8th Circuit Adopts Sylvester Standard for Protected Activity Under SOX

In June 2016 the Eighth Circuit became the latest court to adopt the more lenient and Whistleblower friendly standard for protected activity under the anti-retaliation provision of the Sarbanes-Oxley Act (SOX). In Beacom v. Oracle America, Inc., 825 F.3d 376 (8th Cir. 2016) the court addressed a case brought by a former Vice President of Sales at a division of Oracle, alleging that he had been terminated in retaliation for internally reporting that sales projections for the division were falsely inflated to the tune of $10 million. On appeal, the Eighth Circuit addressed whether Beacom’s actions were protected activity under Section 806 of SOX.

The anti-retaliation provision of SOX generally precludes publicly traded companies and some individuals from taking adverse actions against whistleblowers because they have reported “any conduct which the employee reasonably believes constitutes a violation of” statutes regarding mail fraud, wire fraud, bank fraud, securities fraud or “any rule or regulation of the” SEC. See 18 U.S.C. § 1514A(a)(1)(C).

In Beacom the plaintiff asserted that the falsely inflated sales projections were resulting in shareholder fraud. The Eighth Circuit elected to address the appropriate standard for determining whether an “employee reasonably believes” that shareholder fraud has occurred. As the Beacom court noted, this generally requires that the plaintiff prove both a subjective and objectively reasonable belief that a violation has or will occur. The court then noted that beginning in 2011 a shift has occurred regarding how the objective component of this test is determined.

Prior to 2011 courts had generally applied the standard articulated by the Administrative Review Board (ARB) in Platone v. FLYI, Inc., ARB No. 04–154, 2006 WL 3246910 (ARB Sept. 29, 2006). In Platone, the ARB held that to qualify as protected conduct, the employee’s complaint must (1) “definitively and specifically” relate to one of the categories of fraud or securities violations listed under Sarbanes–Oxley’s whistleblower statute, 18 U.S.C. § 1514A(a)(1); and (2) “approximate … the basic elements” of the fraud or securities violation to which the complaint relates. Id. at *8. This “definitively and specifically” standard was subsequently adopted by several Circuits. See Van Asdale v. Int’l Game Tech., 577 F.3d 989, 996–97 (9th Cir. 2009); Welch v. Chao, 536 F.3d 269, 275 (4th Cir. 2008); Allen v. Admin. Review Bd., 514 F.3d 468, 477 (5th Cir. 2008). See also Day v. Staples, Inc., 555 F.3d 42, 54 n. 8 (1st Cir. 2009).

In 2011 the ARB replaced this “definitively and specifically” rule with a much more forgiving and protective standard in Sylvester v. Parexel Int’l LLC, ARB No. 07–123, 2011 WL 2165854, at *12 (ARB May 25, 2011) (en banc). Under the new Sylvester standard, the objective component of the “reasonable belief” standard now required that the employee must simply prove that a reasonable person in the same factual circumstances with the same training and experience would believe that the employer violated securities laws. Id. at *11–12 (noting that the Senate Report indicated Congress’s intent to impose “the normal reasonable person standard”). An employee’s mistaken belief may still be objectively reasonable. Id. at *13.

In Beacom the court noted that “[n]o court has rejected the Sylvester standard,” before expressly adopting the Sylvester standard. In doing so, the Eighth Circuit join several other Circuits that have rejected the Platone standard, in favor of Sylvester. See Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 220–21 (2d Cir. 2014); Wiest v. Lynch, 710 F.3d 121, 131–32 (3d Cir. 2013); Rhinehimer v. U.S. Bancorp Investments, Inc., 787 F.3d 797, 806 (6th Cir. 2015); see also Feldman v. Law Enforcement Assocs. Corp., 752 F.3d 339, 344 n. 5 (4th Cir. 2014) (discussing Sylvester but not reaching the issue of the proper standard, as the Platone standard was satisfied); Lockheed Martin Corp. v. Admin. Review Bd., 717 F.3d 1121, 1132 n. 7 (10th Cir. 2013) (same).

While the Eighth Circuit’s adoption of the more lenient and protective Sylvester standard is a good sign for whistleblowers who are attempting to find some protection and compensation for retaliations conduct by their employers, the second part of the Beacom decision appears to significantly undermine this victory.

After adopting the Sylvester standard, the Eighth Circuit went on to find that Beacom had in fact NOT engaged in protected activity because no reasonable person could have believed that the falsification of sales projections was shareholder fraud. The court gets to this counter-intuitive conclusion by summarily analyzing (a) Beacom’s experience and position and (b) the materiality of the sales projection falsification. The court noted that the Oracle division “missed its projections by no more than $10 million,” and that Beacom was “an Oracle salesperson and shareholder,” and thus “would understand the predictive nature of revenue projections.” The court then went on, without any citation to the record, to find that Beacom “would understand that $10 million is a minor discrepancy to a company that annually generates billions of dollars.” Consequently, the court concluded that base on these “facts” alone “Beacom’s belief that Oracle was defrauding its investors was objectively unreasonable, even under the less-stringent Sylvester standard.”

As I discussed above, the old Platone standard required the plaintiff to prove that his complaint “approximate … the basic elements” of the fraud or securities violation to which the complaint relates, in order to be considered objectively reasonable under the SOX protected activity standard. In determining that Beacom did not engage in protected activity because the $10 million at issue was a “minor discrepancy” it appears that the Eighth Circuit is imposing a requirement that the plaintiff prove materiality, i.e. an element of shareholder fraud. This requirement would seem to apply the rejected Platone standard. In fact, in Sylvester the ARB specifically rejected any requirement that the plaintiff prove materiality. See Sylvester, 2011 WL 2165854 at *17-18. Consequently, it appears that the Eighth Circuit has only adopted the Sylvester standard in principle, but is continuing to require plaintiffs to prove the elements of a fraud claim, contrary to the actual holding of Sylvester.

In sum, while it is great that more Circuit courts are adopting the much more lenient and protective Sylvester standard, it appears that courts still cannot shake their inclination to find some way to get rid of whistleblower claims. In Beacom the Eighth Circuit plays lip service to the idea of adopting a plaintiff friendly standard, and then in action applies the same old standard to justify its decision to get rid of a whistleblower claim.