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Second Circuit Clarifies Reach of Sarbanes-Oxley Whistleblower Retaliation Protections

Posted  August 14, 2014

By Gordon Schnell

What it takes to make out a whistleblower retaliation claim under the Sarbanes-Oxley Act just got a little clearer thanks to the Second Circuit decision last Friday in Nielsen v. AECOM Technology Corp.  There, the Court wrestled with exactly what kind of complaint a whistleblower needs to make to be protected under the statute enacted in the wake of the mighty Enron debacle.  In doing so, the Court provided some useful guidance on the type of whistleblower this law was really designed to target.

The whistleblower in this case, Christian Nielsen, was employed in the position of Fire Engineering Manager with AECOM Technology Corp., a Fortune 500 engineering design company.  One of his direct reports allegedly was approving fire safety designs without actually reviewing them and when Nielsen complained to his superiors, the company refused to do anything about it.  AECOM ultimately fired Nielsen for what he claimed was pushing forward on what he saw as the company’s failure to address this “fraudulent business practice.”

After filing an unsuccessful administrative claim with the Department of Labor, Nielsen brought this whistleblower retaliation claim under Sarbanes-Oxley.  The district court dismissed the action, finding Nielsen had not sufficiently alleged he engaged in “protected activity” which qualified him as a whistleblower under the Act.  Specifically, the court found the basis of Nielsen’s whistleblower complaint did not “definitively and specifically relate to one of the listed categories of fraud or securities violations” in the statute; namely, mail fraud, wire fraud, bank fraud, securities fraud or any other law relating to fraud against shareholders.

The Second Circuit affirmed the dismissal but rejected the standard on which the lower court relied.  According to the appellate court, that standard is no longer valid and has been explicitly repudiated by the Administrative Review Board of the Department of Labor.  The Second Circuit ruled that instead of the “definitively and specifically” test, the proper standard to assess a Sarbanes-Oxley whistleblower retaliation claim is whether the whistleblower has an “objectively reasonable” belief that the challenged conduct violates one of the laws and regulations enumerated in the statute.  This more relaxed standard accounts for the reality that many potential whistleblowers “are unlikely to be trained to recognize legally actionable conduct by their employers.”

But even under this looser standard—tied to “the centrality of the belief of the whistleblower that her employer has engaged in wrongdoing”—the Second Circuit found Nielsen came up short.  His complaint was merely that “a single employee failed properly to review fire safety designs.”  There was no allegation that this particular lapse posed any specific safety hazard, or was part of a more pervasive company-wide failure, or most importantly, would have any “significant repercussions for AECOM, or by extension, its shareholders.”  The Court found Nielsen’s complaint to be nothing more than a “trivial matter [] in terms of its relationship to shareholder interests.”  As such, the Court concluded that the whistleblower retaliation provisions of Sarbanes-Oxley do not come into play.

Perhaps not the most surprising of outcomes given what the record shows as the relatively innocuous basis for the whistleblower’s complaint here.  But the decision provides useful guidance nonetheless on the type of whistleblower that Sarbanes-Oxley was designed to protect and encourage to step forward as a bulwark against the next Enron-type financial collapse.

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