SOX Whistleblower Decision Clarifies Broad Scope of SOX Protected Conduct

A recent win by a Sarbanes-Oxley Act (“SOX”) whistleblower in Burns v Medtronic , No. 8:15-cv-2330-T17-TBM, 2016 WL 3769369 (M.D. Fla. July 12, 2016), highlights the broad scope of SOX protected whistleblowing and the trend of federal courts rejecting the “definitively and specifically” requirement for SOX protected conduct.

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Burns’ Whistleblowing About Sales Practices

John Burns worked for Medtronic for approximately fourteen years. He held various positions there, including as a Clinical Specialist and Sales Representative.  Burns opposed and refused to perform illegal sales practices that his co-workers employed to increase sales, including unlawful entertainment of physicians and superbilling.  Burns believed these practices were designed to defraud Medicare.

When Burns was counseled about his decreasing sales numbers, he reiterated that he would not engage in illegal activities.  Shortly thereafter, Medtronic demoted Burns, and co-workers whom Burns had reported for illegal practices took over his sales territory.  When threatened with another demotion, Burns complained of retaliation.  Medtronic then escalated the retaliation by demoting him, stripping him of the resources required to perform his new job, accusing him of insubordination, and, ultimately, terminating his employment.  Burns brought suit under the whistleblower protection provision of SOX.

Sarbanes-Oxley “Reasonable Belief” Standard

Medtronic moved to dismiss Burns’ SOX complaint, contending that Burns’ disclosures are not protected under SOX because they do not relate specifically to one of the enumerated categories of protection.  Judge Kovachevich rejected this argument, noting that the Sixth Circuit in Rhinehimer v. U.S. Bancorp Investments, Inc., adopted the Department of Labor Administrative Review Board’s (“ARB”) reasoning in Sylvester v. Parexel Int’l LLC, whereby a SOX complainant need only “show that he or she ‘reasonably believes’ that the conduct complained of constitutes a violation of the enumerated laws.” Burns, 2016 WL 3769369, at *4 (internal quotation mark omitted) (quoting Rhinehimer v. U.S. Bancorp Invs., Inc., 787 F.3d 797, 811 (6th Cir. 2015)). Accordingly, Judge Kovachevich concluded there is no “definitively and specifically” requirement under SOX. Id.

Burns contended that the unlawful practices to which he objected would expose Medtronic to significant fines for fraud and illegal kickbacks and also that, according to Medtronic’s 10-K, Medtronic would lose its contracts with Medicare if the company participated in Medicare fraud. The judge found that those allegations enabled Burns to show an objectively reasonable belief of shareholder fraud. Id.

Federal Courts Broadly Construing Sarbanes-Oxley Protected Conduct

In May of 2011, the ARB appointed by Secretary of Labor Hilda Solis issued the seminal Sylvester decision, which expressly abrogated Platone v. FLYi, Inc., and adopted the following broad construction of SOX protected conduct:

  • SOX complainants need only show that they reasonably believed the conduct complained about violated a relevant law. Sylvester v. Parexel Int’l LLC, ARB Case No. 07-123, at *14 (U.S. Dep’t of Labor May 25, 2011).
  • An employee need not wait until misconduct occurs to make a protected disclosure, so long as the employee “reasonably believes that the violation is likely to happen.” at *16.
  • A complainant need not allege shareholder fraud to receive SOX’s protection. SOX was enacted to address “corporate fraud generally,” and so a reasonable belief that a violation of “any rule or regulation of the Securities and Exchange Commission” could lead to fraud is protected, even if the violation itself is not fraudulent. For example, SOX would protect a disclosure about deficient internal controls over financial reporting, even though there is no allegation of actual fraud. at *19.
  • The reasonable belief standard does not require complainants to tell management or the authorities why their beliefs are reasonable. at *42.
  • SOX complainants no longer need to show that their disclosures “definitively and specifically” relate to the relevant laws. at *41.
  • SOX complainants do not need to establish criminal fraud. Requiring a complainant to allege, prove, or approximate the elements of fraud would be contrary to the whistleblower protection provision’s purpose. at *47.

Sylvester also held that the Platone standard was in conflict with “the plain language of the SOX whistleblower protection provision, which protects ‘all good faith and reasonable reporting of fraud.’” Id. at *14–15, 30 (quoting 148 Cong. Rec. S7418-01, S7420). When the ARB issued Sylvester, the key battleground in SOX litigation in federal court became whether federal courts would continue deferring to the prior ARB’s Platone decision or would instead adopt the current ARB’s Sylvester decision. Five years later, we know the answer, and it is decisively positive for whistleblowers. In particular, the Second, Third, Sixth, and Eighth Circuits and several district courts have adopted the Sylvester standard of SOX protected conduct, and no federal court has rejected the reasoning in Sylvester. See Beacom v. Oracle America, Inc., No. 15-1729, 2016 WL 3144730, at *3 (8th Cir. June 6, 2016) (expressly adopting the Sylvester standard); Rhinehimer, 787 F.3d at 811; Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 220–21 (2d Cir. 2014) (granting Skidmore deference to Sylvester); Wiest v. Lynch, 710 F.3d 121 (3d Cir. 2013) (according Chevron deference to Sylvester); Stewart v. Doral Fin. Corp., 997 F. Supp. 2d 129, 135–36 (D.P.R. 2014) (adopting the Sylvester standard); Leshinsky v. Telvent GIT, S.A., 942 F. Supp. 2d 432, 443 (S.D.N.Y. 2013).

Recently the Sixth Circuit issued the Rhinehimer opinion, in which it adopted the Sylvester standard in affirming a jury verdict for a whistleblower who disclosed unsuitability fraud. Rhinehimer, 787 F.3d at 811–13. Rhinehimer agrees with the ARB’s observation in Sylvester “that an interpretation demanding a rigidly segmented factual showing justifying the employee’s suspicion [referring to Platone] undermines this purpose and conflicts with the statutory design, which turns on employees’ reasonable belief rather than requiring them to ultimately substantiate their allegations.” Id. at 810. In addition, Rhinehimer suggests that the issue of objective reasonableness is rarely amenable to summary disposition:

[T]he issue of objective reasonableness should be decided as a matter of law only when no reasonable person could have believed that the facts [known to the employee] amounted to a violation” or otherwise justified the employee’s belief that illegal conduct was occurring. If, on the other hand, “reasonable minds could disagree about whether the employee’s belief was objectively reasonable, the issue cannot be decided as a matter of law.

Id. at 811–12 (citations omitted).

At trial, the jury found that Rhinehimer was disciplined and fired in retaliation for alerting one of his superiors to unsuitable trades made by a coworker to the detriment of an elderly client of U.S. Bancorp Investments (“USBII”). Rhinehimer’s manager expressly admitted that he gave Rhinehimer a written warning for opposing the unsuitable trades because Rhinehimer’s complaint “prompted a FINRA investigation . . . and anybody associated with this was really feeling the heat.” Id. at 804. In addition, the manager warned Rhinehimer that if he were to sue the bank, his career in the city would be over. The bank placed Rhinehimer on a performance improvement plan requiring him to increase his revenue to $40,000 per month. Shortly thereafter, the bank terminated his employment.

On appeal, USBII argued that, under Platone, Rhinehimer was required to establish facts from which a reasonable person could infer each of the elements of an unsuitability fraud claim, including the misrepresentation or omission of material facts and that the broker acted with intent or reckless disregard for the client’s needs. The Sixth Circuit held that the evidence was more than sufficient to sustain the jury’s finding that Rhinehimer reasonably believed that certain trades constituted unsuitability fraud. Id. at 812. And the court noted the “employee’s reasonable belief is a simple factual question requiring no subset of findings that the employee had a justifiable belief as to each of the legally-defined elements of the suspected fraud.” Id. at 806. 

Burns and Rhinehimer are important decisions for the development of corporate whistleblower rights and protections in that they restore the original intent of SOX whistleblower protection. A whistleblower’s reasonable belief is now assessed in a manner consistent with similar anti-retaliation statutes; i.e., the employee must subjectively believe that there is a violation, and the belief must be objectively reasonable. And as federal courts continue to adopt or defer to the ARB’s construction of SOX protected conduct as articulated in Sylvester, SOX whistleblowers are more likely to survive summary judgment.

Experienced Sarbanes-Oxley (SOX) Whistleblower Retaliation Attorneys

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Jason Zuckerman, Principal of Zuckerman Law, litigates whistleblower retaliation, qui tam, wrongful discharge, and other employment-related claims. He is rated 10 out of 10 by Avvo, was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” in 2015 and selected by his peers to be included in The Best Lawyers in America® and in SuperLawyers.