Third Circuit Denies En Banc Review of Pro-Whistleblower Decision

April 25, 2013

Sarbanes-Oxley whistleblower Jeffrey Wiest will be permitted to continue with his lawsuit alleging that Tyco Electronics unlawfully terminated him in retaliation for raising concerns about the company’s event expenditures, which he believed may have constituted fraud.  In March, a three-judge panel of the U.S. Court of Appeals for the Third Circuit overturned a decision by the U.S. District Court for the Eastern District of Pennsylvania to grant Tyco’s motion to dismiss, but Tyco petitioned for a review of the decision by the full Court of Appeals.  On Tuesday, April 23, 2013, the Third Circuit rejected Tyco’s motion for an en banc review, clearing the way for Wiest to proceed with his lawsuit.

As detailed in an article written by Katz Banks Kumin partner Debra S. Katz for the National Law Journal, the lawsuit arose after Wiest, who had worked for 31 years in Tyco’s accounts-payable department, was terminated following concerns he raised about event expenditures he viewed as overly extravagant and potentially in violation of Internal Revenue Service (“IRS”) regulations.   Wiest was particularly concerned about these expenditures in the wake of the corporate fraud scandal involving Dennis Kozlowski, Tyco’s former CEO.  Wiest filed a lawsuit under the Sarbanes-Oxley Act of 2002 (“SOX”), alleging that his termination constituted a violation of Section 806 of SOX, which protects employees of publicly traded companies from retaliation for reporting concerns regarding fraud.

The issue faced by Wiest, however, was that in his reports to his supervisors, he did not specifically enumerate the type of fraud he believed the company was engaged in.  In the 2006 decision by the Administrative Review Board (“ARB”) of the Department of Labor (“DOL”) in the case of Platone v. FLYi, Inc., the ARB held that in order for a communication to qualify as “protected activity” under SOX, it must “definitively and specifically” relate to one of the statutes or rules listed in Section 806 – mail fraud, wire, fraud, bank fraud, securities fraud, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.   Platone was later adopted by several federal courts of appeals.

The decision in Platone, however, was overturned by the ARB in 2011 in the case of Sylvester v. Parexel Int’l LLC.  In that case, the ARB held that given the lack of clarity in the statutory language of SOX, the statute should be interpreted to afford protections to an employee who demonstrates that at the time of her reports, she had a “subjective belief that the employer’s conduct violates a provision listed within Section 806,” and requiring that the belief be “objectively reasonable.”  Adopting the ARB’s decision in Sylvester, the Third Circuit overturned the district court decision to dismiss Wiest’s case, finding that Wiest had alleged sufficient facts to demonstrate that when he reported his concerns to his supervisors, he held both a subjective and an objectively reasonable belief that Tyco’s reckless event expenditures could constitute fraud against the company’s shareholders, and concluding that those communications therefore constituted protected activity and that any adverse action taken against Wiest as a result would constitute illegal retaliation.  With the Third Circuit rejecting Tyco’s petition for an en banc review, Wiest will now have the opportunity to proceed with his case at the district court and gather evidence to support his claim through the discovery process.

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