The First Circuit in Day v. Staples recently had its first opportunity to interpret the requirements under the whistleblower protection (18 U.S.C. §1514A) provision of the Sarbanes-Oxley Act (“SOX”). Kevin M. Day worked for Staples as a Reverse Logistics Analyst. Prior to his termination, Day allegedly voiced concerns about certain business practices that he believed to be unethical and unlawful:
First, he claimed to his employer that Reverse Logistics issued monetary credits to customers without having received proper documentation; this, in his view, raised the risk of Staples overpaying credits to customers who did not return goods. Second, he alleged that Reverse Logistics knowingly withheld money from contract customers by under-issuing credits over $25.00; this, in his view, raised the risk to Staples of inaccurately accounting by overstating Staples revenues and to customers of not getting full refunds. Third, he claimed that Reverse Logistics’s practice of canceling and reissuing pick-up orders could permit couriers to overbill Staples. This, in his view, raised the risk of a reduction in Staples’s profits.
In considering whether Day was protected under SOX’s whistleblower provision, the First Circuit noted that Section 1514A prohibits retaliation against any employee who “provide[s] information…regarding any conduct which the employee reasonably believes constitutes a violation” of the pertinent laws listed in that section.
The precise issue before the First Circuit was whether Day “reasonably believed” that Staples’ conduct violated SOX. The court, thus, addressed what constitutes a “reasonable belief” under Section 1514A. In doing so, the First Circuit first noted that SOX protects employees from retaliation where the employee voices about any one of three specific types of illegal conduct:
a violation of specified federal criminal fraud statutes
a violation of any rule or regulation of the SEC
a violation of any provision of federal law relating to fraud against shareholders
The court noted that a reasonable belief must be both subjective and objective:
The employee must show that his communications to the employer specifically related to one of the laws listed in § 1514A. … [I]n addition to a subjective belief, an objectively reasonable belief that conduct complained of constituted a violation of the relevant law set out in the statute. The employee is not required to provide the employer with the citation to the precise code provision in question. The employee is not required to show that there was an actual violation of the provision involved.
Although the court found that Day possessed subjective good faith, it concluded that his complaints lacked the objective component. Specifically, the First Circuit stated noted that “the complaining employee’s theory of such fraud must at least approximate the basic elements of a claim of securities fraud.” In this case, the court characterized Day’s complaints as more akin to concerns over efficiency, rather than shareholder fraud. The court also found that Day failed to satisfy the materiality requirement:
[C]omplaints about purely internal practices that are not financial in nature and are not reported to shareholders do not meet the materiality requirement for an objectively reasonable belief in shareholder fraud.
The First Circuit’s decision provides much needed guidance regarding the elements employees must satisfy to assert a viable whistleblower claim under the Sarbanes-Oxley Act.