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From Securities Regulation Daily, August 4, 2014

Lawson opinion explained, but lack of protected activity sinks whistleblower claim

By Mark S. Nelson, J.D.

A worker who alleged misappropriation of intellectual property and other claims against his former employer that later became a subsidiary of a public company may have had some timely Sarbanes-Oxley Act (SOX) whistleblower claims, but even these claims failed because the worker did not sufficiently allege a protected activity. The case arose from Kurt Fuqua’s being fired by SVOX AG (SVOX) for not signing an intellectual property agreement as a condition of at-will employment.

The decision may be remembered more for what it had to say about the Supreme Court’s Lawson opinion and SOX jurisdictional and timing issues than for its result: dismissal (without prejudice) of SOX whistleblower claims and its refusal to stay a related arbitration (Fuqua v. SVOX AG, August 1, 2014, Tharp, Jr., J.).

Lawson, logic and covered persons. A key question for the court was whether Fuqua was a “covered person” under SOX. Fuqua said he was as defined by the relevant SOX regulations and under the Supreme Court’s Lawson opinion, decided just months ago. SVOX said Fuqua could not be a covered person because SVOX was not a public company at the time Fuqua worked there.

In Lawson, the Supreme Court held that the employees of private contractors and subcontractors who do work for public companies can assert SOX whistleblower protections. But the court here said Lawson was inapt because the mutual fund employers there fell within the scope of SOX while the plaintiffs in that case worked for contractors advising the funds. The court said Fuqua’s argument would stretch Lawson too far.

Still, a bit of logic may bring Fuqua within SOX’s reach. The key fact was SVOX’s later acquisition by a public company, Nuance, after Fuqua left SVOX. Fuqua said at least some of SVOX’s allegedly retaliatory acts happened after the acquisition.

SVOX cited the Fourth Circuit’s 2007 Depaoli opinion as a reason not to find Fuqua is a covered person under SOX. In that case, the appellate court said a small company that later becomes a big one cannot be held liable under Title VII for acts taken during its slimmer, formative years.

The issue here, noted the court, may be one of first impression. The court said Fuqua filed a state suit and a second OSHA complaint after SVOX became a covered Nuance subsidiary; the DOL’s administrative law judge also found SOX could apply to retaliation Fuqua said occurred after Nuance acquired SVOX.

Said the court: “The ‘formerly worked for’ definition of ‘employee’ is susceptible to the reading that an individual who formerly worked for an entity that is now public (whether he did so before or after the company became public) and who engages in protected activity under Sarbanes-Oxley after the company goes public may sue for retaliation that occurs in response to that protected activity.”

No jurisdictional reset. Prior to deciding the extent to which Fuqua was a “covered person,” the court took on the issue of its own jurisdiction to hear Fuqua’s case. Much of the discussion focused on the highly circuitous route Fuqua’s claims against SVOX took through the Department of Labor (DOL) and the Illinois and federal courts.

Fuqua argued that more than 180 days had elapsed since he filed his first OSHA complaint, so the court could hear his case. SVOX countered that Fuqua reset the 180-day clock each time he amended his complaint. According to the court, SVOX’s theory that Fuqua’s actions bar federal court jurisdiction now is not backed by legal authority.

But the key question, said the court, is whether Fuqua engaged in bad faith. While the court noted that Fuqua’s repeated amendments of his OSHA complaint might qualify, they had little impact on the ability of authorities to process his complaint. Even assuming the clock reset upon Fuqua’s last amendment, the DOL’s ruling in Fuqua’s case was late by one day. Because the many amendments did not reset the SOX jurisdictional clock, the district court could hear Fuqua’s case.

SOX limitations period. Actions Fuqua said SVOX took against him in retaliation for blowing the whistle (e.g., withheld wages) when he still worked at SVOX in 2009 and 2010 were tardy, said the court. Likewise, two SVOX legal filings within the applicable limitations period also could not be retaliatory because they merely replied to legal actions started by Fuqua. But the SOX limitation period did not bar Fuqua’s claim that SVOX is still allegedly retaliating by continuing to misappropriate his intellectual property.

No protected activity. In the end, Fuqua’s timely misappropriation claim failed because he did not engage in a protected SOX activity. SOX requires an employee to hold an objectively and subjectively reasonable belief that the conduct he blew the whistle on fell within one of the specified types of activity.

According to the court, despite Fuqua’s poorly crafted (subjective) references to mail and wire fraud, these allegations fail because Fuqua did not make objectively reasonable allegations of a scheme to defraud and he failed to overcome the heightened pleading requirements of FRCP 9(b). Similarly, Fuqua’s Economic Espionage Act allegations fail because this law is not one specified by SOX’s whistleblower provision.

Moreover, Fuqua’s securities fraud allegations failed to show the outlines of a securities fraud case. SVOX also had no shareholders during the time period covered in Fuqua’s complaint.

The case is No. 14 C 216.

Attorneys: Kurt Fuqua, pro se. John Anthony Ybarra (Littler Mendelson PC) for SVOX AG.

Companies: SVOX AG; SVOX USA, Inc.; American Arbitration Association; Nuance

MainStory: TopStory SarbanesOxleyAct IllinoisNews

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