Earlier this month, the Seventh Circuit affirmed dismissal of a CEO’s whistleblower retaliation claims in a decision that should provide corporate defendants ammunition to fight SOX and Dodd-Frank whistleblower cases going forward.
In Verfuerth v. Orion Energy Systems, Inc., No. 16-3502 (7th Cir. Jan. 11, 2017), the plaintiff, founder and former CEO of Orion, claimed that Orion’s Board of Directors terminated him for cause in retaliation for making whistleblower complaints about perceived fraud on SEC reports and other managerial decisions. Orion asserted that it terminated Verfuerth for numerous legitimate reasons, including falling stock prices, Verfuerth’s intimidating leadership style, high rates of senior management turnover, and other business disagreements such as reimbursement for Verfuerth’s costly divorce.
After the district court granted summary judgment in favor of Orion, Verfuerth appealed to the Seventh Circuit. First addressing Verfuerth’s Dodd-Frank cause of action, the Seventh Circuit noted that the issue of whether internal reporting is protected under Dodd-Frank is the subject of a circuit split and is currently before the U.S. Supreme Court in Somers v. Digital Realty Trust. The Seventh Circuit determined it did not have to await the Supreme Court’s decision, because Verfuerth’s Dodd-Frank claim was “entirely derivative” of his SOX claim, and Verfuerth’s SOX claim failed as a matter of law. Specifically, the Seventh Circuit held that the practices and managerial decisions Verfuerth complained about were not “fraud” within the meaning of SOX, and it chastised Verfuerth for his claims that “rest[ed] on feet of clay.” For instance, Verfuerth raised concerns pertaining to alleged: (1) overbilling by outside counsel related to his divorce reimbursement, (2) potential patent infringement by one of Orion’s products, (3) potential conflicts of interest involving a member of the Board and a company executive, (4) miscellaneous violations of internal company policy, such as Board members consuming alcohol at an informal Board meeting, (5) the Board’s handling of a defamation suit brought by a former employee who had been accused of stock manipulation, and (6) the fact that the chairman of Orion’s audit committee allowed his CPA license to expire. He also argued with the Board about communication techniques, sales tactics, and product innovation. Verfuerth advised the Board to disclose these issues to shareholders, but the Board ignored the advice.
The court opined, “An executive who advises board members to disclose a fact that the board already knows about has not ‘provide[d] information’ about fraud. At most, he has provided an opinion. Nothing in Sarbanes-Oxley, or any other federal statute, prevents a company from firing its executives over differences of opinion.” Similarly, “[A] person does not become a whistleblower just by advising his colleagues about their own disclosure obligations and then doing nothing when they fail to follow his advice.” Moreover, as CEO, Verfuerth was responsible for disclosing material information to the SEC, so he would have been participating in fraud when he filed SEC reports without mentioning the issues. Likewise, Verfuerth failed to prove that the conduct he complained of was significant enough to constitute fraud. Finally, although Verfuerth claimed he tried to file an online complaint with the SEC before his termination, the SEC never received a complaint and Verfuerth never produced any evidence that anyone at Orion knew about his attempted SEC reporting. As a result, the Seventh Circuit affirmed the district court’s judgment dismissing Verfuerth’s claims.
The Seventh Circuit’s decision provides helpful language for employers defending Dodd-Frank and SOX whistleblower claims in terms of what constitutes protected activity under the laws. Companies defending themselves against such claims should familiarize themselves with Verfuerth when developing their defense strategy.