Third Circuit Adopts Plaintiff-Friendly Test for Activity Protected by Sarbanes-Oxley Act

In Wiest v. Lynch, 2013 WL 1111784 (3d Cir. March 19, 2013), the Third Circuit adopted a broad, plaintiff-friendly interpretation of the scope of employee activity protected by the whistleblower provisions of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A (“SOX”).

The Court of Appeals in Wiest reversed the District Court’s dismissal of the plaintiff’s whistleblower complaint under the Sarbanes-Oxley Act. In doing so, the Third Circuit endorsed the “reasonable belief” standard recently announced by the Department of Labor’s Administrative Review Board (“ARB”) for determining when an employee engages in protected activity under SOX and rejected the District Court’s reliance on the ARB’s prior, more stringent standard, which required a SOX complainant’s communications “definitively and specifically” relate to a violation of one of the enumerated anti-fraud provisions identified in Section 806 of SOX in order to be protected.

Under the more lenient reasonable belief standard, which the ARB first announced in Sylvester v. Parexel Int’l, LLC, ARB Case No. 07-123 (May 25, 2011), and which the Third Circuit adopted in Wiest, an employee’s communication is protected so long as the employee has “a subjective belief that the employer’s conduct violates a provision listed within Section 806 and … the belief is objectively reasonable.” The subjective element requires that the plaintiff actually believe that the conduct in question violated one of the provisions enumerated in SOX. The objective reasonableness of the employee’s belief is “evaluated based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee.”

The Third Circuit acknowledged that the ARB’s prior approach requiring that the employee’s complaint “definitively and specifically relate” to a violation of the statutory provisions listed in SOX had been approved by a number of other Courts of Appeals. See Van Asdale v. Int’l Game Tech., 577 F.3d 989 (9th Cir. 2009); Day v. Staples, Inc., 555 F.3d 42 (1st Cir. 2009); Allen v. Admin. Rev. Board, 514 F.3d 468 (5th Cir. 2008). However, the Court found that the ARB had provided an adequate explanation for its change in position and agreed with the ARB that the definitive and specific standard potentially conflicts with the statutory text, which prohibits retaliation against an employee for reporting information the employee reasonably believes violates the provisions listed in SOX.

In addition to adopting the ARB’s more lenient standard, the Third Circuit also adopted a broad, plaintiff-friendly approach to the level of detail required for an employee’s communications to be protected. On this point, the Third Circuit explained that “there is nothing in the statutory text that suggests that a complainant’s communications must assert the elements of fraud in order to express a reasonable belief that his or her employer is violating a provision listed in Section 806. Therefore, the District Court erred by requiring that an employee’s communication reveal the elements of securities fraud, including intentional misrepresentation and materiality.”

The dissent by Judge Jordan criticized the majority for adopting what he called an “impossibly vague” standard and was particularly critical of the possibility that an employee whose complaint to his or her employer does not even “approximate” a charge of fraud should be entitled to protection as a “whistleblower” under SOX.

The Third Circuit’s decision in Wiest is the second significant decision issued by the Court in the past month adopting a broad, plaintiff-friendly interpretation of the federal whistleblower statutes enforced by OSHA and the ARB. See Araujo v. New Jersey Transit, 2013 WL 600208 (3d Cir. Feb. 19, 2013).

The whistleblower provisions in a number of other federal statutes subject to the ARB’s jurisdiction, including Dodd-Frank, 12 U.S.C. § 5567; the Consumer Product Safety Improvement Act, 15 U.S.C. § 2087; the Federal Railroad Safety Act, 49 U.S.C. § 20109; and the National Transit Systems Security Act, 6 U.S.C. § 1142, contain similar language defining protected activity, and employers covered by those statutes should expect similarly broad treatment of whistleblower claims.

More generally, the Third Circuit’s holding in Wiest that the ARB’s interpretation of SOX is entitled to deference under the Supreme Court’s decision in Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984) also is cause for concern for employers covered by any of the statutes the ARB is charged with interpreting because the Court’s decision suggests that the Third Circuit would take a deferential approach to review of the ARB’s broad reading of those statutes as well.

In sum, employers need to appreciate that, at least in the jurisdictions covered by the Third Circuit (Pennsylvania, Delaware, New Jersey and the Virgin Islands), the ARB’s lenient standard for determining when employees engage in protected activity has been blessed by the courts. As a result, even employees who make generalized complaints of fraud or other legal violations may be entitled to whistleblower protection.