Second Circuit Reaffirms Expanded Definition of Protected Activity Under SOX Whistleblower Statute

This article was written by Alice K. Jump, a Partner in the Firm.

For an employee to establish a whistleblowing claim under the Sarbanes Oxley Act of 2002 (“SOX”), the employee must show that (1) he or she engaged in a protected activity; (2) the employer knew that the employee was engaged in the protected activity; (3) the employee suffered an adverse employment action and (4) the protected activity was a contributing factor in the unfavorable action. What constitutes a “protected activity” is, therefore, a crucial question and the Court of Appeals for the Second Circuit has recently provided guidance as to the answer. In a summary decision in Sharkey v. J.P Morgan Chase & Co., No. 13-471 (October 9, 2014), the Second Circuit allowed an employee’s whistleblowing lawsuit against J.P. Morgan Chase to proceed, overruling the lowers court’s finding, on a motion for summary judgment, that the employee had failed to show that she had engaged in a “protected activity” pursuant to Section 806 of SOX. In reversing the lower court’s judgment for the defendant, the Second Circuit relied upon its decision earlier this year in Nielsen v. AECOM Tech. Corp., 762 F.3d 214 (2d Cir. 2014).

In Nielsen, the Court addressed the level of certainty the employee must allege concerning the reported wrongdoing in order to have engaged in a protected activity that would give rise to a retaliation claim under SOX. Prior court and older Department of Labor decisions had determined that the employee must allege that he or she reported activity that “definitively and specifically” related to the categories of misconduct enumerated in Section 806 of SOX (mail fraud, wire fraud, bank fraud, securities fraud, fraud against shareholders or violations of SEC rules). The Second Circuit panel in Nielsen rejected the “definitive and specific” test as too restrictive, agreeing with more recent Department of Labor rulings that the test should be whether the employee “reasonably believed” that the activity constituted a SOX violation. Such belief must be both subjectively and objectively reasonable. Put another way, a plaintiff must show that he or she actually believed that the conduct constituted a violation and that a reasonable person in the employee’s position would have believed that the conduct constituted a violation. This is a less exacting standard than having to show that the employee’s report concerned a definite and specific violation of the one of the enumerated violations of law under SOX.

The Court in Sharkey noted that the lower court’s decision, which was decided before Nielsen, had applied the “definitive and specific” standard, which had subsequently been rejected by the Nielsen court as too strict. The Sharkey panel remanded the case to the district court to determine whether the facts presented showed that the plaintiff reasonably believed that the conduct complained of constituted a violation of SOX. Thus, for the moment, the Second Circuit has definitively adopted the “reasonable belief” standard, as opposed to a more restrictive test, for determining whether protected activity exists.

This article is intended only as a general discussion of these issues. It is not considered to be legal advice or relied upon. We would be pleased to consider providing additional details or advice about specific situations. For additional information on this topic, please feel free to contact Alice Jump who regularly counsels and litigates for clients in connection with employment and business disputes.