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Third Circuit Defers to DOL and Adopts ARB’s New and Expansive Definition of Protected Activity under SOX

On April 2, 2013 by Schnader in Labor and Employment

By Scott J. Wenner

A sharply divided panel of the Court of Appeals for the Third Circuit has embraced the Department of Labor Arbitration Review Board’s (ARB) broad redefinition of “protected activity”  under the Sarbanes-Oxley Act (SOX).

In Wiest v. Lynch, No. 11-4257 (March 19, 2013),  Judge Vanaskie, writing for himself and Chief Judge McKee, held that the court should defer to the ARB’s interpretation of SOX by accepting its new, more expansive definition of a “protected activity” under SOX.  Neither the dramatic change of course presented by redefining this key term, nor the fact that the new meaning supplanted a preexisting definition that had been adopted by all the appellate courts called upon to review it, convinced the majority that the ARB’s rejection of its original interpretation of the statute in favor of a significantly different one was not worthy of deference and approval.

The concept of “protected activity” is a key part of SOX.  A plaintiff must plead  and prove that s/he engaged in a protected activity under SOX – which generally involves a communication – as part of a prima facie case in order to avoid dismissal or entry of summary judgment in favor of the employer.  To qualify as “protected,” until recently the ARB required the communication or other activity to “definitively and specifically” relate to one of the categories of fraud or securities violations listed in §806 of SOX, most of which are imported from the Securities & Exchange Act.  Platone v. FLYi, Inc., ARB Case No. 04-154 (ARB Sept. 29, 2006), aff’d, Platone v. U.S. Dept. of Labor, 548 F.3d 322 (4th Cir. 2008).  This required the communication to assert specific elements of one of the violations identified in §806.

Then, in Sylvester v. Parexel International LLC, ARB Case No. 07-123 (ARB May 25, 2011), with an Obama-appointed ARB firmly in place, that body abruptly changed course and repudiated its Platone “definitively and specifically” standard for a protected activity or communication, finding the analysis of SOX by the 2006 ARB faulty.  It instead substituted a less stringent and nonspecific “reasonable belief” standard that it deemed more consistent with language of §806 of SOX, which prohibits retaliation for reporting an act that the reporting employee reasonably believed violated SOX.  Under the reasonable belief standard propounded in Sylvester and approved by the panel in Wiest, the plaintiff must only prove that s/he believed the conduct in question violated some provision of SOX, and that a reasonable person with the same levels of training and experience would believe that conduct could violate SOX as well.

Also key to the majority opinion was its decision to defer to the ARB’s changed interpretation.  Under standards announced by the Supreme Court 30 years ago in Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837, 842-43, if Congress failed to address a question in a statute, such as what constitutes a “reasonable belief” as that term is used in §806 of SOX, and the responsible enforcement agency has framed an answer that is challenged in court, the court must determine initially “whether the agency’s answer is based on a permissible construction of the statute.” Wiest, supra. If so the courts should defer to the agency’s answer.  And where the agency’s answer represents a reversal of its prior position, the Supreme Court has directed that the new answer also should be deferred to by a court “if the agency adequately explains the reasons for a reversal of policy.”  National Cable &Telecommunications Ass’n v. Brand X Internet Services, 545 U.S. 967 (2005).  The majority in Wiest found that ARB had adequately explained the change – a conclusion with which dissenting Judge Jordan forcefully disagreed, declaring: “Sylvester’s rejection of Platone is hardly explained and far from persuasive.”


The Wiest panel’s adoption of the ARB’s weakened test for whether a communication or other act is protected under SOX eases the way for purported whistleblowers to gain protection from discipline or discharge, to withstand dismissal motions in SOX actions, and to prevail on the merits.  It could well permit employees to obtain protection based on vague assertions of belief that conduct was observed that might turn out to have violated SOX – a far cry from the definiteness and specificity employers need to properly investigate and evaluate a claim, and hardly consistent with an ostensible goal of SOX to motivate employers to root out and correct conduct that violates the securities laws.

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