PHILADELPHIA – The U.S. District Court for the Eastern District of Pennsylvania ruled in favor of Merck & Co. on Oct. 18 in a lawsuit alleging the company violated securities laws and retaliated against a whistleblower.
Plaintiff Joni Westawski, a former market research analyst at Merck, claimed the company fired her after she expressed concerns regarding the hiring of an outside market research firm. Westawski alleged that bringing in an outside firm violated the company’s vendor selection process and cost guidelines.
In ruling in favor of Merck, the district court said Westawski was not able to prove that her actions were protected under the relevant law because no one could reasonably claim that the issues she raised constituted bank fraud, securities fraud, mail fraud or wire fraud.
Pinchos (Pinny) Goldberg, an associate in Proskauer Rose LLP’s Labor & Employment Law Department, said the court concluded that no reasonable person in the plaintiff’s position would have believed that the concerns she raised, which were related to purported violations of the company’s own internal controls and procedures, amounted to a violation of one of the laws enumerated in Section 806 of the Sarbanes-Oxley Act (SOX).
“This is a very sensible ruling, as Sarbanes-Oxley was enacted in response to large corporate scandals that shook investor confidence, such as Enron, and was not intended to address claims based on immaterial events,” Goldberg told the Pennsylvania Record.
In addition, the court ruled that the company’s conduct did not qualify as shareholder fraud because the retention of the outside market research firm only cost Merck roughly $200,000, representing just 0.000004 percent of the company’s revenue for the year the outside retention was made.
According to an analysis of the Westawski case written by Goldberg and Proskauer partners Steven J Pearlman and senior counsel Harris M Mufson, “this amount could not meet the materiality requirement for an objectively reasonable belief of fraud on shareholders.”
Goldberg said the plaintiff’s attorneys would argue that the district court ruling contradicted a finding by the Administrative Review Board of the U.S. Department of Labor in a previous case entitled Sylvester v. Parexel International LLC. In that case, the board found that “materiality” is not a factor in determining protected activity.
“Recent case law, however, supports the result (the district court) reached,” Goldberg said. “For example, the Eighth Circuit recently relied on the immaterial nature of a complaint as an important factor in determining whether or not a whistleblowing employee has a reasonable belief of illegal conduct.”
Although Goldberg said he does not have insight into why Merck chose to fight Westawski’s claim instead of pursuing a settlement, he said the company clearly made the right choice in challenging whether the plaintiff had engaged in protected activity in this case.
“This decision is valuable precedent for employers facing claims based on alleged breaches of internal company polices that do not amount to a violation of the securities laws covered by SOX, or claims of fraud on shareholders amounting to a very small percentage of the employer’s overall revenues,” Goldberg said.