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No Plausible SOX Act Retaliation Claim For Fired Engineer Manager, 2d Cir. Affirms

Tuesday, August 12, 2014

By Kevin McGowan  

Aug. 11 — A fire engineering manager in Dubai alleging he was terminated for bringing a subordinate's alleged flouting of safety standards to the attention of executives at AECOM Technology Corp. has no Sarbanes-Oxley Act retaliation claim because he can't relate AECOM's alleged misconduct to fraud on shareholders, the U.S. Court of Appeals for the Second Circuit ruled Aug. 8.

On appeal from a district court's dismissal of Christian Nielsen's complaint against AECOM Technology Corp. and AECOM Middle East Ltd., the Second Circuit endorsed a Labor Department Arbitration Review Board 2011 decision adopting a more-complainant friendly interpretation of the SOX Act's retaliation provision, which is codified as 18 U.S.C. § 1514A.

But the appeals court said even under the ARB's more relaxed standard for protected activity, announced in Sylvester v. Parexel International LLC, 32 IER Cases 497 (DOL ARB 2011), Nielsen has no SOX Act claim because he failed plausibly to plead a link between AECOM's alleged misconduct and a violation of any of the federal securities and fraud statutes enumerated in the SOX Act.

‘Bittersweet' Decision for Plaintiff

The Second Circuit decision is “very significant” for employees pursuing SOX Act whistle-blower claims, said Daniel Kaiser of Kaiser Saurborn & Mair in New York, who represented Nielsen.

Although it's “bittersweet” because the Second Circuit affirmed dismissal of Nielsen's claim, Kaiser said it's “much more important” for employee advocates that the appeals court endorsed the ARB's Sylvester test and rejected a more narrow and restrictive standard used by the district court.

In endorsing a “reasonable belief” test rather than requiring SOX complainants specifically to cite the securities or fraud law provision allegedly violated by an employer, Kaiser said the court recognized “most people aren't lawyers” and shouldn't be expected specifically to relate alleged employer misconduct to the federal laws and rules listed in § 1514A.

It's a “very, very important decision” because of the Second Circuit's approval of the Sylvester standard, which potentially allows more SOX Act claims to survive motions to dismiss, Kaiser told Bloomberg BNA Aug. 11.

AECOM didn't immediately respond to Bloomberg BNA's request for comment.

Some Deference Given to DOL

It remains an open issue whether courts must defer to the ARB's interpretations of the SOX Act's anti-retaliation provision, Judge Debra Ann Livingston wrote for the Second Circuit.

In Sylvester, the ARB rejected its previous SOX Act interpretation that a whistle-blowing employee's communications must “definitively and specifically relate” to one of the fraud or securities law violations listed in § 1514A(a)(1).

Instead, the ARB said a SOX Act complainant employee must have “a subjective belief” the challenged conduct violates a provision listed in § 1514A and this belief must be objectively reasonable.

The objective component of the reasonable belief standard should be evaluated “based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee,” the ARB said in Sylvester.

It remains an open issue whether courts must defer to the ARB's interpretations of the SOX Act's anti-retaliation provision, Judge Debra Ann Livingston wrote for the Second Circuit.

The U.S. Supreme Court and the Second Circuit have yet to decide whether Congress delegated to the ARB authority to interpret the SOX Act's anti-retaliation provision and that courts therefore must defer to the agency's interpretation, Livingston wrote.

The Supreme Court this year in Lawson v. FMR LLC, 134 S. Ct. 1158, 37 IER Cases 1193 (2014) decided its first SOX Act case, but the justices declined to reach the issue of deference to the ARB's statutory interpretations.

The Second Circuit likewise declined to decide whether ARB interpretations generally must be accorded deference based on a congressional delegation of authority, as in Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984).

But the court said the ARB's Sylvester decision merits some deference under Skidmore v. Swift & Co., 323 U.S. 134 (1944) because it is a “persuasive” interpretation of the SOX Act issued by the Labor Department, which Congress charged with adjudicating whistle-blower complaints under the act.

“[T]his circuit has not yet decided whether Congress delegated interpretive authority over § 1514A to the ARB in Sarbanes-Oxley, and the Supreme Court recently declined to decide this issue,” Livingston wrote. “Because the ARB's rejection of its earlier standard is persuasive even under lesser Skidmore deference, we need not decide the question whether [the ARB's] interpretations of § 1514A merit Chevron deference.”

The ARB's rejection in Sylvester of its previous rule that an employee's protection communication under the SOX Act must relate “definitively and specifically” to one of the listed categories of fraud or securities violations was “persuasive” given that the act protects employees who aren't lawyers, the court said.

“Thus, relief pursuant to § 1514A turns on the reasonableness of the employee's belief that the conduct violated one of the enumerated provisions—which is contrary to the ‘definitively and specifically' standard,” the court said. “The objective prong of the reasonable belief test focuses on the ‘basis of knowledge available to a reasonable person in the circumstances with the employee's training and experience.' ”

“Many employees are unlikely to be trained to recognize legally actionable conduct by their employers,” the court said. “Accordingly, the centrality of the belief of the whistleblower that her employer has engaged in wrongdoing leads us to conclude in accord with the ARB's interpretation in Sylvester, that the ‘definitively and specifically' requirement is not in keeping with the language of the [SOX Act].”

Employee Fails to State Claim

But even under the new ARB interpretation of § 1514A, Nielsen failed to allege a plausible SOX Act retaliation claim, the court said.

Nielsen failed to allege it was objectively reasonable for him to believe the activity he reported—alleged falsification of fire safety reports in engineering plans—violated any of the federal securities, mail fraud, wire fraud or bank fraud laws enumerated in § 1514A, the court said.

Nielsen alleged he “reasonably believed” AECOM executives were committing “fraud upon their shareholders and would likely continue violating [U.S.] mail and wire fraud statutes” by relying on the alleged false reports. Such “conclusory statements” can't sustain Nielsen's § 1514A claim, the court said.

Nielsen hasn't “plausibly pled an objectively reasonable belief” that AECOM engaged in mail or wire fraud, as each requires a scheme to steal money or property, allegations absent from his complaint, the court said.

Nor can Nielsen show it was objectively reasonable to believe the complained-of conduct was shareholder fraud, the court said. He essentially alleged a single employee failed properly to review fire safety designs and that management ignored his warnings about that employee's reports, the court said.

“There is no claim that this fire safety review is required by any federal statute or regulation, that these designs had even been submitted by AECOM for approval by any outside body, or even that the allegedly inadequate fire safety review posed any specified safety hazard,” the court said.

‘There is no claim that this improper activity allegedly disregarded by AECOM was related to any specified AECOM venture, much less an important one, nor is there any nonconclusory claim that this activity would negatively affect AECOM operations either in the United States or in Dubai,” the court said. “The connection between Nielsen's claims and supposed fraud against shareholders is simply too tenuous.”

“Stripped of its bare and unsupported conclusions, Nielsen's complaint wholly fails to allege that the misconduct he reported would have significant repercussions for AECOM or, by extension, its shareholders,” the court said. “Nor has Nielsen alleged any facts plausibly suggesting that this supposed misconduct implicated any of the enumerated provisions in § 1514A. We conclude that the complaint's allegations fail to sustain this whistleblower suit under § 1514A because Nielsen has failed plausibly to allege that he reasonably believed AECOM's conduct violated an enumerated provision.”

Judges Peter W. Hall and Robert D. Sack joined in the decision.

In addition to Kaiser, Henry L. Saurborn of Kaiser Saurborn & Mair in New York represented Nielsen. William Roberts III, John R. Shane and Todd A. Bromberg of Wiley Rein LLP in Washington represented AECOM Tech. Corp. and AECOM Middle East Ltd.

To contact the reporter on this story: Kevin McGowan in Washington at kmcgowan@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

Text of the opinion is available at http://www.bloomberglaw.com/public/document/NIELSEN_v_AECOM_TECHNOLOGY_CORPORATION_No_13235cv_2014_BL_221266_

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