Genberg v. Porter
882 F.3d 1249 (2018)
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Rule of Law:
An employee's communication reporting corporate misconduct constitutes 'protected activity' under the Sarbanes-Oxley Act if the employee subjectively holds a belief that the conduct violates a relevant law and that belief is objectively reasonable, even if the communication does not cite a specific statute or rule.
Facts:
- Following a 2005 merger, the Ceragenix Board of Directors, including CEO Steven Porter, obtained a proxy to vote the shares of new shareholders, including executive Carl Genberg.
- For approximately five years, the Board used this proxy to reelect themselves and increase their own compensation, while the new shareholders' shares remained in escrow.
- On March 2, 2010, Mr. Genberg, objecting to the Board's continued use of the proxy, ghostwrote an email for a major shareholder to send to the Board, arguing the practice was inequitable and contrary to shareholder accountability.
- The next day, March 3, the Board discussed the email, suspected Mr. Genberg's involvement, and considered him disloyal. They discussed firing him but decided to wait because he was engaged in fundraising.
- On March 4, 2010, Mr. Genberg sent another email directly to a Board member, accusing CEO Steven Porter of insider trading.
- In response to the emails, the Board hired an attorney to investigate both the insider trading allegation and Mr. Genberg's relationship with a group attempting to acquire Ceragenix.
- The investigation found no evidence of insider trading by Mr. Porter but did confirm Mr. Genberg's involvement with the group seeking to acquire the company.
- Following the investigation, the Board terminated Mr. Genberg for cause, and Mr. Porter subsequently made several allegedly defamatory statements about Mr. Genberg to a consultant and company lenders.
Procedural Posture:
- Carl Genberg sued Steven Porter in the U.S. District Court (trial court), alleging retaliation under the Sarbanes-Oxley Act and defamation under Nevada law.
- The district court granted summary judgment in favor of Mr. Porter on both claims.
- Mr. Genberg appealed the district court's decision to the U.S. Court of Appeals for the Tenth Circuit (intermediate appellate court).
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Issue:
Does an employee's communication that alleges corporate misconduct, but does not cite a specific law or regulation, constitute 'protected activity' under the Sarbanes-Oxley Act if the employee subjectively and reasonably believes a violation occurred?
Opinions:
Majority - Bacharach, J.
Yes, an employee's communication can constitute 'protected activity' under Sarbanes-Oxley even without citing a specific law, as long as the employee subjectively and reasonably believes a violation occurred. The court rejected the obsolete, stricter 'definitive and specific' standard for determining protected activity. Instead, it adopted the two-part 'reasonable belief' standard articulated in Sylvester v. Parexel International, which requires both: 1) the employee's subjective, actual belief that the employer's conduct constituted a violation of the law, and 2) that the belief was objectively reasonable. Mr. Genberg's sworn statement that he believed the Board's prolonged use of the proxy violated an SEC rule was sufficient to create a question of fact on the subjective component, as credibility cannot be decided on summary judgment. The court also found a genuine dispute of material fact existed as to whether this protected activity was a contributing factor in his termination, given the close temporal proximity between the emails and the Board's discussions about firing him. The court held that the subsequent investigation was inextricably intertwined with the protected activity and could not be considered a legitimate intervening event. Finally, the court found Mr. Porter had forfeited the 'same-action defense' by not raising it, but even if he had, a reasonable factfinder could conclude that Mr. Genberg would not have been fired absent his protected communications.
Dissenting - Hartz, J.
No, this specific communication did not constitute 'protected activity' because no reasonable juror could infer that the employee subjectively believed he was reporting a violation of federal securities law. The dissenting opinion argues that Mr. Genberg, a lawyer sophisticated in securities law, would have explicitly stated that the Board's conduct violated the law if he truly believed it did. Instead, the March 2 email framed the issue in terms of fairness, equity, and corporate policy, and even noted that a different SEC rule was not applicable. The dissent characterizes Mr. Genberg's later affidavit, which claimed he believed a specific rule was violated, as a 'sham' affidavit created for litigation that fails to explain the critical omission in the original email. Given the email's language and Mr. Genberg's expertise, his claim of a subjective belief in a legal violation at the time is not credible as a matter of law.
Analysis:
This decision solidifies the adoption of the more lenient 'reasonable belief' standard for Sarbanes-Oxley whistleblower claims within the Tenth Circuit, formally rejecting the older, stricter 'definitive and specific' test. By doing so, it lowers the initial burden for employees to establish that their complaints constitute protected activity, making it more difficult for employers to obtain summary judgment in retaliation cases. The ruling emphasizes that an employee's subjective belief is a question of fact for a jury, thereby increasing the likelihood that such claims will proceed to trial. This shift provides greater protection for whistleblowers who may suspect illegal conduct but lack the legal expertise to identify the precise statute being violated in their initial report.
