SOX Issues (Part IV)

Post-Parexel Federal Court Decisions That Mention Parexel

a. Sharkey

On August 19, 2011, in Sharkey v. J.P. Morgan Chase & Co., 805 F. Supp. 2d 45 (S.D.N.Y. 2011), the district court cited to Parexel with approval for the proposition that a heightened pleading standard does not apply to SOX whistleblower cases. Id. at 53, 57. In so doing, the court denied the defendants’ motion to dismiss. This was the first federal court decision to cite to Parexel.

b. Gladitsch

On March 21, 2012, in Gladitsch v. Neo@Ogilvy, No. 11 Civ. 919 DAB, 2012 WL 1003513 (S.D.N.Y. Mar. 21, 2012), the district court cited Parexel with approval for the proposition (that some courts have rejected) that protected activity under SOX Section 806, 18 U.S.C. § 1514A(a)(1), is not limited to reporting fraud against shareholders, but rather prohibits an employer from retaliating against an employee who complains about any of the six enumerated categories of misconduct under that section, whether or not they involve reporting fraud against shareholders. Id. at *7.

Other courts taking this same position include O’Mahony v. Accenture Ltd., 537 F. Supp. 2d 506, 518 (S.D.N.Y. 2008) (employee’s reporting of employer’s fraudulent scheme to evade social security taxes deemed protected activity, regardless of relation to shareholder fraud); Sharkey v. J.P. Morgan Chase & Co., 805 F. Supp. 2d 45, 57 (S.D.N.Y. 2011) (SOX prohibits an employer from retaliating against an employee who complains about any of the six enumerated categories of misconduct), and Reyna v. ConAgra Foods, Inc., 506 F. Supp. 2d 1363, 1381 (M.D. Ga. 2007) (finding that § 1514A “clearly protects an employee against retaliation based upon that employee’s reporting of mail fraud or wire fraud regardless of whether that fraud involves a shareholder of the company”).

Courts taking a contrary position (all pre-Parexel) include Bishop v. PCS Admin., (USA), Inc., No. 05 Civ. 5683, 2006 WL 1460032 at *9 (N.D. Ill. May 23, 2006) (finding that the phrase “relating to fraud against shareholders” must be read as modifying all violations enumerated under section § 1514A) (citations omitted), and Livingston v. Wyeth, Inc., 2006 WL 2129794 *10 (M.D.N.C. July 28, 2006) (“To be protected under Sarbanes-Oxley, an employee’s disclosures must be related to illegal activity that, at its core, involves shareholder fraud.”), aff’d, 520 F.3d 344 (4th Cir. 2008). The Fifth Circuit U.S. Court of Appeals expressly declined to rule on this issue in Allen v. Administrative Review Bd., 514 F.3d 468, 480 n. 8 (5th Cir. 2008) (“Because the issue is not before us, we express no opinion on whether the first five enumerated categories of protected activity found in § 1514A require some form of scienter related to fraud against shareholders.”) (citations omitted).

Post-Parexel, however, the court in Gauthier v. Shaw Group, Inc., No. 3:12–cv–00274–GCM, 2012 WL 6043012, at *5 (W.D.N.C. Dec. 4, 2012), continued to follow Wyeth, and dismissed the plaintiff’s SOX claim, because even if the plaintiff raised concerns of fraud, the concerns did not concern fraud against shareholders. As the court concluded, “[a]ny fraudulent modification of the safety-related report would not provide a basis for suit under Section 1415A because it in no way reflects attempts to defraud shareholders.” Id. The court did not discuss or mention Parexel.

c. Wiest v. Lynch, __ F.3d __, No. 11–4257, 2013 WL 1111784 (3rd Cir. Mar. 19, 2013)

In this case, the plaintiff filed a complaint alleging retaliation under Section 806 after having reported concerns about certain corporate expenditures. The district court granted the defendants’ motion to dismiss. The district court held that the plaintiff failed to adequately allege that he engaged in protected activity, and emphasized that Section 806 only protects employees who provide information regarding conduct they “reasonably believe” violates one of the laws enumerated in Section 806, and that the complaint must “definitively and specifically” relate to such laws. Following the dismissal of the complaint, the plaintiffs moved for reconsideration, relying on the ARB’s decision in Parexel rejecting the “definitively and specifically” standard. The court district court denied the motion for numerous reasons, including its belief that “[a]n ARB decision is not binding authority on a United States district court.” Id. at *4. Wiest filed an appeal.

In a 2-1 decision issued on March 19, 2013, the Third Circuit U.S. Court of Appeals reversed the district court. The Third Circuit held that the ARB’s rejection of the “definitive and specific” standard [in Parexel] is entitled to Chevron deference.” Id. at *8 (citing Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837, 842–43 (1984) (“If … the court determines Congress has not directly addressed the precise question at issue … the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”)). Moreover, it concluded that, based on Parexel: (1) the District Court erred by requiring that an employee’s communication reveal the elements of securities fraud, including intentional misrepresentation and materiality; and (2) the District Court erred in holding that to constitute protected activity, the information contained within an employee’s communication must implicate “a reasonable belief of an existing violation.” Id. at *10. After applying what the Third Circuit considered to be the correct legal standard, it found that the plaintiff had alleged sufficient facts to make out a SOX retaliation claim, and remanded the case to district court for further proceedings. Id. at 12-14. One justice dissented, arguing that Parexel was wrongly decided by the ARB, and was not entitled to deference. That justice’s position is in line with pre-Parexel cases from other circuit courts that adopted the “definitive and specific” standard, such as Day v. Staples, 555 F.3d 42 (1st Cir. 2009) and Welch v. Chao, 536 F.3d 269 (4th Cir. 2008), cert. denied, 129 S. Ct. 1985 (2009).

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