United States: Third Circuit Rules in High Profile SOX Whistleblower Retaliation Case

18 U.S.C. § 1514A, otherwise known as the anti-retaliation provision of the Sarbanes-Oxley Act ("SOX"), prohibits retaliation by employers against employees who provide information about certain enumerated, illegal activities. These statutorily enumerated activities include mail fraud, wire fraud, bank fraud, securities fraud, any rule or regulation of the Securities and Exchange Commission ("SEC"), or any provision of federal law relating to fraud against shareholders. While the SOX retaliation provision generally is limited to publicly-traded companies and their contractors, the avenue of whistleblowing are expansive. Whistleblowers will be protected if they provide information to or assist in an investigation conducted by (i) a federal regulatory or law enforcement agency, (ii) Congress, or (iii) a person with supervisory authority over the employee.

For several years, the case of Jeffrey A. Wiest v. Tyco Electronics Corporation has been making its way through the Third Circuit. Mr. Wiest, a former Tyco accountant, sued his former employer, Tyco, alleging that he was unlawfully terminated for reporting suspected securities fraud related to the accounting treatment of two Tyco employee/dealer meetings that occurred at resorts. Tyco relied upon a defense that, more than eight months after engaging in this alleged "protected activity" under SOX, Mr. Wiest independently was investigated (and eventually terminated) by Human Resources after multiple employees complained about inappropriate sexual comments and inappropriate relationships with subordinates engaged in by Mr. Wiest. This case gained notoriety primarily for the basis of Mr. Wiest's alleged "protected activity." As a manager in Tyco's accounts payable department, Mr. Wiest had been raising internal concerns regarding expense submitted in connection with these aforementioned employee/dealer meetings at resorts. For example, Mr. Wiest believed that the reporting of, for example, a $350,000 event in the Bahamas with mermaid greeters, costumed pirates and fire dancers, violated federal tax laws. Following discovery, the District Court granted summary judgment in favor of Tyco, finding insufficient evidence for a jury to believe that Mr. Wiest's protected activity was a "contributing factor" in Tyco's decision to terminate his employment. On appeal, the Third Circuit Court of Appeals agreed with the District Court and concluded that Mr. Wiest failed to offer any evidence that his protected activity related to suspected securities fraud was a "contributing factor" to his termination. The Court of Appeals also went even further, stating that even if Mr. Wiest had met the threshold evidentiary hurdle of a SOX whistleblower claim (that a protected activity was a "contributing factor" to an adverse employment action), Tyco demonstrated that it would have taken the same actions against Mr. Wiest in the absence of his SOX protected activity. Specifically, the Court of Appeals gave great weight to: (i) the fact that Tyco's investigation was "thoroughly documented" and conducted by a human resources director "who had no involvement with, or knowledge of, Wiest's protected activity;" (ii) that any inference of causation was minimal given the more than eight month passage in time; (iii) that Tyco had praised Mr. Wiest's performance both before and after his protected activity; and (iv) evidence that colleague of Mr. Wiest who engaged in similar protected activity did not face any adverse employment actions. Also important, from the standpoint of legal precedent and in an issue of first impression, the Court of Appeals defined the "contributing factor" standard referenced above as "any factor, which alone or in combination with other factors, tends to affect in any way the outcome of the decision." Employers in the Third Circuit now have the benefit of knowing the standard that will apply (or, at least, should uniformly be applied) to SOX whistleblower claims in this jurisdiction. However, employers also should be mindful that the "contributing factor" standard is more akin to the lower "motivating factor" standard that applies to most anti-discrimination statutes (such as Title VII), and not the heightened "but-for" standard found in more limited circumstances (such as with respect to the Age Discrimination in Employment Act). Thus, when faced with the need to investigate, discipline, or terminate an employee who recently may have engaged in protected activity pursuant to SOX, it is recommended that the investigation be thoroughly documented, assigned to someone without knowledge of the SOX protected activity (if possible), and that factors such as temporal proximity and treatment of comparators be taken into account.

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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