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Ninth Circuit Affirms The Dismissal Of A Whistleblower Retaliation Complaint Using Securities Fraud Standard

  • Posted on: Aug 11 2017

As this Blog has noted in a previous post (here), to state a retaliation claim, both the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) require plaintiffs to demonstrate, among other things, that they engaged in protected whistleblowing activity, that their employer knew they engaged in protected activity, and that there was a causal connection between the protected activity and an adverse employment action. Failure to satisfy these requirements will result in the dismissal of the claim.

Recently, the Ninth Circuit affirmed the grant of summary judgment in an employer’s favor because the plaintiff failed to demonstrate that she had engaged in protected activity under either SOX or Dodd-Frank. Rocheleau v. Microsemi Corporation, Inc., No. 15-56029, 2017 WL 677563 (9th Cir. Feb. 21, 2017).

Background 

The defendant, Microsemi Corporation, Inc. (“Microsemi”), a publicly traded company, hired the plaintiff, Ramona Lum Rocheleau (“Rocheleau”), as an independent contractor in 2006.  Beginning in 2008, Rocheleau internally reported concerns that Microsemi (1) engaged in certain technical violations of the affirmative action requirements imposed by the Office of Federal Contract Compliance Programs (“OFCCP”), (2) misclassified Rocheleau and two other employees as independent contractors, and (3) asked Rocheleau to retroactively change hiring and recruiting data in violation of OFCCP regulations. Microsemi terminated her employment on February 17, 2010.

Thereafter, Rocheleau filed a whistleblower retaliation lawsuit in the United States District Court for the Central District of California, claiming violations of the anti-retaliation provisions in SOX and Dodd-Frank.  Rocheleau maintained that Microsemi defrauded its shareholders by creating an unreported risk to Microsemi’s business (i.e., an investigation by OFCCP into Microsemi) and by engaging in payroll tax fraud.

Microsemi moved for summary judgment on the grounds that Rocheleau failed to establish that she was engaged in a protected activity under either statute, as she could not hold an objectively reasonable belief that Microsemi violated the securities laws such that it and its shareholders suffered losses.  The district court granted Microsemi’s motion for summary judgment and Rocheleau appealed.

The Court’s Ruling. 

The Ninth Circuit affirmed the district court’s ruling, concluding that Rocheleau failed to demonstrate that she engaged in protected activity under either SOX or Dodd-Frank.  The Court noted that to demonstrate that she was engaged in protected activity, Rocheleau had to show that she possessed a reasonable belief that the information she was providing to Microsemi related to a securities law violation. In this regard, the Court held that Rocheleau had to allege “at least … the basic elements of a claim of securities fraud.”  According to the Court, Rocheleau failed to make this showing because she only complained about violations of OFCCP rules and regulations and misclassifications of individuals as independent contractors:

Reports of violations of OFCCP regulations are not themselves protected under SOX or Dodd-Frank, and no objectively reasonable basis existed to believe that any such violations would cause Microsemi and its shareholders to suffer significant losses, as required to establish a prima facie case of reasonable belief in shareholder fraud. Similarly, Rocheleau’s belief in misclassification of employees was reasonable only in regard to herself, and the misclassification of a single employee as an independent contractor falls far short of the materiality standard for shareholder fraud.

As to the claim that Microsemi defrauded its shareholders by failing to disclose a risk to Microsemi’s business (namely, OFCCP’s investigation into Microsemi), the Court held that Rocheleau’s claim failed for temporal reasons: the annual report on Form 10-K in which Microsemi would disclose such information was not due to be filed until after Rocheleau made her report.

Takeaway 

Being a whistleblower involves personal sacrifice and professional risk.  Many violations of the law go unreported because people who know about them are afraid of being disciplined, losing their job, being demoted, or being passed over for promotion. For these reasons, it is important for whistleblowers and their counsel to be reasonably sure that the conduct about which the whistleblower is complaining is actionable under the securities laws. This means that the whistleblower should come forward with facts supporting the basic elements of a securities fraud claim. Anything less, as Rocheleau learned, will not suffice.

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