United States: Fifth Circuit Rejects SOX Whistleblower Claims Not Raised In Administrative Complaint; Adopts Liberal "Reasonable Belief" Pleading Standard With Respect To Protected Conduct

Executive Summary: On July 31, 2015, the Fifth Circuit issued a decision that may have both a positive and negative impact on employers defending whistleblower retaliation claims under the Sarbanes Oxley Act (SOX). In this decision, the court held that a former employee could not proceed with the portion of his whistleblower retaliation claim that was based on protected activity he did not identify in his administrative complaint to the Occupational Safety and Health Administration (OSHA). However, the court reinstated the former employee's claims that were based on activity that he did report in his administrative complaint, finding that the lower court applied an overly restrictive pleading requirement in dismissing the claims. The Fifth Circuit adopted the more liberal pleading standard established by the U.S. Department of Labor (DOL) Administrative Review Board (ARB) in May 2011 – rendering it far easier for whistleblowers to advance their retaliation claims beyond the pleading stage, into the discovery phase, and potentially on to trial by jury.

Alleged Whistleblower Activity

In this case, the former employee of a wholly-owned subsidiary of a publicly traded company claimed that while performing his job duties in 2008 and 2009, he investigated and internally reported fraudulent pricing and accounting schemes that inflated the company's profitability by treating tax collections as revenues. The former employee claimed that his supervisors and other company officials retaliated against him for reporting these issues, and that he memorialized his concerns about the retaliation on compliance forms he submitted in 2008 and 2009, but the company did not investigate his retaliation claims when he was targeted for discharge. The former employee also claimed that just before he was terminated, he learned of circumstances suggesting that the company was engaged in wire fraud and antitrust violations, which he reported to the general counsel, although he had no opportunity to fully investigate them.

DOL/OSHA Administrative Complaint Procedure

The former employee filed an administrative complaint with OSHA as required by the SOX whistleblower provision; however, he failed to include many of the detailed allegations included in his subsequent federal court complaint. Specifically, his complaint to OSHA did not include his alleged reporting of illegal price signaling, inconsistent customer discounts, and wire fraud. In October 2010, OSHA issued a determination letter finding that the former employee's protected activity was not a contributing factor in the decision to terminate his employment. The former employee subsequently terminated the OSHA proceedings and filed a lawsuit against his former employer in federal court.

Implications of the Administrative Exhaustion Rule

The allegations in the federal court complaint went beyond those raised in the complaint to OSHA. The former employee argued that because SOX gives federal courts subject matter jurisdiction to conduct de novo review, the courts are not limited by the underlying administrative charge. Both the trial court and the Fifth Circuit disagreed, holding that just as Title VII claims are limited in scope to the EEOC investigation that can reasonably be expected to grow out of the administrative charge, so too a federal court's de novo review jurisdiction over SOX whistleblower claims is limited in scope to the OSHA investigation that can reasonably be expected to grow out of the administrative complaint. Because the former employee did not allege in his OSHA complaint that he was discriminated against because he reported that the company had engaged in wire fraud activities, the Fifth Circuit affirmed the trial court's dismissal of those claims for failure to exhaust administrative remedies.

The New Pleading Standard Adopted by the Fifth Circuit

However, the Fifth Circuit reinstated other claims made by the former employee that he raised in his administrative complaint, finding that the trial court applied an overly restrictive pleading requirement in dismissing the claims. The Fifth Circuit held that the lower court should have utilized the more lenient standard adopted by the ARB in 2011.

Before the 2011 decision, the ARB required complaining individuals to show, among other things, that they engaged in protected activity that related "definitely and specifically" to one or more categories of criminal fraud or securities violations enumerated in the statute. Most federal courts endorsed this standard in evaluating SOX whistleblower claims. However, in 2011 the ARB rejected the "definite and specific relation standard," finding it inconsistent with the SOX whistleblower provision which prohibits a publicly traded company from discharging or in any other manner discriminating against an employee for providing information regarding conduct that the employee "reasonably believes" constitutes a SOX violation. The ARB further held that federal court pleading standards do not apply in administrative hearings and that the critical focus at the preliminary review stage in a SOX whistleblower retaliation case is whether the complainant reported conduct he or she reasonably believed constituted a violation of federal law. The ARB held that even conclusory allegations will satisfy the complainant's burden at the initial stages and entitle him or her to move forward with discovery.

The lower court dismissed the balance of the former employee's whistleblower claims under the "definite and specific" pleading standard; however, the Fifth Circuit reversed this decision and reinstated this portion of the complaint. The Fifth Circuit held that from this point forward, it will follow the new liberal pleading standard adopted by the ARB in 2011 as consistent with the text of the statute.

Significance of this Ruling

With this decision, the Fifth Circuit (with jurisdiction over federal district courts in Louisiana, Mississippi, and Texas) joins a few other federal appeals courts, including the Second Circuit (with jurisdiction over federal district courts in Connecticut, New York and Vermont), the Third Circuit (with jurisdiction over federal district courts in Delaware, New Jersey and Pennsylvania), and the Sixth Circuit (with jurisdiction over federal district courts in Kentucky, Michigan, Ohio and Tennessee) in endorsing the new standard articulated by the ARB in May 2011. This will likely make it more difficult for employers in these jurisdictions to get whistleblower retaliation complaints dismissed short of trial. In districts where the courts of appeal have not issued a definitive ruling on whether they will follow the ARB's standard, district courts take varying positions on whether the standard applies. Accordingly, many employers outside the Fifth, Second, Third and Sixth Circuits may continue to argue in good faith that the definite and specific standard should apply in evaluating the sufficiency of a SOX complaint, and ultimately whether an employee's alleged communication states a cognizable claim for relief under the SOX whistleblower provision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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