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Sixth Circuit Adopts Emerging Rule Regarding Standard for Employee's "Reasonable Belief" Under SOX
Practical Law Legal Update 0-615-2266 (Approx. 6 pages)
Sixth Circuit Adopts Emerging Rule Regarding Standard for Employee's "Reasonable Belief" Under SOX
by Practical Law Labor & Employment
| Published on 02 Jun 2015 • USA (National/Federal) |
In Rhinehimer v. U.S. Bancorp Investments, Inc., the US Court of Appeals for the Sixth Circuit held that the anti-retaliation provision of the Sarbanes-Oxley Act of 2002 (SOX) protects an employee who reasonably (even if mistakenly) believes that a violation of SOX has occurred, and that reasonable belief is a factual issue that depends on the totality of the circumstances and does not depend on meeting specific legally-defined elements of the alleged fraud. In doing so, the Sixth Circuit rejected the "definitively and specifically" standard and adopted what it characterized as the "emerging view" among the circuits still split on this issue.
On May 28, 2015, in Rhinehimer v. U.S. Bancorp Investments, Inc., the US Court of Appeals for the Sixth Circuit held that the anti-retaliation provision of the Sarbanes-Oxley Act of 2002 (SOX) protects an employee who reasonably (even if mistakenly) believes that a violation of SOX has occurred, and that reasonable belief is a factual issue that depends on the totality of the circumstances and not on meeting specific legally-defined elements of the alleged violation. The court affirmed summary judgment in favor of an employee who was disciplined and ultimately terminated after complaining to the employer in writing about what he perceived were fraudulent trades made by a co-worker on an account involving an elderly customer. Although the employee reported the fraudulent trades without specific knowledge of whether the co-worker had misrepresented information, the court found this was not relevant to whether the employee's report constituted protected activity under SOX. (No. 13-6641, (6th Cir. May 28, 2015).)
Background
Michael Rhinehimer worked for U.S. Bancorp Investments, Inc. (USBII) as a financial planner. In May 2010, Rhinehimer made several complaints to his supervisors about trades his co-worker, Patrick Harrigan, made on the account of an elderly USBII customer, Norbert Purcell, that caused Rhinehimer concern. Rhinehimer was disciplined, placed on a performance improvement plan and ultimately terminated in January 2011, purportedly for failing to meet the objectives in the plan.
Rhinehimer sued USBII for retaliating against him in violation of SOX. Following a jury trial, Rhinehimer received a verdict in his favor and was awarded damages. USBII appealed to the Sixth Circuit, arguing that Rhinehimer's retaliation claim should fail because he had not engaged in protected activity.
Outcome
The Sixth Circuit noted that:
- SOX prohibits retaliation against employees who report suspected fraud (18 U.S.C. § 1514A).
- Retaliation claims under SOX involve a burden-shifting framework in which an employee must establish a prima facie case by initially proving by a preponderance of evidence that:
- he or she engaged in protected activity;
- the employer was aware of the protected activity;
- the employer took an adverse employment action against the employee; and
- the protected activity was a contributing factor to the adverse employment action.
- The anti-retaliation provision defines protected activity as a lawful act by an employee in providing information to a supervisor regarding conduct the employee reasonably believes violates specific statutory sections of SOX, any Securities and Exchange (SEC) rule or regulation, or federal laws regarding shareholders (18 U.S.C. § 1514A(a)(1)).
- Rhinehimer's report about Harrigan's trades on Purcell's account implicated the "unsuitability fraud" provision of the Securities and Exchange Act (15 U.S.C. § 78j(b)).
Therefore, the main issue the court had to decide was whether Rhinehimer had a reasonable belief that Harrigan's trades violated SEC law. The court discussed the standard applied in cases within and outside the Sixth Circuit, as well as the DOL Administrative Review Board (ARB), noting that:
- Riddle held that the reasonable belief standard under Section 1514A required an employee's complaint to "definitively and specifically" relate to one of the six enumerated fraud categories, and to "approximate" the basic elements of a fraud claim, including that the conduct reported by the employee involved the trader or broker:
- misrepresenting or omitting material facts, and
- acting with intent or reckless disregard for the customers’s needs.
- Numerous circuits had applied the "definitively and specifically" standard following a 2006 decision by the ARB (Platone v. FLYi, Inc., ARB Case No. 04-154, (ARB Sept. 29, 2006)). In 2011, however, the ARB changed course and issued a decision superseding Platone's "definitively and specifically" test as being inapposite for SOX claims (Sylvester v. Parexel Int'l LLC, ARB Case No. 07-123, at *12 (ARB May 25, 2011) (en banc)).
- Since Sylvester, circuits have been rejecting the "definitively and specifically" test (see Nielsen v. AECOM Tech. Corp., 762 F.3d 214 (2d Cir. 2014); Wiest v. Lynch, 710 F.3d 121 (3d Cir. 2013)).
The Sixth Circuit ultimately joined the other circuits that have rejected the "definitively and specifically" test, holding instead that whether an employee had a reasonable belief that a violation occurred is a simple factual question depending on the totality of the circumstances and not dependent on addressing the rigid elements of a fraud claim. The Sixth Circuit sustained the jury's verdict, finding that:
- The anti-retaliation provision of SOX is focused on the employee's reasonable belief that a violation has occurred, not on requiring the employee to substantiate his allegations.
- Many employees would not necessarily have sufficient training to know for certain that a violation occurred, but Section 1514A protects laypersons and not just people with financial expertise.
- The reasonable belief test focuses on the knowledge available to a reasonable person with the employee's training and experience (Harp v. Charter Commc'ns, Inc., 558 F.3d 722, 723 (7th Cir. 2009)).
- Rhinehimer engaged in protected activity under SOX and had an objectively reasonable belief that Harrigan’s conduct with the trades on Purcell's account constituted unsuitability fraud because:
- the trades were inconsistent with Purcell's estate plans;
- Purcell was an elderly man with diminishing faculties; and
- Rhinehimer had specifically warned Harrigan about trading on Purcell's account.
- Rhinehimer's lack of specific knowledge about whether Harrigan had intentionally or recklessly omitted or misrepresented material information to Purcell was not relevant. Even if the trades were legitimate and not fraudulent, Section 1514A protects employees with a reasonable, albeit mistaken, belief that conduct about which they are complaining violates the law.
Practical Implications
The Sixth Circuit characterizes its rejection of the rigid “definitively and specifically” test for determining protected activity in SOX retaliation claims in Rhinehimer as the "emerging view" among the still split circuits. The alternative, broader standard adopted by the Sixth Circuit and other circuits requires only that the employee have a reasonable belief as to the unlawful conduct, not a reasonable belief as to each element of the suspected fraud. In these circuits, it will be more difficult for employers to defend SOX retaliation claims by arguing that the employee did not engage in protected activity. For more information about the standard applied in those circuits that have decided this issue, see Practice Note, Whistleblower Protections under Sarbanes-Oxley and the Dodd-Frank Act: Specificity of the Report.