In a 5-2 decision, the New York State Court of Appeals in Sullivan v. Harnisch, No. 82, 2012 N.Y. Slip. Op. 03574 (N.Y. May 8, 2012), refused to extend to compliance officers an exception to the employment-at-will doctrine articulated in Wieder v. Skala, 80 N.Y.2d 628 (1992).
Facts and Procedural History
Sullivan involved a breach of implied contract claim, among others, brought by Plaintiff Joseph Sullivan, who was the Chief Compliance Officer ("CCO") in a hedge fund, as well as its Executive Vice President, Treasurer, Secretary, Chief Operating Officer and a 15-percent partner. Sullivan's employment was terminated after a dispute with the hedge fund's Chief Executive Officer and President, Defendant William Harnisch. Pursuant to his role as the company's CCO, Sullivan confronted Harnisch about a series of stock trades in which Harnisch had sold stock in his personal account and the accounts of his family members before the firm sold clients' shares. Sullivan believed that this practice amounted to "front-running" that allowed Harnisch to take advantage of an opportunity to the exclusion of the firm's clients. Sullivan was fired within days of the confrontation and this lawsuit followed.
In support of his breach of implied contract claim, Sullivan argued that he was fired in retaliation for his internal inquiries into his superior's trading activity, which violated a company policy that prohibited retaliation for this conduct. While Sullivan never identified the policy itself, he nevertheless inferred its existence from the company's obligations under its Code of Ethics and the securities laws to avoid improper transactions and his own duty as CCO to see that these obligations were met. Based on the legal and ethical duties of his securities firm and his duties as a compliance officer, Sullivan's claim asked the court to recognize an exception to the employment-at-will doctrine when a compliance officer is fired for objecting to misconduct.
The Defendants filed a motion to dismiss Sullivan's claim for a breach of implied contract. The New York County Supreme Court denied Defendants' motion finding Sullivan's claim to be legally sufficient. While the court acknowledged an employer's right to terminate an at-will employee in general, it held that the circumstances of Sullivan's discharge could create an exception to the employment-at-will doctrine. The court found that an "express limitation" to the at-will doctrine may have resulted from the language found in the company's handbook, which prohibits retaliation, as well as the language found in the company's Code of Ethics, which specifically required the CCO to report complaints to the Securities and Exchange Commission ("SEC"). On appeal, however, the Appellate Division reversed and dismissed the claim holding that the company's Code of Ethics did not shield Sullivan from being an at-will employee and, therefore, he did not have either an express or implied right to continued employment. An appeal was then filed with the New York Court of Appeals.
The Wieder Exception To Employment At-Will
New York courts have made clear that employment for an indefinite term is deemed to be a hiring at will which can be terminated by either party at any time for any reason or no reason at all. "[A]bsent a constitutionally impermissible purpose, a statutory proscription, or an express limitation in the individual contract of employment, an employer's right at any time to terminate an employment at will remains unimpaired." Murphy, 58 N.Y.2d 293, 305 (1983).
The only time the New York State Court of Appeals has retreated from the employment-at-will doctrine was its decision in Wieder. In Wieder, an associate at a law firm filed a claim for breach of contract after he alleged he was fired for insisting that his firm report the unethical conduct of another associate at the firm as required by the ethics code. Finding an implied-in law obligation in Wieder's relationship with his law firm, the Court held that Wieder had a valid claim for breach of contract. It reasoned that intrinsic to Wieder's relationship with his law firm there was an implied yet essential understanding that both Wieder and the firm would conduct the firm's legal practice in accordance with the ethical standards of the legal profession. The Court found that the firm's insistence that its own associate, Wieder, act unethically "amounted to nothing less than a frustration of the only legitimate purpose of the employment relationship." Wieder's duties and responsibilities as an associate of the firm and as a lawyer were held to be "so closely linked as to be incapable of separation."
New York State Court of Appeals Narrows Wieder Exception
In Sullivan, the New York State Court of Appeals affirmed the Appellate Court's decision and clarified that the Wieder exception is a very narrow one. The Court rejected Sullivan's contention that as a compliance officer, complying with securities laws was central to his relationship with his company in the same way that complying with ethics rules as a lawyer was central to the plaintiff's employment at a law firm in Wieder.
Unlike the plaintiff in Wieder, the Court concluded that Sullivan's regulatory and ethical obligations as CCO and his duties as an employee were not so closely intertwined "as to be incapable of separation." The Court noted that Sullivan was not even a full-time compliance officer as it was only one of the five positions he held and, therefore, regulatory compliance was not "at the core" and "only purpose" of Sullivan's employment as required under Wieder. The Court also found compelling the fact that Sullivan was not associated with other compliance officers at his firm who were all subject to self-regulation as members of a common profession, as would be the case with lawyers in a law firm.
Although the Court acknowledged that the securities business requires compliance officers to comply with various federal regulations, the Court concluded that "the existence of federal regulation furnishes no reason to make state common law governing the employer-employee relationship more intrusive." Instead, the Court deferred to Congress to issue appropriate regulations if it sees fit to do so. As an example, the Court noted that subsequent to the events that took place in this case, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat 1376 (2010)), which protects whistleblowers from being fired for providing information about violations of securities laws to the SEC. However, the Court did not believe that Sullivan's conduct was covered under Dodd-Frank because Sullivan reported the misconduct internally by confronting his superior and did not "blow the whistle" by reporting misconduct to the SEC or outside the company.
The dissent, which was authored by Chief Judge Jonathan Lippman, characterized the majority opinion as unduly narrowing the scope of the Wieder exception to the doctrine of at-will employment. According to Judge Lippman, "[t]he message that will be taken from the majority's decision is self-evident: if compliance officers (and others similarly situated) wish to keep their jobs, they should keep their heads down and ignore good-faith suspicions or evidence they may have that their employers have engaged in illegal and unethical behavior, even where such violations could cause or have caused staggering losses to their employers' clients." The dissent suggests that compliance officers should not have to look to federal or state statutes for recourse but that "the common law should protect compliance officers from retaliatory termination from the inception of their investigations into alleged misconduct, even before they make any reports to the government."
Implications for Employers
Even though Sullivan does not create or expand an exception to the employment-at-will doctrine, compliance officers are not left without recourse. Employers in the financial services industry still should be cautious when terminating an employee who has raised a complaint about financial wrongdoing. The majority opinion does not give employers free reign "to fire its compliance officers, simply for doing their jobs," as suggested by the dissent. Employees may still be able to assert claims under federal law regardless of whether the misconduct is reported internally or externally. If the employee "blows the whistle" and reports the alleged wrongdoing to an external agency (such as the SEC), as the Court notes, the employee may have a cause of action under Dodd-Frank. Even if the employee only raises an internal complaint, the employee's conduct may be covered under Sarbanes-Oxley.
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