In Rocheleau v. Microsemi Corp., Inc., No. 15-56029, — F. App’x —, 2017 WL 677563 (9th Cir. Feb. 21, 2017), the Ninth Circuit affirmed the decision of the U.S. District Court for the Central District of California to dismiss a plaintiff’s claims under the whistleblower protection provisions of the Dodd-Frank Act and the Sarbanes-Oxley Act (SOX). The plaintiff, Ramona Lum Rocheleau, alleged that her former employer, Microsemi Corporation, Inc., retaliated against her on a variety of bases, including her reports that Microsemi:

1. Engaged in certain technical violations of the affirmative action requirements imposed by the Office of Federal Contract Compliance Programs (OFCCP)
2. Misclassified Rocheleau and two other employees as independent contractors
3. Asked Rocheleau to change hiring and recruiting data retroactively in violation of OFCCP regulations.

According to the plaintiff, these actions constituted fraud against shareholders because they created an unreported risk factor to Microsemi’s business and represented payroll tax fraud.

The Ninth Circuit rejected this argument, finding that “[r]eports of violations of OFCCP regulations are not themselves protected under SOX or Dodd-Frank, and no objectively reasonable basis existed to believe that any such violations would cause Microsemi and its shareholders to suffer significant losses, as required to establish a prima facie case of reasonable belief in shareholder fraud.” The court rejected her claim that she reasonably believed anyone other than she had been misclassified and then held that “the misclassification of a single employee as an independent contractor falls far short of the materiality standard for shareholder fraud.”

Takeaways from the Case 

The case illustrates some pitfalls for a plaintiff making a whistleblower complaint. In its opinion, the Ninth Circuit noted the plaintiff’s argument that her supervisors had “directed her to ‘scrub’—or, as she believed, to falsify—data that was then sent ‘to the U.S. Government via both the Internet and the United States mail,’ and that sending the data ‘constituted both mail and wire fraud.’” The court first noted that the plaintiff had said in her deposition that she had refused to falsify the data, so in fact Microsemi did not transmit any false data. The court also explained that the plaintiff had failed to argue before the district court that her actions constituted opposition to mail and wire fraud, and it would not entertain an argument on appeal that had not been presented before the district court.

The clearest takeaway from this decision is that a plaintiff must argue her theory of the case in the district court. Although the Ninth Circuit did not discuss whether her argument would have prevailed if she had preserved it, there is some reason to believe that arguing that her concerns constituted allegations of mail and wire fraud would have brought her reports under the protection of SOX’s anti-retaliation provision. The Department of Labor has held that, to be protected under SOX, an employee need not have used the word “fraud;” rather, the statute protects an employee from retaliation for reports that her publicly traded employer is engaged in a “knowing misrepresentation or knowing concealment of a material fact.” Dietz v. Cypress Semiconductor Corp., ARB No. 15-017, 2016 WL 1389927, at *5 (ARB Mar. 30, 2016). And it is not necessary that the employee identify “what uses of the mails or wires were involved in [the] allegedly fraudulent scheme;” rather, it is sufficient that the mail or wires be “incident to an essential part of the scheme.” Id. at *5 and n.30.

The Ninth Circuit observed that the Administrative Review Board (ARB) no longer requires a definitive and specific communication that relates the plaintiff’s complaint to a listed category of fraud or securities violation, but declined to address whether it would defer to this new interpretation because Rocheleau’s claim failed under either standard. It is possible, however, that if the plaintiff could have shown that her employer transmitted knowing misrepresentations to the OFCCP via the mail or wires, there would have been no question of materiality, and she may have had a stronger argument that her actions fell under SOX’s protections.

The second takeaway from this case derives from the Ninth Circuit’s observation that no false data was transmitted because Rocheleau did not do the “scrubbing” her employer asked her to do. However, the Department of Labor has held that the law clearly protects whistleblowers from retaliation if their complaints describe an imminent violation that has not yet occurred. Sylvester v. Parexel Int’l LLC, ARB No. 07-123, 2011 WL 2165854 (ARB May 25, 2011). Thus, if Rocheleau had voiced concerns to her employer or regulators that changing the data and sending false information to the government would constitute fraud or violate securities laws, and that she would not do it for that reason, her communication would probably have been sufficient to constitute protected activity under SOX.

Of course, demonstrating that she engaged in protected activity would have only been the first step of demonstrating her prima facie case. The plaintiff would still have to show that her employer took an adverse action against her and that her protected activity was a contributing factor in the employer’s decision to take that action. But the Ninth Circuit’s short side note about the argument advanced by the plaintiff in this case provides a useful reminder of how small changes to a plaintiff’s strategy could have a significant impact on the outcome.