SPECIFICALLY;" USE OF WORDS "FRAUD" OR "FRAUD ON SHAREHOLDERS," HOWEVER, IS NOT REQUIRED
In Van Asdale v. International Game Technology , No. 07-16597 (9th Cir. Aug. 13, 2009), the 9th Circuit joined three other circuit courts in agreeing with the ARB's holding that to constitute protected activity under SOX, an employee's communications must "definitively and specifically" relate to one of the categories of fraud or securities violations listed under section 1514A(a)(1).
Reviewing the facts in the light most favorable to the Plaintiffs-Appellants (the case being in summary judgment posture) the court found that the Plaintiffs-Appellants' conversations with company's General Counsel and its Vice President of Product Development satisfied the "definitively and specifically" standard, even though the words "fraud" or "fraud on shareholders" may not have been used.
SUMMARY JUDGMENT; SHAM AFFIDAVIT RULE MUST BE APPLIED WITH CAUTION
In Van Asdale v. International Game Technology , No. 07-16597 (9th Cir. Aug. 13, 2009), the Plaintiffs-Appellants were in-house intellectual property attorneys who in a meeting with a Vice President of Product Development discussed whether fraud on the Patent Office might constitute a defense in any future litigation relating to due diligence in a merger negotiation. The district court found that this was not protected activity under SOX, and granted summary judgment. The court of appeals, however, found that the evidence was not unconverted, and that an affidavit of one of the Plaintiffs raised an issue of fact on whether the discussion also concerned the possibility that shareholders had been harmed by an intentional withholding of information prior to a merger about potential problems with the validity of a patent. The district court had disregarded the Plaintiff's affidavit based on a finding that it contradicted his deposition testimony.
The court of appeals acknowledged the general rule that a party cannot create an issue of fact by an affidavit contradicting his prior deposition testimony - and that the "sham affidavit" rule is necessary to maintain the principle that summary judgment is designed to secure the just, speedy and inexpensive determination of actions. Nonetheless, the court cautioned that the rule should not be used when deciding summary judgment motions to make credibility determinations or weigh conflicting evidence, and that aggressive invocation of the rule could ensnare litigants who had simply been confused in their deposition testimony. Thus, the Ninth Circuit has fashioned two limitations: the sham affidavit rule requires a finding of actual sham; and the inconsistency must be clear and unambiguous. In the instant case, neither of the two conditions had been satisfied. The line of questioning in the deposition had provided the Plaintiff the opportunity to provide only cursory testimony regarding the issue, and his subsequent declaration was a legitimate attempt to explain or clarify. The court also found indicia in the testimony suggesting that it was not inconsistent. While this was ultimately a question for a jury, the court found that the Plaintiff's declaration was sufficient to raise a genuine issue of material fact regarding whether the Plaintiffs' collectively engaged in protected activity under SOX.
PROTECTED ACTIVITY; OBJECTIVELY REASONABLE BELIEF THAT THERE HAS BEEN SHAREHOLDER FRAUD MUST AT LEAST APPROXIMATE ELEMENTS OF SECURITIES FRAUD
In Van Asdale v. International Game Technology , No. 07-16597 (9th Cir. Aug. 13, 2009), the Plaintiffs-Appellants were in-house intellectual property attorneys who allegedly had raised the issue of shareholder fraud in relation to the failure to disclose, prior to a merger, possible problems with an important patent holding.
The Ninth Circuit concluded that the plain language of the SOX whistleblower provision , as well as the statute's legislative history and case law interpreting it, suggest that to trigger the protections of the Act, an employee must have (1) a subjective belief that the conduct being reported violated a listed law, and (2) this belief must be objectively reasonable. The court stated that it agreed with the First Circuit that "[t]o have an objectively reasonable belief there has been shareholder fraud, the complaining employee's theory of such fraud must at least approximate the basic elements of a claim of securities fraud." Slip op. at 11083, quoting Day v. Staples, Inc. , 555 F.3d 42, 55 (1st Cir. 2009).
In the instant case, the court found that the Plaintiffs' theory of fraud was sufficient (for the purposes of determining a summary judgment motion) to approximate a securities fraud — at least that it was objectively reasonable for the Plaintiffs' to suspect that the non-disclosure prior to the merger was deliberate (the patent being the "crown jewel" of the Defendant's intellectual property portfolio). The court made a point of stating that it was not finding that the nondisclosure actually constituted wrongdoing, but that under the SOX whistleblower provision — to encourage disclosures — a plaintiff's reasonable, but mistaken belief of a SOX violation is protected.
PROTECTED ACTIVITY; GENERAL INQUIRY REGARDING A BUSINESS DECISION
In Fraser v. Fiduciary Trust Co., Int'l , No. 1:04-cv-06958 (S.D.N.Y. Aug. 25, 2009) (case below 2003-SOX-28), the Plaintiff had sent an e-mail to the Respondent's president attaching a copy of an e-mail he had earlier drafted, but not sent when instructed not to do so, that explained to other of the Respondent's offices the New York office's decision to sell off WorldCom bonds it held in ERISA trust accounts. Thereafter, the Los Angeles office retained its WorldCom bonds, and suffered substantial losses when WorldCom defaulted on its debt and filed for bankruptcy. The Plaintiff argued that the e-mail to the president was protected activity under SOX. The district court rejected this argument because the e-mail did not express any specific concern about any fraud enumerated in SOX § 806, and the Plaintiff had not alleged that the instruction not to send the earlier e-mail amounted to misconduct on the part of his superiors in New York. "On its face, then, the e-mail constituted a general inquiry regarding a business decision rather than a specific complaint of fraud." Slip op. at 9. The Court also observed that the delay between the drafting of the earlier e-mail and the e-mail to the president cast doubt on the Plaintiff's subjective belief that the New York office's decision not to communicate its WorldCom strategy to other offices constituted a violation. The court also noted that the Plaintiff's stated reason for sending the e-mail to the president was to show the president that the New York office was making the right decisions. This was not, the court found, alerting an employer to a suspected fraud.
The Plaintiff also argued that he engaged in protected activity when he told his supervisor that an internal document showing the United Nations as one of the Respondent's top ten relationships by revenue should not be shown to clients because the UN pension fund accounts were not managed accounts, and the document therefore overstated the Respondent's assets under management. Again, the court rejected the argument because the discussion with the supervisor was merely a general inquiry; the Plaintiff never expressed a specific concern that the information contained in the document was illegal. Moreover, the document was never disseminated to clients.
ADVERSE EMPLOYMENT ACTION NOT SHOWN BY ACTIONS THAT MERELY INCONVENIENCED THE PLAINTIFF, DID NOT CONSITUTE A SIGNFICIANT DIMINUTION OF RESPONSIBILITIES, OR HAD NOT ELMINATED A ROUTINE PART OF THE PLAINTIFF'S EMPLOYMENT
In Fraser v. Fiduciary Trust Co., Int'l , No. 1:04-cv-06958 (S.D.N.Y. Aug. 25, 2009) (case below 2003-SOX-28), the court found that three acts identified by the Plaintiff as retaliatory were not adverse employment actions. First, moving the Plaintiff's desk close to his supervisor's desk was no more than a mere inconvenience. Second, relieving the Plaintiff of responsibility for a client newsletter might constitute an alteration of job responsibilities, but it did not represent a significant diminution of those responsibilities. Third, curtailment of invitations to certain committee meetings was not adverse because the invitations had only been extended there was extra room available, and the Plaintiff's attendance at those meetings was not a routine part of his employment in the first place.
CAUSATION; TEMPORAL PROXIMITY; SIGNIFICANT INTERVENING EVENT
In Fraser v. Fiduciary Trust Co., Int'l , No. 1:04-cv-06958 (S.D.N.Y. Aug. 25, 2009) (case below 2003-SOX-28), the Plaintiff relied on temporal proximity of roughly one month between his allegedly protected activity and his discharge. The court, however, found that such temporal proximity did not compel a finding of causation because there had been a significant intervening event providing a legitimate basis for the Plaintiff's termination — his unauthorized attempt to establish and market a hedge fund.
COVERED EMPLOYER; WHERE COMPLAINANT WAS EMPLOYEE OF NON-PUBLIC SUBSIDIARY, HE MUST ESTABLISH THAT THE SUBSIDIARY WAS AN AGENT OF THE PUBLICLY TRADED PARENT TO BE ABLE TO MAINTAIN A SOX WHISTLEBLOWER ACTION AGAINST THE SUBSIDIARY
In Malin v. Siemens Medical Solutions Health Services , No. 8:07-cv-01896 (D.Md. Aug. 13, 2009), the district court earlier had held that the Defendants could only be liable under the SOX whistleblower provision only if they were shown to be agents of their publicly traded parent company with respect to the Plaintiff's hiring, supervision and termination. The court permitted the Plaintiff 90 days to take further discovery to establish such a relationship. Following that discovery, the court granted the Defendants' motion for summary judgment. The Plaintiff had focused on the parent's code of ethics, human resources policies, and history of assuming liability in a prior case. The court found that this focus was misguided, and that the relevant consideration was whether the parent was involved in the Plaintiff's hiring, supervision or termination. The court stated that non-public subsidiaries are not subject to the whistleblower provisions simply because their parent is required by other SOX provisions to report the subsidiary's financial condition or to adopt an umbrella compliance policy. The court found that the parent's assumption of legal and financial liability for other offenses dealing with different facts was irrelevant. The court found that the fact that the Plaintiff applied for his job through the parent company's website failed, because as the Defendants' showed, the job posted actually clarified that the Defendants, and not the parent company, were the employing entities.
RES JUDICATA; CLAIM SPLITTING; FAILURE OF PLAINTIFF TO AMEND PENDING FEDERAL COURT ACTION BASED ON SAME OPERATIVE FACTS TO INCLUDE SOX COMPLAINT FILED AFTER FAILURE OF DOL TO ISSUE FINAL DECISION WITHIN 180 DAYS OF THE COMPLAINT; DISMISSAL OF FIRST ACTION HAS PRECLUSIVE EFFECT ON SECOND ACTION
In Riel v. Morgan Stanley , No. 1:06-cv-05801 (S.D.N.Y. Aug. 6, 2009), the Plaintiff filed a SOX whistleblower complaint with OSHA, and while OSHA was investigating this complaint, filed an action in federal district court asserting common law causes of action arising out of essentially the same operative facts relied upon by the Plaintiff in his SOX complaint before OSHA. After 180 days passed without a decision by OSHA, the Plaintiff provided notice of intent to pursue the SOX claims in court. OSHA nonetheless issued findings and dismissed the complaint. Shortly thereafter, the Complainant commenced a second action in federal court, relying on essentially the same facts as relied on in the first set of actions. The court dismissed the causes of action in the first case, but granted leave to the Plaintiff to amend the complaint. The Plaintiff, determined to appeal the dismissal of the first action, did not amend the complaint but instead sought an appeal. He then sought a stay of the second action in district court. The Defendant left no doubt in all its filings that it would move to dismiss the second action under res judicata if the first action was affirmed on appeal. The court of appeals later affirmed the dismissal of the first action, and the Defendant moved the district court to dismiss the second action based on res judicata.
Applying New York law on res judicata, the district court analyzed the matter as an instance of claim splitting. The Plaintiff cited authority to the effect that res judicata could not be applied where the parties agreed to or acquiesced in the plaintiff's splitting of his claim. The court found, however, that where a defendant raises an objection to the claim splitting prior to entry of a final judgment in either of the two cases, and does not affirmatively represent that he consents to the actions proceeding separately, there should not be a finding of acquiescence to the claim splitting or waiver of the res judicata defense. In the instant case, the court rejected the Plaintiff's argument that there had been an acquiescence, but instead found that the Defendants gave due notice that they would be raising a res judicata defense if the SOX claim in the second action was not brought into the first action.
In a footnote, the court noted that the SOX does not require a SOX plaintiff, who files a district court action after DOL failed to timely issue a final decision, to commence a new, separate action when another similar action is already pending before a court.
[Editor's note: The procedural history before the district court was complex, and some details have been omitted from this casenote.]
RES JUDICATA; DE NOVO REVIEW IN FEDERAL DISTRICT COURT IS NOT AVAILABLE ONCE THE ALJ'S DECISION BECOMES FINAL, EVEN IF THAT DECISION WAS RENDERED MORE THAN 180 DAYS AFTER THE FILING OF THE COMPLAINT WITH OSHA
In Groncki v. AT&T Mobility LLC , No. 1:08-cv-02016 (D.D.C. Aug. 4, 2009) (case below 2008-SOX-33), the Plaintiff had appealed OSHA's dismissal of his SOX whistleblower complaint to an ALJ. Following a formal hearing, the ALJ dismissed the complaint, and the ALJ's decision became the final DOL decision. The Plaintiff filed a complaint in federal district court, relying on the fact that DOL had not issued the final decision within 180 days of the Plaintiff's complaint. See 18 U.S.C. § 1514A(b)(1)(B). The question before the Court, thus, was whether the Plaintiff was precluded by res judicata from filing suit in federal district court after the agency reached a final decision, even if the final decision was issued after the 180 period. The district court found that the Secretary of Labor's interpretation of section 806 of the SOX to not allow an action in district court after the agency has issued a final order was entitled to deference. See 68 Fed. Reg. 31860, 31863 (2003) (preamble to SOX regulations). The district court also found support for this position in the Western District Court of Pennsylvania's decision in Tice v. Bristol-Myers Squibb Co. , 515 F. Supp. 2d 580, 599 (W.D. Pa. 2007), aff'd , No. 07-3977, 2009 WL 943838 (3d Cir. Apr. 8, 2009) (res judicata effect of final agency SOX decision on Title VII or Age Discrimination claims). The court found that the Plaintiff's position would lead to absurd results, such as allowing a plaintiff more avenues to appeal an adverse decision if the decision was reached after 180 days than a plaintiff would have if the decision was reached within 180 days. The court found nothing in the SOX that contemplated de novo review of final administrative order in district court.
SURFACE TRANSPORTATION ASSISTANCE ACT [STAA Digest V B 2]
PROTECTED ACTIVITY; REFUSAL TO DRIVE CLAUSE; IF DRIVER GOES AHEAD AND DRIVES, THERE HAS BEEN NO REFUSAL TO DRIVEIn Calhoun v. United Parcel Service , No. 07-2157 (4th Cir. Aug. 11, 2009) (case below ARB No. 04-108; ALJ No. 2002-STA-31), the Fourth Circuit agreed with the ARB that a STAA complainant is not protected under the "refusal to drive" provision of the STAA at section 31105(a)(1)(B), where the complainant actually drove the vehicle. In Calhoun , The court found nothing "arbitrary or capricious" about the ARB so finding, even where the Complainant drove "under protest."
[STAA Digest V B 2 b]
PROTECTED ACTIVITY; REFUSAL TO DRIVE CLAUSE; ACTUAL VIOLATION; DRIVER INSPECTIONS UNDER 49 C.F.R. §§ 392.7 AND 396.13In Calhoun v. United Parcel Service , No. 07-2157 (4th Cir. Aug. 11, 2009) (case below ARB No. 04-108; ALJ No. 2002-STA-31), the Complainant did not contend that he could meet the "reasonable apprehension" clause of section 31105(a)(1)(B), but only argued that he meet the "actual violation" clause. Specifically, the Complainant contended that operating his vehicle without completing his preferred pre-trip inspections (which were more extensive than those prescribed by the Respondent) would have resulted in violation of two general FMCSRs, 49 C.F.R. §§ 392.7 and 396.13 (2008), which essentially state that a commercial motor vehicle shall not be driven unless the driver is satisfied that the motor vehicle is in safe operating condition.
The Complainant acknowledged that he was not entitled to take unlimited measures to satisfy himself under those regulations, but only those that were reasonably necessary. The Respondent did not dispute the "reasonably necessary" standard, but argued that its approved inspection measures were themselves reasonable, and that the Complainant did not have an objectively reasonable need to take the additional measures.
The Fourth Circuit reviewed ARB caselaw, and found that it persuasively suggested that "where an employer's prescribed inspection methods are themselves reasonable, an employee's additional inspection measures will typically not be reasonably necessary to satisfy him that his vehicle is safe to drive under 49 C.F.R. §§ 392.7 and 396.13." Slip op. at 14. The court found that this finding made sense as a matter of policy, because under the Complainant's approach "carriers and regulators would be placed in the untenable position of having to assess the reasonableness of as many different safety inspections as there are drivers. Clearly, an approach in which every driver is permitted to design his own inspection routine would seriously undermine the ability of carriers to ensure the timely delivery of packages." Slip op. at 14-15.
The court also noted that the Complainant had not been disciplined simply for using pre-trip inspection techniques beyond those prescribed by the Respondent, but based on the significant delays caused by his the length of his inspections, which were more than double the average of other drivers on his route, and which resulted in numerous delays and service failures. The Complainant did not show that the extra time he spent on inspections made any appreciable difference in the safety of his vehicle.
[STAA Digest V A 4 c iii]
PROTECTED ACTIVITY; COMPLAINT CLAUSE; SILENT PROTEST BASED ON PURPOSEFUL DEPARTURES FROM RESPONDENT'S INSPECTION POLICY IN SUPERVISOR'S PRESENCE DOES NOT CONSTITUTE THE "FILING" OF A COMPLAINTIn Calhoun v. United Parcel Service , No. 07-2157 (4th Cir. Aug. 11, 2009) (case below ARB No. 04-108; ALJ No. 2002-STA-31), the Complainant argued that he engaged in protected activity under the "complaint" clause of the STAA whistleblower provision at section 31105(a)(1), when he complained "sub silentio"about the Respondent's policies on pre-trip inspections by turning off air to the rear trailer and engaging in a prolonged inspection on days on which his inspection routine was being observed by his supervisor. The Complainant argued that such actions could be read as complaints when considered in the context of his history of oral and written complaints about the inspection procedures. The Complainant further argued that, as a matter of policy, the court should construe the complaint requirement of 31105(a)(1)(A)(i) broadly. The court, however, found the Complainant's argument to be untenable, stating that even against the backdrop of his verbal complaints on other days, his silent departures from the Respondent's practices in his supervisor's presence, did not suffice to constitute the filing of a complaint for the purposes of the STAA whistleblower provision.
[STAA Digest V B 2]
PROTECTED ACTIVITY; COMPLAINT CLAUSE; DRIVER INSPECTIONS UNDER 49 C.F.R. §§ 392.7 AND 396.13In Calhoun v. United Parcel Service , No. 07-2157 (4th Cir. Aug. 11, 2009) (case below ARB No. 04-108; ALJ No. 2002-STA-31), the court found that the Complainant could not satisfy the portion of the "complaint" clause that the complaint related to a violation of a commercial motor vehicle safety regulation, standard, or order, when he told a supervisor that he needed to manually inspect the equipment on his vehicle "for safety." The Complainant cited no specific regulation that the Respondent violated by not allowing him to touch his equipment, and the general regulations at 49 C.F.R. §§ 392.7 and 396.13 (2008), which essentially state that a commercial motor vehicle shall not be driven unless the driver is satisfied that the motor vehicle is in safe operating condition, did not suffice to protect the Complainant's position. The court wrote: "While it may have been reasonable for Calhoun to engage in some manual inspection of his vehicle's equipment, Calhoun's own lengthy inspection regimen has not been shown to be reasonably necessary to satisfy himself about the safety of his vehicle. Accordingly, Calhoun cannot use these regulations to demonstrate a 'reasonable belief that the company was engaging in a violation of a motor vehicle safety regulation.'" Slip op. at 19, quoting Dutkiewicz , 1997 DOL Ad. Rev. Bd. LEXIS 98, at *6.
[STAA Digest IV C 2 b]
PRETEXT; ALTHOUGH COMPLAINANT HAD ENGAGED IN PROTECTED ACTIVITY, HE FAILED TO SHOW THAT HIS DISCHARGE FOR INSUBORDINATION WAS PRETEXT FOR DISCRIMINATIONIn Calhoun v. United Parcel Service , No. 07-2157 (4th Cir. Aug. 11, 2009) (case below ARB No. 04-108; ALJ No. 2002-STA-31), the Complainant had a long-running disagreement with the Respondent over the amount of time he took to complete his pre-trip inspections. At the beginning of one work day, managers met with the Complainant to ask him to make a commitment to improving his start-work time and following instructions, but the Complainant refused. The Complainant's supervisor then accompanied the Complainant on his pre-trip inspections, during which the Complainant continued to depart from the Respondent's inspection protocol, including manual inspection of equipment and looking under the tractor cab multiple times. The Complainant discovered a dolly brake out of adjustment and stated that he wanted to take it to the Respondent's shop. The supervisor responded that the "brake test felt OK," and that the Complainant needed "to move on and go." Later, the Complainant had a mechanic check the brake, and the mechanic found severe rust. The next day, the Complainant was discharged (albeit he was later rehired).
The ARB found that the Complainant engaged in protected activity on this day, but that the Complainant failed to show that the Employer's proffered legitimate, nondiscriminatory reason — insubordination— was a pretext for discrimination. On appeal, the 4th Circuit affirmed the ARB's conclusion. The court noted that the protected conduct on the day in question did not happen in isolation — that it was only after his refusal to improve inspection times and in the midst of inspecting the vehicle in defiance of his supervisor's instructions that the Complainant found the brake defective and complained about it. The court found that it was for insubordination, and not the protected complaint, that the Complainant was discharged. The Complainant had a long history of insubordinate behavior, and his conduct on this day "was simply the proverbial straw that broke the camel's back." Slip op. at 20.