Appellate court holds Sarbanes-Oxley whistleblower retaliation claim requires retaliatory intent, setting up potential Supreme Court appeal

On Friday, August 5, the Second Circuit issued Murray v. UBS Securities, LLC, which vacated a judgment for a former employee suing under the Sarbanes-Oxley Act of 2002 (SOX) for termination in retaliation for reporting fraud.  The court held that the SOX whistleblower statute requires a plaintiff to prove that an employer took an adverse employment action with retaliatory intent, meaning an intent to discriminate against the employee because of his or her lawful whistleblowing activity. 

Murray creates an appellate split amenable for Supreme Court review and in the meantime will affect how whistleblowing cases proceed in one of the most important circuits.

Background

SOX was designed with robust whistleblower protections to encourage the reporting of fraud involving public companies. One provision is Section 806 of the Act, codified at 18 U.S.C. §1514A. Generally speaking, subsection (a) prohibits companies that are registered with or file periodic reports with the Securities Exchange Commission (SEC) from discriminating against employees that lawfully provide information to or assist the SEC, Congress, or the employee’s supervisor, in an investigation regarding any SEC violation or other fraud; subsection (b) allows a person who alleges discharge or other discrimination in violation of subsection (a) to file a complaint with the Secretary of Labor and, if the Secretary does not issue a final decision within 180 days, to bring a federal court lawsuit.

Murray was filed by a strategist hired by the commercial mortgage-backed securities business of a major financial institution. The plaintiff claimed that the lead securities traders in that business pressured him to publish research reports that skewed his opinions, while the law required him to attest that his reports reflected his personal views.  The plaintiff claimed his supervisor at first was sympathetic to his reports of this pressure, but later told the plaintiff that he would have to comply with the pressure.  The supervisor then recommended that the plaintiff be terminated or moved to another unit; when that unit declined to accept the plaintiff, he was terminated.

The plaintiff sued under Section 1514A, alleging he had been terminated in retaliation for his whistleblowing.  Over the employer’s objection, the district court judge refused to instruct the jury that the plaintiff had to prove that the employer had a retaliatory intent. 

After the jury found for the plaintiff, the employer appealed the denial of a motion for judgment in its favor as a matter of law.

The decision

The Second Circuit vacated the judgment.  It opined that the plain, ordinary meaning of the statutory text unambiguously requires an intent to retaliate as an element of liability:   Section 1514(a) states that employers cannot “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee . . . because of” whistleblowing.  To “discriminate” requires a conscious act and “because of” connotes a causal relationship between the discrimination and whistleblowing. 

The district court had instructed the jury that the plaintiff had to prove that his whistleblowing was a contributing factor to his termination, meaning that it “either alone or in combination with other factors tended to affect in any way [the] decision to terminate plaintiff’s employment.”  The Second Circuit recognized “contributing factor” as an element from its own case law.  The court, however, found that the district court’s instruction ignored the element of retaliatory intent and was so abstract that a “jury might look beyond whether the whistleblowing activity actually caused the termination to whether it was the sort of behavior that would tend to affect a termination decision.” 

The court thus held that to prevail on the “contributing factor” element, “a whistleblower employee must prove that the employer took the adverse employment action against the whistleblower-employee with retaliatory intent – i.e., an intent to ‘discriminate against an employee . . . because of’ lawful whistleblowing activity.”  The court added that its reading of SOX was consistent with interpretation of nearly identical language in the antiretaliation statute in the Federal Railroad Safety Act.

The Second Circuit also found that the error in instruction was not harmless.  The district court judge had called this “one of the closest cases it has ever observed” and there was evidence of non-retaliatory reasons for the termination: there had been a large company-wide reduction in force due to large losses in the company, and the plaintiff’s position was not vital to generating revenue. 

While there also existed what the appellate court called “circumstantial” evidence of termination for whistleblowing, the failure to instruct that retaliatory intent was required meant it was impossible to know whose reasons for termination – the employer’s or the plaintiff’s – the jury credited, even as it found that the whistleblowing had been a contributing factor.

Implications: splits do not go unnoticed

Murray creates a split between the federal circuits on whether retaliatory intent is required for a SOX whistleblowing claim; as the court noted, the Fifth and Ninth Circuits have ruled otherwise, while three other circuits had declined to address the issue. 

History teaches that this will not go unnoticed.  The last time there was a circuit split on the elements of a securities law-related antiretaliation cause of action – when the Ninth Circuit held that the Dodd-Frank Act did not require a whistleblower to have reported to the SEC in order to sue his or her employer under a cause of action created by that legislation – the Supreme Court accepted certiorari and unanimously reversed, thereby restricting the cause of action.  Digital Realty Trust v. Somers, 138 S. Ct. 767 (2018).  A few years earlier, the Supreme Court accepted certiorari when a government agency (the Administrative Review Board) issued a decision that interpreted Section 1514 differently than the First Circuit.  Lawson v. FMR LLC, 134 S. Ct. 1158 (2014).

In the meantime, SOX anti-retaliation litigation will proceed differently in the Second Circuit and those circuits that may now be inclined to follow it.  While litigants may always have focused on whether a plaintiff’s whistleblowing actually caused a termination, they now will be incentivized to prove or disprove some form of tighter causal connection between whistleblowing and termination as required by Murray.  Whether that will turn out to be a but-for connection or something else remains to be seen.

Murray also likely will affect the whistleblower anti-retaliation cause of action enacted by Dodd-Frank because the text of the prohibition on employers is practically identical to Section 1514(A).  15 U.S.C. §78u-6(b)(1)(A).  The only differences are that Dodd-Frank prohibits “discrimination … because of any lawful act” against a “whistleblower,” while SOX prohibits it against an “employee” who engages in certain “lawful act[s]” constituting whistleblowing; and Dodd-Frank adds the phrase “directly or indirectly” in the list of prohibited examples of discrimination.

Learn more about the implications of this decision and the evolving legal landscape by contacting the author or your DLA Piper relationship attorney.