Fourth Circuit Breathes Life Into Summary Judgment For Employers Defending SOX Whistleblower Claims

On May 12, 2014, the U.S. Court of Appeals for the Fourth Circuit issued a ruling upholding a grant of summary judgment in favor of the employer in Feldman v. Law Enforcement Assocs. Corp.,1 a Sarbanes-Oxley (SOX) whistleblower retaliation case filed by the defendant employer's former president and chief executive officer. Section 806 of SOX2 creates a federal cause of action in favor of employees who allege that their employers retaliated against them for reporting violations of federal securities laws. In affirming the lower court's decision, the circuit court concluded that the CEO failed to establish that his alleged protected activities were a "contributing factor" to the company's decision to fire him. In what is a rare case of a court finding an employee failed to make a prima facie showing under a SOX whistleblower statute, the court determined that the plaintiff's "light burden" was not satisfied due to the 20-month gap between his protected activities and his termination from employment and the existence of a "legitimate intervening event" that precipitated his firing.

This ruling may be viewed as a victory for employers in what is an emerging area of employment law.

Facts of the Case

The named plaintiff was president and CEO of a company that manufactures security and surveillance equipment. The plaintiff, along with his co-plaintiff, also served as an inside director on the company's board, which included three outside directors. In 2005, the company's founder pleaded guilty to criminal export violations involving another one of his companies and, as a result of that plea deal, was required to refrain from export activities for five years. The founder resigned from his position on the company's board of directors after the guilty plea, but he remained one of its major stockholders. He also closely followed the board's activities and apparently retained the loyalty of the board's remaining outside directors.

As early as 2007, there existed a deep divide between inside and outside directors, due in part to the founder's plan to sell the company without offering the plaintiff the first opportunity to buy it, and the board's refusal to approve the plaintiff's requested contract renewal and salary increase. In January 2008, nearly 20 months before the plaintiff was terminated, he and his co-plaintiff first reported concerns to the U.S. Department of Commerce that the company and one of the founder's other companies may have...