In the wake of the Enron collapse, Congress passed the Sarbanes-Oxley Act (SOX). Among other measures, SOX provides a cause of action for employees of publicly-traded corporations who claim that they were fired in retaliation for complaining about the employer’s violation of securities laws. A new decision from the Fourth Circuit Court of Appeals (which includes North and South Carolina) differentiates claims of violation of securities laws from other business practices that might have an indirect effect on securities-related disclosures.
The case, Livingston v. Wyeth, Inc., was filed by a former employee of a North Carolina pharmaceutical manufacturer. He alleged that he was terminated in retaliation for complaining about the company’s failure to comply with FDA-mandated employee training requirements. The plaintiff claimed that his termination violated SOX because the FDA violation was material information that must be disclosed under Section 10(b) of the Securities Exchange Act and its related Rule 10b-5. Wyeth claimed that the alleged complaints were not protected behavior under SOX because the plaintiff could not reasonably have believed that he was complaining about violation of securities laws.
In a 2-1 decision, the Fourth Circuit affirmed dismissal of the SOX claim. The majority opinion noted that the plaintiff never alleged that Wyeth had made any false statement to a government agency or to shareholders. He never claimed that the employer concealed information, only that it was not achieving mandated training requirements. Speculation that the employer might have eventually made a material misrepresentation is not enough to constitute a SOX violation. Moreover, given Wyeth’s size, the alleged training deficiencies at one facility would not have been a material fact requiring disclosure under securities laws.
In order to fulfill his burden of proof under SOX, the Fourth Circuit will require a plaintiff to demonstrate a much closer tie between the nature of the alleged complaint, and false statements or filings by the employer, or material impact on shareholders. The plaintiff’s complaints in this case were too attenuated from securities law requirements for the court to conclude that he was exercising protected rights under SOX.
Of course, the plaintiff was entitled to file a public policy wrongful discharge claim based upon claims of retaliatory termination for complaining about non-compliance with FDA requirements. The Fourth Circuit rejected those claims as well, finding adequate business reasons for the termination decision.