Attn: OG Lawyers

S.D. N.Y. Dismisses SOX and Dodd-Frank Whistleblower Claims Asserted Against Private Company

In early June, the U.S. District Court for the Southern District of New York granted an employer’s motion for summary judgment, thereby dismissing whistleblower retaliation claims against it under the Sarbanes-Oxley Act (SOX) and under Dodd-Frank. Importantly, the court explicitly found that the alleged whistleblowing did not involve fraud related to a public company, which is a prerequisite for liability under SOX.

The plaintiff, a former employee of the defendants, was hired as president of one of the defendant entities that developed and provided software used at the defendants’ restaurant and concession facilities in airports. During the plaintiff’s tenure, the defendants ran a test that involved offering video games, for a fee, on iPads at its restaurants in a single airport concourse. Those iPads displayed the logo of the airline located in that particular concourse. The plaintiff alleged that paywall software installed on the iPads potentially violated third-party licensing agreements with video game manufacturers. He reported this potential violation to the defendants’ General Counsel, Chief Technology Officer, and Chief Executive Officer, and claimed that the software was fraudulent and illegal. Shortly thereafter, the plaintiff was fired. The plaintiff then filed his lawsuit claiming that his termination constituted retaliation in violation of SOX’s and Dodd-Frank’s whistleblower protections for reporting the defendants’ allegedly fraudulent scheme.

The defendants argued in their summary judgment motion that they are not subject to SOX because they are not publicly traded companies and were not acting on behalf of the airline in whose concourse they ran their software test (which is a public company) by implementing the paywall system on iPads displaying the airline’s logo. The plaintiff argued that a private contractor, like the defendants, does not need to act on behalf of a public company in order to be subject to SOX’s whistleblower provisions. The court disagreed and dismissed the plaintiff’s SOX claim, ruling that a contractual relationship alone is insufficient to impose liability upon a private company under SOX. The plaintiff otherwise failed to provide evidence that could lead a reasonable juror to infer that the defendants performed the paywall software test on behalf of the airline, or that the airline had any specific involvement with the software test. The court further reasoned that imposing liability on the defendants would be contrary to SOX’s purpose because the alleged fraudulent activity did not relate to a public company. The court went on to dismiss the plaintiff’s Dodd-Frank claims, clarifying that Dodd-Frank only protects whistleblowers from retaliation for making external disclosures required by SOX (i.e., reporting to the SEC).

The case is Tellez v. OTG Interactive, LLC, et al., No. 15 CV 8984-LTS-KNF, in the United States District Court for the Southern District of New York.

I just want to make sure I understand this correctly, that one of the main reasons that the plaintiff isn't protected from retalitation is because it is a private vs public company?

I'm not well versed in this area.

They have to be a publicly traded company or contracted to a publicly traded company.

His argument is that they were contracted to the publicly traded airline, but the evidence he provided for that was insufficient, & he’s just plain wrong on his follow-up: “a private contractor, like the defendants, does not need to act on behalf of a public company in order to be subject to SOX’s whistleblower provisions.”

(Not an attorney; just know how to read legal.)