Third Circuit Declares that New Jersey Whistleblower Protections Are More Than “Skin-Deep”

October 4, 2017
Matthew S. Stiff

In a recent victory for whistleblowers, a prominent federal appellate court reiterated its expansive interpretation of New Jersey state whistleblower protections when it revived a patent lawyer’s lawsuit against his former employer. In Trzaska v. L’Oréal, the U.S. Court of Appeals for the Third Circuit overturned a trial court’s narrow interpretation of New Jersey’s uncommonly robust state whistleblower protections. The Third Circuit also rejected the same employer’s request for a “second-bite-at-the-apple” when it later denied the employer’s petition for en banc review. The Third Circuit’s precedential decision should afford whistleblowers increased confidence that New Jersey state law will protect them from retaliatory personnel actions.

The Trial Court Decision

In 2015, the plaintiff, Steven Trzaska, sued L’Oréal in the U.S. District Court for the District of New Jersey. A patent lawyer by trade, Trzaska alleged in his lawsuit that L’Oréal had fired him because he had complained about the company’s violations of legal ethics rules. Specifically, Trzaska contended that L’Oréal had imposed “patent quotas” requiring him and his in-house team of subordinates to file a predesignated number of patents in a calendar year, irrespective of whether the lawyers actually believed that there was a legal basis for those patents. According to Trzaska, local management pushed the in-house lawyers to meet the quota as part of the France-based parent corporation’s global goal of achieving 500 patent applications in a given year. The quota approach troubled Trzaska, and he eventually concluded that the quota scheme violated both the New Jersey rules of professional conduct and related ethics rules of the U.S. Patent and Trademark Office (collectively, the “RPCs”). Trzaska complained to management about these practices in October 2014, and the company fired him two months later after he refused to participate in the scheme.

On April 16, 2015, Trzaska filed his lawsuit against L’Oréal alleging retaliatory discharge under the New Jersey Conscientious Employee Protection Act (“CEPA”). To establish this claim, a CEPA plaintiff must show:

  1. that she had an objectively reasonable belief that her employer’s conduct violated a law, rule, regulation, or public policy;
  2. that she performed a whistleblowing activity as defined by CEPA’s protected conduct provisions;
  3. that her employer took an adverse employment action against her; and
  4. that a causal connection exists between the whistleblowing activity and the adverse action.

At the outset of the litigation, L’Oréal asked the trial court to dismiss Trzaska’s CEPA claim, arguing that the lawsuit had failed to state an actionable claim, even accepting the plaintiff’s factual allegations as true. The trial court considered and granted the motion, thereby dismissing Trzaska’s lawsuit. In reaching this decision, the trial court found that the RPCs did not govern L’Oréal’s business practices, nor did the RPCs prohibit L’Oréal from establishing metrics or goals to maintain the company’s intellectual property rights. The trial court further faulted Trzaska’s CEPA claim on the grounds that L’Oréal had not directly ordered the plaintiff to submit defective or deficient patent applications. According to the trial court, Trzaska had merely disagreed with his employer’s opinion about the propriety of a patent application quota. The trial court held that a CEPA plaintiff must make some greater showing of misconduct by the company, and that a company’s mere pressuring of its in-house lawyers to file questionable patent applications did not form an actionable predicate to a CEPA claim.

The Third Circuit’s Reversal of the Trial Court

Trzaska appealed the trial court’s decision to the Third Circuit. On July 25, 2017, a two-judge majority of a three-judge panel overturned the trial court’s ruling. Using a “punny” play on words that invoked L’Oréal’s product line, the majority found that “[the plaintiff’s] allegations against the beauty-products corporation are more than skin-deep” and held that Trzaska’s CEPA allegations “plausibly pass muster at the motion-to-dismiss stage.”

At the outset of its legal analysis, the Third Circuit reviewed the elements of a CEPA claim and considered whether Trzaska’s complaints about the patent quota scheme amounted to protected conduct under New Jersey state law. The Third Circuit explained that an employer violates a clear mandate of public policy where the employer coerces its in-house patent attorneys to disregard RPCs. The appellate court justified this finding on the grounds that the patent process is innately tied to the public interest and that a well-functioning patent system cannot operate without attorneys who adhere to the rules of professional conduct. Looking to New Jersey state court precedent, the Third Circuit also concluded that rules of professional conduct in other contexts have provided an actionable basis for CEPA retaliation claims. The Third Circuit disagreed with the trial court’s framing of Trzaska’s lawsuit as one premised on L’Oréal’s violation of the RPCs. Instead, the Third Circuit reframed the complaint as hinging on the plaintiff’s argument that instructing lawyers to disregard the RPCs violated a mandate of public policy.

The Third Circuit also found that the trial court had misapplied the standard for a motion to dismiss when it granted L’Oréal’s motion and noted that Trzaska’s lawsuit had properly stated a claim for relief:

[Trzaska’s complaint] alleges there was a company policy of meeting the patent application quota regardless whether the applications submitted were for products that he did not believe were patentable. He also claimed that he and other colleagues were implicitly instructed to disregard the RPCs in order to meet the quota and that his supervisors expressly rejected his concern about violating the RPCs. And, to close the circle, L’Oréal threatened to terminate his employment if he did not meet the quota. If these allegations are taken as true, which they must be for the purposes of deciding a motion to dismiss, Trzaska has alleged a colorable violation of CEPA. Whether he was in fact instructed to violate the RPCs is determined later in the litigation process.

The Third Circuit remanded the case to the trial court for the parties to proceed with discovery.

The Third Circuit’s Denial of Rehearing En Banc

L’Oréal filed a petition for en banc rehearing. On August 22, 2017, the Third Circuit rejected the employer’s request in a one-page decision. Writing for the appellate court, Judge Thomas Ambro declined the offer to take up the case again, noting that a majority of the 12-member Third Circuit had voted against the petition (including Judge Ambro). The fact that only three circuit judges voted in favor of a rehearing indicates that there is fairly limited interest in revisiting the Third Circuit’s expansive interpretation of CEPA’s whistleblower protections.

Trzaska’s victory should hearten whistleblowers in New Jersey and provide greater assurance that they can investigate, uncover, and oppose their employer’s misconduct without fear of retaliation.

This post was subsequently published in Law360.

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