On September 25, 2023, the United States Court of Appeals for the Eleventh Circuit clarified what a whistleblower plaintiff must allege to demonstrate they had a “reasonable belief” that their employer violated the Sarbanes-Oxley Act (“SOX”). In Ronnie v. Office Depot, LLC, the Eleventh Circuit adopted an employer-friendly “totality of the circumstances” standard for evaluating whether a plaintiff’s belief was “reasonable.” Ronnie is a win for employers in the Eleventh Circuit because it makes clear that, to establish that they engaged in protected activity under SOX, a plaintiff must link their reasonable belief of alleged violations to elements of securities fraud and provide evidence substantiating their belief.
To prevail on a SOX whistleblower claim, a plaintiff must establish that (1) he engaged in protected activity, (2) the employer knew or suspected that the employee engaged in a protected activity, (3) the employee suffered an adverse action, and (4) an inference could be made that the protected activity was a contributing factor in the unfavorable action. To establish that the plaintiff engaged in protected activity, they must demonstrate that they subjectively believed and that a reasonable person in like circumstances would objectively believe that the employer engaged in SOX prohibited conduct.
The plaintiff, Chris Ronnie, worked for Office Depot as a senior financial analyst tasked with ensuring data integrity. Ronnie used company data and a third-party analytics company to identify “Sales Lift” which essentially informed the company as to whether closure of a given store resulted in customers taking their business to another Office Depot store or to a competitor.
While carrying out his duties, Ronnie identified and reported two accounting errors he believed indicated securities fraud. As to the first, Ronnie alleged that Office Depot overinflated the Sales Lift and, by extension, the revenue retention following store closures, by 30-55% by running the projections with an incorrect data set. Regarding the second, Ronnie alleged that Office Depot miscalculated its projected sales by using two different pre-closure data sets when the initial data sets used should have been identical.
After reporting these accounting errors to his supervisors, Ronnie corrected the first accounting issue, which was significant. He then recommended that the company resolve the second accounting discrepancy by “only using the APT pre-closure data in the future for both the project sales calculation and the ultimate Sales Lift calculation.” Although Ronnie’s supervisors appreciated the “significant” disparity in the calculations, they told him that they were reluctant to implement his recommendation “without being 100% confident that it [was] the right thing to do.” As such, they tasked him with investigating the discrepancy’s root cause, and even said they “looked forward to Ronnie’s report on his research into the discrepancy.”
According to Ronnie, his relationship with his supervisor grew strained; he stopped receiving invites to weekly meetings and received clerical stapling tasks and unfair and frequent reprimands for turning in late or incomplete reports. Fearing retaliation, Ronnie reported this conduct to Human Resources.
Meanwhile, Ronnie began to investigate the second accounting error’s cause and provided a written report to his supervisors approximately three weeks after his initial report. However, Ronnie’s report only addressed the differences between the figures and not the root cause for the discrepancy. When Ronnie failed to provide this answer a month later, Office Depot grew increasingly frustrated with his lack of progress and terminated his employment. Ronnie later blamed Office Depot’s IT team for his lack of progress but provided no evidence supporting this assertion.
Ronnie then filed a Complaint with the Department of Labor’s Occupational Safety and Health Administration (“OSHA”), alleging retaliation under SOX. After OSHA dismissed his Complaint, Ronnie appealed to an administrative law judge who granted Office Depot’s Motion for Summary Decision, reasoning that Office Depot terminated Ronnie based on his performance and that he reasonably believed that the company engaged in securities fraud. The Administrative Review Board affirmed the administrative law judge’s decision.
On appeal, the Eleventh Circuit framed the issue as what must a plaintiff allege to prove he had a “reasonable belief” that his employer violated SOX. The Court began its analysis by recognizing the split in the circuit courts regarding establishing the objective component. Whereas the Third and Sixth Circuits do not require plaintiffs to put forth specific “information sufficient to for an objectively reasonable belief,” the Second and Fourth Circuits employ a “totality of the circumstances” test which requires a plaintiff to make “some showing of scienter, materiality, reliance, or loss in order to enjoy SOX protection.” Adopting the “totality of the circumstances” standard, the Eleventh Circuit reasoned that it would strike a balance “between protecting employees from retaliation and protecting employers from baseless allegations.” Under the newly adopted standard, the reasonableness of a plaintiff’s belief depends on the knowledge available to a reasonable person in the same circumstances with the same training and experience as the plaintiff. Factors relevant to evaluating reasonableness include, “whether the employer acted with the requisite scienter, whether the misstatement was material, whether the misstatement was relied upon, and whether it yielded economic loss.” Notably, the Eleventh Circuit clarified that its standard does not require a plaintiff to prove each element of fraud “definitively and specifically;” rather, “the plaintiff must make more than a conclusory allegation.”
Applying its new standard to the case at bar, the Eleventh Circuit concluded that Ronnie failed to establish that he reasonably believed that Office Depot engaged in misconduct that violated SOX. In doing so, the Eleventh Circuit rejected Ronnie’s argument that Office Depot “intentionally manipulated sales data … to mislead or deceive” because he provided no evidence substantiating this allegation. Specifically, the Eleventh Circuit found that Ronnie could not establish reasonableness based on “mere speculation,” particularly where he failed to allege scienter on Office Depot’s behalf or to identify the materiality of the accounting error.
Ronnie is a win for employers in the Eleventh Circuit because its newly adopted standard better protects employers from baseless accusations of wrongdoing under SOX. Specifically, Ronnie clarifies that a whistleblower plaintiff cannot rely on pure speculation to establish a reasonable belief regarding misconduct which violated SOX. Rather, they must produce evidence showing how the alleged misconduct correlates to the elements of securities fraud.
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