Debra Katz and Matthew LaGarde Publish Article on Recent ARB SOX Decision

Katz, Marshall & Banks partner Debra S. Katz and Matthew LaGarde published an article in Law360 on April 27, 2016, entitled “A Victory For SOX Whistleblowers In Recent DOL Decision.”  The article discussed the Department of Labor Administrative Review Board’s recent decision in Dietz v. Cypress Semiconductor Corp., a case brought under the anti-retaliation provision of the Sarbanes-Oxley Act (SOX) in which the Board upheld an administrative law judge’s ruling in favor of whistleblower Timothy Dietz.  As Ms. Katz and Mr. LaGarde explain in the article, the Board’s decision included three holdings that should prove helpful to SOX whistleblowers: “(1) complaints of fraud at covered employers are likely to constitute protected activity under SOX due to the broad construal of what constitutes mail and wire fraud; (2) whistleblowers can claim constructive discharge for resigning when an employer acts in a way that would put a reasonable employee on notice that he or she will be terminated; and (3) although the heightened evidentiary requirements mandated by the ARB’s 2014 holding in Fordham v. Fannie Mae are not dead, they have been mortally wounded.”

Read the article below, or click here to access the article in PDF format.


Law360, New York (April 27, 2016, 10:45 AM ET) -- 

In a recent decision that arguably made new whistleblower law on three different fronts, the U.S. Department of Labor's administrative review board (ARB) upheld the findings of an administrative law judge who ruled in favor of Timothy Dietz, a Sarbanes-Oxley Act whistleblower who alleged that he had been retaliated against for opposing his company’s fraudulent implementation of an illegal bonus plan.

There are three main takeaways from the ARB’s decision in Dietz v.Cypress Semiconductor Corp., ARB No. 15-017, ALJ No. 2014-SOX-2 (ARB March 30, 2016): (1) complaints of fraud at covered employers are likely to constitute protected activity under SOX due to the broad construal of what constitutes mail and wire fraud; (2) whistleblowers can claim constructive discharge for resigning when an employer acts in a way that would put a reasonable employee on notice that he or she will be terminated; and (3) although the heightened evidentiary requirements mandated by the ARB’s 2014 holding in Fordham v. Fannie Mae are not dead, they have been mortally wounded.

All of these developments will serve to strengthen protections for whistleblowers at publicly traded companies by: increasing the types of fraudulent activity about which an employee may complain and receive protections; increasing a whistleblower’s options for exiting a company when he or she has reason to believe that he or she no longer has a future there; and increasing the scope of information upon which a whistleblower may rely to establish that her employer violated SOX.

Dietz was working for Ramtron International Corporation when the company was acquired by Cypress Semiconductor Corporation in September 2012. Dietz, slip op. at 2. Ramtron employees were required to reapply to Cypress, and in November 2012, Dietz was rehired as a program manager. Id. Unbeknownst to Dietz or his subordinates, Cypress enrolled them into its mandatory “design bonus plan,” which, among other things, deducted 10 percent of participants’ salaries each month to put toward a quarterly “bonus,” which, depending on the company’s assessment of the employee’s performance, could result in the employee making less than the amount the employee contributed to the plan. Id. at 2–3.

In mid-April 2013, after a number of Dietz’s subordinates discovered the bonus plan and complained to him about it, Dietz sent an email to James Nulty, a senior vice president at Cypress and Dietz’s direct supervisor, asserting that the bonus plan violated state wage laws. Id. at 3. Ten days later, in a teleconference with the company’s general counsel and another attorney, Dietz complained that Cypress had not informed prospective employees of the compulsory salary deductions in their offer letters. Id. at 3–4. Just two days later, Cypress began a month-and-a-half campaign of undermining and admonishing Dietz, including taking resources away from his projects without his knowledge and in violation of Cypress’s own policies. Id. at 4.

On May 29, 2013, Cypress gave Dietz an unfavorable performance review, and on June 4, 2013, Nulty sent Dietz a formal disciplinary memo that included “language that would serve as an automatic disqualification for any other job Dietz might seek in the industry.” Id. Sensing that his termination was imminent, Dietz sent a letter to Nulty the next day rebutting the points made in Nulty’s memo but stating, among other things, that Dietz was “terminating [his] employment at Cypress.” Id. at 5.

According to Dietz, however, Cypress employed what it called a “turnaround process” policy in which it aggressively attempts to retain employees who express an intent to resign. Id. Thus, although Dietz had explicitly expressed his intent to resign in his June 5 letter, the ALJ credited Dietz’s explanation that he did not actually intend to resign. Id. at 5–6. On June 6, 2013, Cypress ordered Dietz to appear at a meeting the following day with Nulty, another business unit manager, and a human resources representative. Id. at 6. Feeling certain that he would be terminated at this meeting, Dietz skipped the June 7, 2013 meeting and instead tendered his resignation, effective immediately. Id.

After hearing evidence over a four-day hearing, the ALJ found in favor of Dietz, concluding that Dietz’s version of events was more credible than the company’s on virtually every issue. Accordingly, the ALJ found that Dietz had engaged in protected activity when he complained about the bonus plan, that Cypress knew of his protected activity, and that Dietz’s protected activity led to the retaliatory treatment that formed the basis of his claim of constructive discharge.

On appeal, the ARB was thus faced with two different questions: (1) whether Dietz’s objections to the bonus plan constituted protected activity under SOX, and (2) whether substantial evidence supported the ALJ’s finding that Dietz had been constructively discharged. The ARB agreed with the ALJ on both counts.

First, the ARB noted that Dietz did not engage in protected activity under SOX when he sent the memo alleging that the bonus plan violated state wage laws. Dietz, slip op. at 9. As the ARB explained, “an allegation of a violation of state wage laws is, by itself, insufficient to constitute protected activity under SOX’s whistleblower provision without some allegation of a knowing misrepresentation or concealment of a material fact.” Id.

However, the ARB determined that Dietz engaged in protected activity when he complained during a conference call with the company’s general counsel that Cypress had “knowingly failed to disclose to those potential employees the fact that the bonus plan required compulsory deductions from their salaries, possibly inducing them to take jobs at Cypress without understanding that their true base salary was effectively less than they thought.” Id. at 10. According to the ARB, Dietz had thus expressed a reasonable belief that Cypress had engaged in a “knowing misrepresentation or knowing concealment of a material fact.” Id.

Notably, the ARB determined that it was immaterial that Dietz had failed to characterize the bonus plan as “fraud” or “fraudulent,” or that he did not “explicitly tell Cypress what uses of the mails or wires were involved in Cypress’s allegedly fraudulent scheme.” Id. at 8. The ARB explained that, under Sylvester v. Parexel International LLC, ARB No. 07-123, ALJ Nos. 2007-SOX-039, - 42, slip op. at 14–16 (ARB May 25, 2011), an employee “need only have a ‘reasonable belief’ of a violation of law and need not have communicated that belief to the relevant authority.” Id. at 8 n.30. Moreover, the ARB noted that “the mail and wire fraud statutes can be triggered even when the connection between the alleged fraud and the use of the mails or wires might seem tenuous.” Id.

The ARB reasoned that the “‘use of the mails need not be an essential element of the [fraudulent] scheme. It is sufficient for the mailing to be incident to an essential part of the scheme or a step in the plot.’” Id. (quoting Schmuck v. United States, 489 U.S. 705, 710–11 (1989)). The ARB also cited a decision by the the Fifth Circuit to clarify that the same standard applied to wire fraud claims. Id. (citing United States v. Barraza, 655 F.3d 375, 383 (5th Cir. 2011)). Accordingly, the ARB upheld the ALJ’s findings that Dietz’s complaints regarding the company’s withholding of information about the bonus plan’s effect on their salary constituted complaints of mail and wire fraud, and therefore constituted protected activity under SOX. Id. at 12.

Next, the ARB turned to the question of whether Dietz had succeeded in proving his claim of constructive discharge. The ARB noted that there is one definition of constructive discharge that is most commonly associated with the claim: when the employer “has created ‘working conditions so intolerable that a reasonable person in the employee’s position would feel forced to resign.’” Id. (quoting Strickland v. United Parcel Service, 555 F.3d 1224, 1228 (10th Cir. 2009)). The ARB explained, however, that an employee may also establish constructive discharge by showing that the employer has acted “‘in a manner so as to have communicated to a reasonable employee that [he] will be terminated’”; in other words, “that the ‘handwriting is on the wall’ and the ‘axe is about to fall.’” Id. at 13 (quoting EEOC v. University of Chicago Hospitals., 276 F.3d 326, 332 (7th Cir. 2002)).

The ARB concluded that “the full context of the facts here supports the ALJ’s conclusion that Cypress constructively discharged Dietz on June 7, 2013: as of that date, Cypress had, for all intents and purposes, ‘communicated to [Dietz] that [he was to] be discharged[.]’” Id. at 14 (quoting University of Chicago Hospitals, 276 F.3d at 332). The ARB acknowledged that although it was somewhat unusual for Dietz to claim that he feared he was about to be discharged on June 7, 2013, after he had ostensibly resigned in writing on June 5, 2013, the ALJ had found Dietz’s explanation credible. Id. at 15–16.

Essentially, Dietz explained that his letter expressing his intent to resign did not actually mean that he intended to resign; rather, it was an “an opening gambit in a negotiation related to his alleged performance deficiencies” that he hoped would trigger Cypress’s turnaround process. Id. at 16–17. Then, when Cypress informed Dietz that he would be meeting the next day with his supervisor, a business unit manager, and a human resources representative, Dietz became convinced that he was about to be terminated and chose instead to resign. Id. at 17–18. The ARB found that this explanation was supported by substantial evidence and held that Dietz had succeeded in establishing that he had been constructively discharged. Id. at 18.

One final note about the Dietz opinion relates to a previous holding by the ARB in Fordham v. Fannie Mae, ARB No. 12-061, ALJ No. 2010-SOX-051 (Oct. 9, 2014). In that case, the ARB had appeared to express that any evidence put forward by the respondent — e.g., reasons provided for the adverse personnel action — should not be considered in determining whether or not the complainant’s protected activity was a contributing factor to the adverse personnel action taken against him. Dietz, slip op. at 25 (Corchado, J., dissenting in part) (citing Fordham, ARB No. 12-061, slip op. at 3, 22, 24, 26 (including n.52), 28–29, 30, 33, 35 at n.84, 37).

Although the ARB in Dietz did not expressly overturn Fordham — which has been a controversial decision since it was issued — it stated that Cypress was “wrong when it argues that ALJs are categorically prohibited from considering employer evidence in assessing whether an employee’s protected activity was a contributing factor in the adverse personnel action.” Dietz, slip op. at 20. The ARB clarified that “ALJs are not precluded from considering evidence of pretext, inconsistent application of an employer’s policies, and inconsistent explanations for the adverse personnel actions to support a finding that a complainant has met his burden to show that his protected activity was a contributing factor.” Id. at 21.

As Judge Luis Corchado expressed in his dissent, this holding appears difficult to square with Fordham; however, it nevertheless marks a significant step forward for employees as it broadens the scope of proof upon which they may rely in establishing their claim of retaliation.

Although time will tell whether the decision is ultimately construed narrowly and restricted to this particular set of facts, or forms the basis for increased whistleblower protections moving forward, Dietz appears at the moment to be a noteworthy victory for SOX whistleblowers. The language in this decision about protected activity and constructive discharge, and the narrow construal of the board’s previous decision in Fordham, could all form useful tools for whistleblowers and their counsel in the years to come.

—By Debra Katz and Matthew LaGarde, Katz Marshall & Banks LLP

Debra Katz is a founding partner of Katz Marshall & Banks LLP in Washington, D.C. She concentrates her practice on employment discrimination, sexual harassment, wrongful discharge, Sarbanes-Oxley, corporate, environmental and other whistleblower retaliation claims, SEC whistleblower tips, and contractual employment disputes. Matthew LaGarde is a law clerk at Katz Marshall & Banks LLP in Washington, D.C., who will begin working as a litigation fellow this fall.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.