Jeffrey Wiest v. Thomas Lynch
710 F.3d 121, 35 I.E.R. Cas. (BNA) 269, 2013 WL 1111784 (2013)
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Rule of Law:
Under Section 806 of the Sarbanes-Oxley Act, an employee engages in protected activity when they report conduct that they subjectively and objectively reasonably believe could violate one of the enumerated anti-fraud laws, even if the report does not definitively allege the specific elements of fraud or concern a violation that has already occurred.
Facts:
- Jeffrey Wiest worked in Tyco Electronics Corporation's accounting department, which operated under a high level of audit scrutiny due to a well-known corporate scandal involving its former parent company.
- Beginning around 2007, Wiest established a practice of questioning and rejecting expense requests that he believed failed to satisfy accounting standards or tax laws.
- In mid-2008, Wiest refused to process a payment for a $350,000 event at the Atlantis Resort, expressing in an email to his supervisor his belief that the costs were inappropriately charged as advertising expenses and needed to be treated as income for attending employees.
- Also in mid-2008, Wiest's department questioned a $218,000 expense for a conference at the Venetian Resort due to insufficient documentation and a lack of proper approval.
- In late 2008, Wiest emailed his supervisor about a $335,000 expense for an event at the Wintergreen Resort, explaining his belief that the expense required CEO approval under company policy, which it lacked.
- Between 2007 and 2009, Wiest also questioned expenses for a holiday party, an audit team meeting, an employee baby shower, and an employee's duplicative expense report.
- In September 2009, Tyco's human resources department informed Wiest he was under investigation for several unrelated matters, including an old relationship with a coworker and alleged comments made to others.
- Following the investigation, Wiest went on medical leave and was terminated from his employment by Tyco in April 2010.
Procedural Posture:
- Jeffrey Wiest sued Tyco Electronics Corporation in the U.S. District Court for the Eastern District of Pennsylvania, alleging retaliation in violation of Section 806 of the Sarbanes-Oxley Act and related state law claims.
- Tyco filed a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).
- The District Court granted Tyco's motion to dismiss the federal claim, applying the strict 'definitive and specific' standard, and dismissed the complaint without prejudice.
- The District Court then declined to exercise supplemental jurisdiction over the remaining state law claims.
- Wiest filed a Motion for Reconsideration, arguing the court should have applied the more lenient 'reasonable belief' standard articulated in the recent ARB decision, Sylvester.
- The District Court denied the Motion for Reconsideration.
- Wiest (Appellant) appealed the denial of his motion to the U.S. Court of Appeals for the Third Circuit, with Tyco (Appellees) as the responding party.
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Issue:
Does an employee's communication constitute 'protected activity' under Section 806 of the Sarbanes-Oxley Act if it expresses an objectively reasonable belief that the employer's conduct could violate a listed anti-fraud law, even if the communication does not definitively and specifically relate to an existing violation or allege all the elements of fraud?
Opinions:
Majority - Vanaskie, J.
Yes. An employee's communication constitutes 'protected activity' under Section 806 if it expresses an objectively reasonable belief that the employer's conduct could violate a listed anti-fraud law, even without alleging all elements of fraud. The court adopts the standard set by the Department of Labor's Administrative Review Board (ARB) in Sylvester, which rejected the older, stricter 'definitive and specific' standard from Platone. Giving Chevron deference to the ARB's interpretation, the court holds that the proper test is whether the employee had a subjective belief of a violation and whether that belief was objectively reasonable for a person with the same training and experience. This standard does not require the employee to allege materiality, scienter, or other specific elements of fraud, nor does it require that the violation has already occurred; a reasonable belief about a prospective violation is sufficient. Applying this standard, Wiest's communications about the Atlantis and Wintergreen events stated a plausible claim for protected activity, while his other complaints did not.
Dissenting - Jordan, J.
No. To constitute protected activity, an employee's communication must relate in an understandable way to a violation of one of the specific laws listed in Section 806, which means it must be measured against the basic elements of those fraud laws. The majority's adoption of the 'impossibly vague' Sylvester standard ignores the requirement that the employer must know or suspect that the employee is engaged in protected activity. If the communication does not clearly point to fraud—as opposed to mere accounting errors, internal policy violations, or poor judgment—the employer cannot be on notice. Wiest's complaints were sensible inquiries from an accountant, not allegations of shareholder fraud; they lacked any suggestion of falsity, scienter, or materiality. By abandoning any requirement to connect the complaint to the elements of fraud, the majority improperly turns any internal questioning of an accounting decision into a potential SOX whistleblower claim.
Analysis:
This decision significantly broadens the scope of 'protected activity' for whistleblowers under the Sarbanes-Oxley Act within the Third Circuit. By adopting the ARB's more lenient 'reasonable belief' standard from Sylvester and rejecting the stricter 'definitively and specifically relate' test, the court lowers the pleading standard for plaintiffs at the motion-to-dismiss stage. Employees no longer need to demonstrate that their internal complaints approximated a formal securities fraud claim, making it easier to survive early dismissal and proceed to discovery. The ruling shifts the focus from the technical legal sufficiency of the employee's communication to the reasonableness of the employee's belief, thereby offering greater protection to employees who report potential misconduct without full knowledge of all the elements of a legal violation.
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