District Court Widens Split On Whether Complaints Of Alleged Future Misconduct Are Protected

The U.S. District Court for the Central District of California ruled that a SOX whistleblower complaint survived a Rule 12(b)(6) challenge on "reasonable belief" grounds and found that complaints of potential future violations of the law may amount to protected activity. Zulfer v. Playboy Enterprises, Inc., No. 12-cv-08263 (C.D. Cal. Feb. 11, 2013). This ruling (styled as "tentative") is in line with a few other district court rulings, but is at odds with a seminal Fourth Circuit decision and other district court cases.

Background

Defendant Playboy Enterprises, Inc. (Company) employed Plaintiff Catherine Zulfer for approximately 30 years in various accounting positions. During the last 18 months of her employment, she served as senior vice president and corporate controller. According to Plaintiff, in late 2010, the CFO instructed her to accrue $1M in discretionary bonuses for certain corporate executives without approval by the Board of Directors (Board). And the CFO allegedly demanded that she accrue $1M in bonuses again in January 2011. Plaintiff claims she refused to comply with these alleged directives based on her purported belief that the Board was required to vote on and approve of discretionary bonuses before they were accrued or paid. Plaintiff reported the request to both the General Counsel and outside counsel. Her employment was subsequently terminated.

Plaintiff then filed suit under Section 806 of SOX, alleging she was discharged in retaliation for refusing to circumvent internal controls in violation of federal securities laws. The Company moved to dismiss pursuant to Rule 12(b)(6), asserting she lacked a reasonable belief because she did not and could not allege that any bonuses were actually accrued or paid without Board approval i.e., her complaint was based on potential future violations of the law, not ongoing or past violations and her belief that accruing bonuses without Board approval violated federal securities laws is objectively unreasonable in any event. The Company further argued that Plaintiff failed to allege a violation of one of the fraud or securities laws set forth in Section 806; the Company asserted that violations of statutory laws, such as the Securities and Exchange Act and the internal controls requirements therein do not constitute violations of "any rule or regulation of the SEC," as that phrase is used in Section 806. Also, the Company argued that Plaintiff failed to plead "fraud on shareholders"...