Monday, August 08, 2022

SOX whistleblower must prove retaliatory intent

By Anne Sherry, J.D.

Retaliatory intent is a required element of a whistleblower claim under Sarbanes-Oxley, the Second Circuit held. The plain meaning of the statutory language, particularly its admonition that an employer not “discriminate because of whistleblowing,” required this conclusion, which is consistent with the Second Circuit’s interpretation of nearly identical language in another federal statute. Because the district court declined to instruct the jury as to retaliatory intent, the appeals court vacated the verdict in favor of the whistleblower and remanded for a new trial (Murray v. UBS Securities, LLC, August 5, 2022, Park, M.).

The employee was a commercial mortgage-backed security strategist and executive director at UBS Securities. He claimed that CMBS division personnel pressured him to create reports bolstering the company’s activities, regardless of his independent, research-based opinions to the contrary. Rather than succumb to the pressure, the employee complained to his superiors and continued to turn out honest reports. Nine months later, he was fired. The employee sued for retaliatory termination under both the Dodd-Frank Act and Sarbanes-Oxley Act Section 806(a), with UBS maintaining that it terminated him as part of a reduction in staff during an economic downturn. The Dodd-Frank whistleblower protection claim was dismissed, but the SOX claim survived.

Jury instructions. At trial on the SOX claim, the district court instructed the jury on the elements of the claim: that the plaintiff engaged in protected activity; that UBS knew the plaintiff engaged in the protected activity; that the plaintiff suffered an adverse employment action; and that the protected activity was a contributing factor in the adverse action. Those jury instructions further stated, “For a protected activity to be a contributing factor, it must have either alone or in combination with other factors tended to affect in any way UBS’s decision to terminate plaintiff’s employment. Plaintiff is not required to prove that his protected activity was the primary motivating factor in his termination, or that UBS’s articulated reasons for his termination was a pretext, in order to satisfy this element.”

UBS objected to the jury instructions because they did not include the element of retaliatory intent in taking the adverse action, which UBS argued was a key element of a SOX whistleblower claim. The district court overruled this objection, and the jury found UBS liable. In post-trial briefing, UBS again moved for judgment as a mater of law or for a new trial, but the district court again did not view retaliatory intent as an element of a SOX whistleblower claim, and it denied the motions. The court adopted the jury’s advisory verdict of damages and awarded the plaintiff $650,000 in back pay and $250,000 in non-economic damages, as well as nearly $1.8 million in attorney fees and costs.

De novo review. On the parties’ cross-appeal, the Second Circuit examined de novo whether SOX requires a whistleblower to prove retaliatory intent. First, the court looked to the statutory text in concluding that retaliatory intent is an element of a SOX claim. Under the statute, no covered employer “may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee because of whistleblowing.” The court reasoned that dictionaries define “discriminate” as “to act on the basis of prejudice,” which requires a conscious decision to act based on a protected characteristic or action. Discriminatory action “because of” whistleblowing therefore requires retaliatory intent: that the employer’s adverse action was motivated by the employee’s whistleblowing.

The court had previously interpreted nearly identical language in the Federal Railroad Safety Act as requiring evidence of retaliatory intent, another reason to interpret SOX consistently with that holding. As in that case, a SOX whistleblower does not need to show that retaliatory intent was the sole factor in the disciplinary action or that the employer acted only with retaliatory motive. However, there must be more than a temporal connection between the protected conduct and the adverse action.

Error not harmless. Finally, the court determined that the court’s error was not harmless. An error is harmless only if the appeals court is convinced the error did not influence the jury’s verdict. On the contrary, the district court itself remarked that it was a close case. UBS offered evidence at trial of non-retaliatory reasons for the firing, supporting its position that it acted without retaliatory intent. While there was also circumstantial evidence that UBS did terminate the plaintiff in retaliation for whistleblowing, the court could not know whose explanations the jury credited because the jury instructions did not require a finding of retaliatory intent. Even though the jury found that the plaintiff’s whistleblowing was a contributing factor, this was not enough to know that it would have found that UBS acted with retaliatory intent. Because the error in instructing the jury was not harmless, the court remanded to the district court for a new trial.

The case is No. 20-4202.