04.04.2013 Third Circuit Adopts Obama Administration’s New Standard for Pleading Requirements in Sarbanes-Oxley Act Whistleblower Retaliation Claims


On March 19, 2013, the United States Court of Appeals for the Third Circuit reversed an order of the District Court for the Eastern District of Pennsylvania dismissing the retaliation claim of Jeffrey A. Wiest (“Wiest”) under the Sarbanes-Oxley Act (“SOX”) against his former employer, Tyco Electronics Corporation and several officers and directors of the company (collectively, “Tyco”). Wiest v. Lynch., No. 11-4257 (3d Cir. Mar. 13, 2013).  Specifically, the Third Circuit held that the District Court erred in requiring that Wiest allege that “his communications to his supervisors ‘definitively and specifically related to’ an existing violation of a particular anti-fraud law, as opposed to expressing a reasonable belief that the corporate managers are taking actions that could run afoul of a particular anti-fraud law.”  Id. at 3 (emphasis added.)  Instead, the Third Circuit adopted a more employee-friendly standard, making it easier for an employee alleging that his or her actions were protected by SOX to get past a motion to dismiss.

Wiest, a longtime employee in Tyco’s accounting department, alleged that that on several occasions he sent emails and raised concerns with management regarding lavish expenditures, including a $350,000 event at the Atlantis Resort in the Bahamas, a $218,000 conference at the Venetian Resort in Las Vegas, and a $335,000 conference at the Wintergreen Resort in Virginia.  These and other expenses, according to Wiest, either were improper expenses not tied to legitimate business purposes or violated Tyco’s own internal policies regarding such expenses.  According to the Complaint, Wiest was targeted by the company and investigated for sexual harassment because Tyco was “frustrated with his insistence on following proper accounting procedures.”  He alleged that the stress caused his health to deteriorate, and he had to go on medical leave.  Wiest was terminated seven months later. 

After his termination, Wiest filed a SOX whistleblower complaint, asserting that his termination was in retaliation for his reports of improper expenditures.  Tyco filed a motion to dismiss, asserting that Wiest had failed to allege a prima facie case.  The District Court granted Tyco’s motion, finding that Wiest’s alleged communications did not “definitively and specifically” relate to a violation or rule listed in the SOX statute. 

Writing for the panel, Judge Vanaskie reversed this decision, finding that the District Court should have applied a more recent standard outlined in Sylvester v. Parexel Int’l LLC, ARB 07-123, 2011 WL 2165854 (Dep’t of Labor May 25, 2011) (en banc).  In Sylvester, the Department of Labor’s (“DOL”) Administrative Review Board (“ARB”) abandoned the “definitive and specific” standard that was formulated in 2006 under President George W. Bush, opting instead for a “reasonable belief” standard.  Under the Sylvester standard, an employee must establish a subjective, good faith belief that his or her employer violated a provision listed in SOX, and that such a belief is also objectively reasonable to a reasonable person with the same training and experience. 

The Third Circuit reasoned that an “employee should not be unprotected from reprisal because she did not have access to information sufficient to form an objectively reasonable belief that there was an intent to defraud or the information communicated to her supervisors was material to a shareholder’s investment decision.”  Wiest, No. 11-4257 at 22.  Moreover, under the new standard, an employee’s communication does not necessarily have to involve a reasonable belief of an existing violation, but can implicate a future one.  “It would frustrate that purpose to require an employee, who knows that a violation is imminent, to wait for the actual violation to occur when an earlier report possibly could have prevented it.”  Id. at 24.  The Third Circuit, in applying this standard, held that Wiest met his burden with respect to his communications regarding certain expenses, although not others.            

The implications of the Wiest decision may not be fully realized as it could directly affect an appeal of a SOX case currently pending in the Tenth Circuit.  Moreover, the Wiest holding is directly in conflict with prior jurisprudence from the Fourth Circuit, setting up a challenge to the Supreme Court.  For now at least, employees in the jurisdictions governed by the Third Circuit will have a much easier road to show that their actions are protected under SOX and similarly structured whistleblower protection laws enforced by DOL.  Also, adoption of this new, more employee-friendly reading could embolden the Obama administration step up its enforcement efforts with respect to all 22 of the whistleblower protection statutes under DOL jurisdiction.

Employers should carefully handle any employees making complaints about actions that could reasonably be interpreted as fraudulent by the complainant.