The Sarbanes-Oxley Act of 2002, enacted in the wake of major corporate accounting scandals at companies such as Enron, WorldCom and, yes, Tyco International, established a multiprong approach to protect shareholders of publicly held companies from corporate greed. Congress included in the act a whistleblower protection provision, Section 806, that made it illegal for a publicly traded company to take an adverse personnel action against an employee because that employee engaged in "protected activity," such as reporting fraud against shareholders. Congress correctly recognized that individuals with the most information about company fraud are often current employees who require robust legal protections to be able to report fraud without fear of reprisal.

In the years following the statute’s passage, the whistleblower provision was watered down in decisions such as Platone v. FLYi Inc., a 2006 decision by the Administrative Review Board of the U.S. Department of Labor that implemented stringent requirements in order for whistleblower reports to qualify as "protected activity." Several federal courts adopted the heightened standard in Platone, requiring whistleblowers to "definitively and specifically" report a violation of Sarbanes-Oxley to be deemed to have engaged in legally protected activity. In 2011, the board changed course, explicitly rejecting Platone and liberalizing the standard for "protected activity" in Sylvester v. Parexel Int’l LLC. Because decisions of the Administrative Review Board are not necessarily binding precedent for federal courts, however, it remained to be seen whether federal courts would defer to the board’s new less demanding standard of protected activity articulated in Sylvester.

In a decision eagerly anticipated by employment lawyers on both sides of the aisle, the U.S. Court of Appeals for the Third Circuit in Wiest v. Lynch overturned the district court decision dismissing Jeffrey Wiest’s whistleblower suit against Tyco International spinoff Tyco Electronics Corp. (now TE Connectivity Ltd.) and applying the extremely narrow definition of "protective activity" established by Platone, which had led to the dismissal of scores of Sarbanes-Oxley whistleblower cases.

Wiest alleged that he was placed on leave and then terminated after 31 years in Tyco’s accounts-payable department in retaliation for raising questions about Tyco’s event expenditures, which he believed were overly extravagant and potentially violated Internal Revenue Ser­vice guidelines. Following his termination, Wiest filed a Sarbanes-Oxley retaliation lawsuit against Tyco (and, among ­others, the named defendant, the company’s current chief executive officer, Thomas Lynch). Tyco responded by filing a motion to dismiss for failure to state a claim.

On July 21, 2011, the district court granted Tyco’s motion. Citing Platone, it held that for a communication to qualify as "protected activity," it must "definitively and specifically" relate to one of the statutes or rules listed in Section 806, including mail, wire, bank or securities fraud, any rule or regulation of the Securities and Exchange Commission, or any provision of federal law relating to fraud against shareholders. The court concluded that Wiest’s allegations did not meet this standard.

Before the court issued a decision on Tyco’s motion to dismiss, the Administra­tive Review Board issued its decision in Sylvester, expressly overturning the Platone decision and holding that the complainant need only show that (1) he had a subjective belief that the conduct he was reporting constituted fraud or some other violation of Section 806, and (2) the belief was objectively reasonable.

Wiest promptly filed a motion for reconsideration, arguing that the Sylvester decision required a different outcome in his case. The court rejected this argument, holding that "[a]n [Administrative Review Board] decision is not binding authority on a United States district court" and, even if Sylvester did constitute binding precedent, it would not overturn the dismissal because Wiest failed to meet the Sylvester standard.

On March 19, 2013, the Third Circuit reversed, finding that the Sylvester decision was entitled to deference under Chevron U.S.A. Inc. v. National Resources Defense Council and that Wiest had pleaded the facts necessary to meet that standard. The court agreed with the board in Sylvester that a "definitively and specifically alleged" standard would be " ’inapposite to the question of what constitutes protected activity under [Sarbanes-Oxley]‘s whistleblower protection provision.’ " Likewise, the court found that the board reasonably determined that, in light of the lack of clarity in the statutory language of the act as to what a "reasonable belief" was, the phrase should be interpreted to require "that the plaintiff have a subjective belief that the employer’s conduct violates a provision listed within Section 806 and that the belief is objectively reasonable."

Citing the U.S. Supreme Court’s decision in National Cable & Telecommunications Association v. Brand X Internet Services, the Third Circuit noted that " ’if the agency adequately explains the reasons for a reversal of policy, change is not invalidating, since the whole point of Chevron is to leave the discretion provided by the ambiguities of a statute with the implementing agency.’ " The Third Circuit also noted that the rationale for protecting an employee who communicated a reasonable good-faith belief that his employer had engaged in some form of fraud under Section 806 was preferable as a matter of policy than requiring that the employee "definitively and specifically" complain of one or more of the enumerated categories of fraud.

The Third Circuit also rejected the lower court’s determination that information contained within an employee’s communication must implicate "a reasonable belief of an existing violation." Instead, the court held that "given the statute’s purpose to combat corporate wrongdoing," the board was correct in Sylvester to hold that Section 806 protects "an employee’s communication about a violation that has not yet occurred ‘as long as the employee reasonably believes that the violation is likely to happen.’ " Finding that Wiest had alleged sufficient facts to demonstrate that he communicated both a subjective and an objectively reasonable belief that Tyco’s reckless event expenditures could constitute fraud against shareholders, the court concluded that those communications constituted protected activity and that any adverse action taken against Wiest as a result was a violation of Sarbanes-Oxley.

Although Tyco on April 2 petitioned for an en banc review of the Third Circuit panel’s decision, the court should not change course. The Third Circuit got it right. America is still reeling from the economic collapse of 2008, caused in many ways by the exact sort of behavior that the Sarbanes-Oxley Act was designed to prevent. One of the act’s most potent tools to prevent future economic catastrophes is its whistleblower provision. Ensuring that the provision is broad enough to actually protect whistleblowers will serve to increase corporate transparency and legal compliance and will help to protect shareholders and the public against fraud.

Debra S. Katz is a partner at Katz, Marshall & Banks who specializes in the representation of employees in Sarbanes-Oxley and other whistleblower matters. Matthew LaGarde is a law clerk at the firm who is a 1L at the University of Maryland Francis King Carey School of Law.