United States Court of Appeals
For the First Circuit
No. 08-1689
KEVIN M. DAY,
Plaintiff, Appellant,
v.
STAPLES, INC.,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Lynch, Chief Judge,
Howard, Circuit Judge,
and Garcia-Gregory,* District Judge.
Bryan J. Day for appellant.
Dawn Reddy Solowey with whom Ariel D. Cudkowicz, Krista Green
Pratt, and Seyfarth Shaw LLP were on brief for appellee.
February 9, 2009
*
Of the District of Puerto Rico, sitting by designation.
LYNCH, Chief Judge. This is our first occasion to
interpret the requirements for an action under the whistleblower
protection provision of the Sarbanes-Oxley Act ("SOX"), 18 U.S.C.
§ 1514A. Kevin Day sued his former employer, Staples, Inc.,
alleging he was fired for reporting fraud, in violation of this
federal whistleblower protection provision and of state law. SOX
prohibits discharging an employee because the employee provides
information to a supervisor "regarding any conduct which the
employee reasonably believes constitutes a violation of [several
enumerated laws] . . . or any provision of Federal law relating to
fraud against shareholders." Id.
Day's complaint did not assert any specific violations of
securities laws; rather, it stated that he believed certain Staples
practices resulted in the "manipulat[ion] [of] accounting data in
an unlawful manner that had negative financial ramifications for
Staples," which "defrauded Staples' shareholders" and violated the
Staples Code of Ethics. The district court granted summary judgment
in favor of Staples. Day v. Staples, Inc., 573 F. Supp. 2d 336 (D.
Mass. 2008). We establish the criteria by which such claims are to
be evaluated and affirm.
I.
On an appeal from a grant of summary judgment, we take all
reasonable inferences in favor of the plaintiff, as the nonmoving
party. Mellen v. Trs. of Boston Univ., 504 F.3d 21, 24 (1st Cir.
-2-
2007). We may nonetheless ignore "conclusory allegations,
improbable inferences, and unsupported speculation." Prescott v.
Higgins, 538 F.3d 32, 39 (1st Cir. 2008) (quoting Medina-Munoz v.
R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)).
We tell the material facts, which are undisputed, not in
entirely chronological order, but as parallel accounts of Day's
complaints to Staples and of Staples's growing dissatisfaction with
Day's work. Day worked for Staples for less than three months, from
May 23, 2005 to August 5, 2005, never progressing from his entry
level Analyst position in Staples's Reverse Logistics Department.
During his employment, he offered many criticisms of Staples
business practices. The nature of those criticisms is at the heart
of this case.
Day was offered a position as a Reverse Logistics Analyst
on May 6, 2005, shortly before his graduation from the University
of Massachusetts-Amherst, in a letter which stated that Day would
have to sign Staples's Code of Ethics on his first day of work as
a condition of employment.
The Reverse Logistics Department analyzes open product
returns and coordinates product returns from customers who order
Staples products in large volume and also return products in bulk.
Such product returns involve two separate departments. Reverse
Logistics handles the actual delivery of returned products to the
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warehouse; by contrast, it is Staples's Customer Service Department
which normally issues monetary credits to the customer.
Day's duties included analyzing open customer returns for
assigned warehouse locations and addressing issues with couriers who
picked up returned products. Although Day was initially told in his
interview that his job responsibilities would include up to 70
percent travel in order to work with midwest regional returns, Day's
actual duties did not involve travel, other than for his initial
training. Mary-Ellen Julio, the Manager of the Reverse Logistics
Department, supervised Day's work. She became the subject of
several of his complaints.
A. Day's Complaints of Alleged Shareholder Fraud
Day soon came to believe that certain Staples business
practices he observed in Reverse Logistics were potentially unlawful
and unethical. He ultimately complained to his supervisors about
three types of practices, which we summarize and then return to in
some detail. First, he claimed to his employer that Reverse
Logistics issued monetary credits to customers without having
received proper documentation;1 this, in his view, raised the risk
of Staples overpaying credits to customers who did not return goods.
1
Day was told that Staples policy mandated that before
issuing a credit to a customer, Staples required two pieces of
supporting documentation: a return authorization form indicating
the item had been picked up from a customer and a pallet manifest
showing the item was on the pallet on its way back to Staples's
warehouse.
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Second, he alleged that Reverse Logistics knowingly withheld money
from contract customers by under-issuing credits over $25.00; this,
in his view, raised the risk to Staples of inaccurately accounting
by overstating Staples revenues and to customers of not getting full
refunds. Third, he claimed that Reverse Logistics's practice of
canceling and reissuing pick-up orders could permit couriers to
overbill Staples. This, in his view, raised the risk of a reduction
in Staples's profits.
Two of the alleged harms were ostensibly against Staples's
corporate self-interest: the possible overpayment of refunds to
customers who returned goods and the possible overpayment of
couriers. Day argued, however, that the canceling and reissuing
practice benefitted Staples managers because it resulted in the
manipulation of an internal metric called "aging days," the time
interval between Staples's receipt of a customer request for a
pickup of a product for return and when a Staples courier actually
picked up the product. Day believed that his supervisor Julio's
bonus was tied to the average aging day metric, and that it was in
her interest to make that number seem artificially low. Day was
incorrect and his belief was based on a conversation with a co-
worker named Jason Englemeyer. Day never actually saw a bonus
policy and was never told about the bonus calculation by Julio,
whose bonus was never tied to the aging days metric.
-5-
Day communicated his concerns about these three practices
to Julio and other supervisors in a series of face-to-face meetings
and email exchanges. Day first articulated his concerns on July 14,
2005. That day, he met with Julio at her request; to Julio's
dismay, Day had recommended a competitor company's product to a
dissatisfied customer over the phone. During the meeting, Day
communicated one of his three key allegations: he told Julio that
he believed the company was inappropriately canceling and reissuing
return orders and this permitted her to manipulate the company's
measurement of aging days so that Julio would "look good for her
bosses." Day stated that if the information about the alleged
accounting manipulation "ever went to Wall Street[,] heads would
turn." Julio explained the business reasons for canceling and
reissuing return orders, including that the couriers in the
locations that Day handled did not have the ability to reprint the
previous orders or obtain Staples's paperwork in any other way than
canceling and reissuing. Julio felt that Day refused to accept the
explanations.
One hour after that July 14 meeting, Julio met with Anne-
Marie Bourque, the Staples human resources representative for
Reverse Logistics. Julio expressed her concerns about Day's
behavior and recommended that Day's employment be terminated because
of his poor performance, including Day's recommendation of a
competitor's product to a customer. At Bourque's suggestion, Julio
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documented Day's performance issues in a memo. The memo also
included reports of conflicts with co-workers and unprofessional
behavior and recommended termination.
The next day, July 15, 2005, Day delivered a letter to
Doreen Nichols, Director of Associate Relations and Diversity in
Staples's Human Resources Department, which repeated the allegations
he had made the previous day about the cancellation and reissuance
policies. His letter contained a section entitled "Forced
Participation in Fraudulent Activity." In his letter, Day
complained that: (1) he felt he was "being pressured into knowingly
committing fraud so that [his] supervisor Mary-Ellen Julio can
report false and inaccurate numbers"; (2) while he knew Julio was
not happy with his job performance, he "refuse[d] to knowingly take
part in the mass canceling and reissuing of pickup orders just for
the sake of resetting aging days," a practice he described as
"defrauding the shareholders of this company of their return on
investment so that [Julio] can make herself look good for her
supervisors"; and (3) "any auditor" could "find hundreds, if not
thousands, of cases of inaccurate reporting of figures, accounting
fraud and general unethical behavior," much of it defrauding
customers. He stated that the "fraudulent activity . . . needs to
stop immediately." The letter also contained a section in which Day
alleged there were misrepresentations in his job description,
stating that he had not traveled as much as had been promised.
-7-
Nichols met with Day on July 15 for one hour so that
Nichols could get a clear understanding of Day's concerns. She
assured Day his concerns would be forwarded to the appropriate
personnel. Nichols forwarded Day's letter to Ellen Kruse, Staples's
Regional Director of Human Resources, and Nan Stout, Staples's Vice
President of Ethics. Stout did not contact Day directly, but
instead asked Robert McGrath, Staples's Director of Loss Prevention,
to investigate the allegations in the letter.
Three days later, on July 18, 2005, Day met with Bourque
and Kruse to discuss the July 15 letter. At the meeting, Kruse told
Day that the allegations in the letter were very serious, and she
requested more specific examples of the type of accounting fraud and
unethical behavior that Day had alleged in his July 15 letter. Day
then identified the three practices that now form the basis of his
claim for § 1514A protection: the canceling and reissuing of
returns, the withholding of credits from contract customers, and the
issuance of credits without proper documentation. Kruse told Day
she thought he was wrong about his allegations; still, Bourque and
Kruse told Day that they would investigate his allegations. Indeed,
McGrath had already been asked to look into the allegations.
On July 20 and 21, 2005, Staples brought in Reverse
Logistics senior managers to address Day's allegations with him.
On July 20, George Zalitis, Director of Staples's Office of Project
Management, Julio, Kruse, and Bourque met with Day. Zalitis oversaw
-8-
all of Reverse Logistics, including Julio's team. Day complained
he was not traveling more and said the Reverse Logistics Analyst job
did not require analytic skills; it could be done by a high school
student. In the discussion of whether the returns process was
improper, Day's supervisors stated that there were business reasons
for the practices. For example, Zalitis explained that canceling
and reissuing returns was necessary for efficient delivery of
paperwork to couriers: sometimes a courier who was scheduled to
pick up a return either lost or misplaced paperwork and therefore
did not pick up the return. Reverse Logistics had determined that
the most efficient way to get that paperwork back to the courier was
simply to cancel and reissue the return rather than to fax the
paperwork to the courier, as Day preferred to do. Further, Zalitis
explained that the critical metric he used was the completion rate
of deliveries rather than aging days and that any technical
improvements in the system were not worth it: they would be
expensive and time-consuming to implement. In the July 20 meeting,
Day was instructed to perform his job as directed while the company
investigated his July 15 allegations and to undergo additional
training.
In a third meeting on July 21, 2005, Day discussed his
concerns with Kruse and McGrath, who had been assigned to
investigate Day's complaints. McGrath assured Day that his
allegations would be investigated and invited him to submit further
-9-
information about his concerns. That day, McGrath met with Zalitis
and Greg Igo, the Director of Planning, who had previously helped
create the Reverse Logistics Department. Igo and Zalitis explained
the business purposes behind the credit and returns processes to
McGrath, so that McGrath would understand the entire returns process
in assessing Day's complaints.
On July 23, 2005, Day sent a follow-up email to McGrath
elaborating on the situations in which the alleged unethical and
fraudulent activity in Reverse Logistics were occurring and urging
McGrath to examine those specific examples. In particular, Day
expressed concern with Staples's practice regarding the issuance of
credits to contract customers and of requiring that contract
customers call before Reverse Logistics would issue a credit.
On July 25, McGrath emailed Day to report that, having
conducted his investigation, he had found no evidence of fraud or
unethical behavior. McGrath stated that he had followed up with
Zalitis and Igo to discuss Day's allegations. McGrath wrote that
"management is aware the returns goal is being impacted by the
process of cancelling/reissuing. The process . . . is being
followed to communicate with couriers and fleet locations in the
absence of a more efficient method." McGrath also indicated that
he would share the concerns Day raised in his July 23 email with
Zalitis.
-10-
Day felt, however, that his concerns were not being taken
seriously, due to the short duration of McGrath's investigation and
the brevity of his email. Day contends McGrath's investigation
consisted only of the July 21 meeting with Day, the July 21 meeting
with Zalitis and Igo, and Day's follow-up email on July 23, and that
this was insufficient to address his allegations.
Staples then brought in even more senior management to
meet with Day on August 3. Day repeated his allegations in a
meeting with Steve Bussberg, Vice President of Finance for North
American Delivery, Igo, McGrath, and Kruse. Bussberg is the most
senior Staples official who met with Day. Igo again explained that
senior management had made a considered judgment to implement the
practice of canceling and reissuing orders about which Day
complained, and that this method was preferable because it allowed
Staples to re-drop the paperwork for outstanding orders. He also
explained why Day's proposed alternative practice -- reprinting and
faxing the orders -- would be less efficient.
At the August 3, 2005 meeting, Igo also explained the
reasons for the process of issuing credits to contract customers.
Staples's business practice is to offer "hassle-free" returns to the
customer, which allows contract customers to return a product with
any subsequent order and have the credit applied to that subsequent
order. Logistical difficulties in the past had led to Staples often
issuing duplicate credits, because both Customer Service, which
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addressed customer concerns, and Reverse Logistics, which
coordinated the physical returns, would credit the customer. Igo
explained that Staples's approach avoided such double crediting.
Staples had studied the issue in 2005, weighing the costs and
benefits of issuing duplicate credits compared to giving immediate
credits to the customer, and determined that the best practice was
for the Reverse Logistics Department to enter a "log note" in the
system, because the Customer Service Department had likely already
issued a credit.
Day, however, insisted his methods were preferable to
those the company had adopted after consideration. Igo believed
that because the August 3 meeting was at least the fourth meeting
Day had had with upper management, Day should have had a broader
perspective on the Reverse Logistics processes, but that Day did
not.
After his August 3, 2005 meeting with Day, Igo recommended
termination of Day's employment. Igo based his recommendation on
his own experience with Day's inflexibility and the prior complaints
from Day's direct supervisors that Day was not performing his job
well and threatened not to follow his managers' instructions. Long
before this meeting, Julio had complained to Igo about Day's
unsatisfactory performance in July and August. Joanie Cordani,
another Staples manager, had also told Igo that Day was abrasive.
Kruse and Bussberg agreed with Igo's recommendation.
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On August 4, Day emailed Kruse with further concerns about
his job and affirmed his concerns with crediting procedures. He
requested that the issue be discussed the following day.
Staples terminated Day's employment on August 5, during
a meeting that Day had requested to address his concerns further.
That day, the plaintiff had an exit interview with McGrath and
Kruse. At the meeting, McGrath told Day that he was "looking for
perfection in an imperfect process" and that he was a distraction
and was disruptive. Day asked whether he was protected under the
SOX whistleblower protection provision, and McGrath responded that
Day was not protected because McGrath had investigated and found no
fraud. Staples offered him three months' salary and outplacement
services as part of a proposed severance package, which contained
a general release of liability. Day felt the offer was "insulting"
and did not accept it.
Four days later, on August 9, Kruse created a "Personnel
Action Notice" regarding Day's termination. That document states
that the reason for Day's termination was his "Inability to Perform
Job." Day claims that he was never told the reason for his firing
was his inability to perform his job and that he never received any
type of written warning from Staples that his employment might be
terminated.
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B. Prior Concerns About Day's Job Performance
Day's supervisors described many instances of serious
dissatisfaction with Day's job performance independent of his
complaints about potentially fraudulent business practices at
Staples. These concerns about poor performance began approximately
three weeks after Day began working at Staples -- one month before
Day ever voiced concerns about possible fraud in Reverse Logistics
practices to his supervisors -- and continued until his employment
terminated.
On June 13, 2005, Day traveled to California for two weeks
of training with Staples personnel, including Wendy Watanabe. Day
clashed with his supervisors during the first days of this training.
Day later testified in his deposition that he had a "rocky
relationship" with Watanabe and that they "weren't compatible." In
a July 18, 2005 email, sent in response to a request by Julio that
she make a statement regarding Day's training, Watanabe stated that
she had had difficulty with Day. She stated that he "was
argumentative and sometimes [made] offensive comments about the
process and [others'] ability to do their job." Another supervisor,
Judith Gutierrez, and a co-worker, Scott Martin, also told Julio
that Day was confrontational during the California training session.
On the July 4 holiday, Day called Julio at her home to ask
for a co-worker's telephone number to complain about IT issues,
during which he described the IT department as incompetent. Julio
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felt it was inappropriate to call employees at home over the holiday
and that the work should have been completed earlier.
On July 5, 2005, Day sent an email complaining about a
courier company named SpeeDee. Day expressed concerns about
SpeeDee's lack of responsiveness, which led to a number of returns
being reissued. He complained that he was "getting the brush off"
and experienced the equivalent of "a blank stare" over the phone.
When Julio told Day to be more professional, he stated in an email
that "[s]ometimes I may come across as rash, but it is all in an
effort to get things taken care of . . . . Perhaps my downfall is
that I say things that need to be said and sometimes don't worry if
somebody is hurt or embarrassed, especially if they are in fact to
blame."
Julio testified that during the July 14 meeting with Day,
Day was demanding and constantly interrupted her and that "[a]ny
explanation [she] would try to give him, he would just overpower."
Day told Julio that he could do a better job in Reverse Logistics
than Julio, that Julio was complacent in her job, and that she had
not done anything to make any improvements in the returns process
during the course of her working at Staples. Day conceded in his
deposition that he had a "rocky relationship" with Julio.
Day's supervisors were further dissatisfied with his
performance during the additional training he received to address
concerns about his performance. Day was dismissive of the training
-15-
he received on July 26-28 and August 1. Day questioned the efficacy
of Staples's procedures and thought that his training on "Staples
Values" on July 28 was a "waste of time."
His trainer Vicky Thomes, who instructed Day on proper
telephone protocol, expressed frustration with Day's insistence on
questioning many Staples customer service procedures. She
complained in an email to Julio that "[Day] just asks so many
questions that have nothing to do with what we are working on at the
time." For example, Analysts calling to inquire about whether a
return had been picked up were directed to say, "This is Staples
quality control, and we were wondering how your return went." Day,
however, believed that this script was effectively "lying" because
he would prefer to simply ask directly whether the courier had
picked up the return.
In deciding ultimately to terminate Day's employment on
August 5, Day's supervisors felt that he was inflexible, that he
insisted he knew how to carry out Reverse Logistics functions better
than his supervisors, and that he often threatened not to follow his
managers' instructions. Kruse cited Day's August 4 email as further
evidence of Day's refusal to follow Staples internal processes.
C. Day's SOX Whistleblower Violation Complaint
Day filed a complaint with OSHA on September 26, 2005,
alleging retaliatory termination in violation of the SOX
whistleblower protection provision, 18 U.S.C. § 1514A. On November
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23, 2005, the OSHA investigator concluded Day's claim lacked merit
because Day's concerns appeared to be a "disagreement with
management" about internal procedures and were not the "protected
activity of alleging intentional deceit of shareholders or
violations of [Securities and Exchange Commission ("SEC")] rules or
regulations."2 Day filed timely objections to the investigator's
findings and requested an administrative hearing, which took place
on March 3 and March 6, 2006. On March 14, 2006, Day filed a Notice
of Intent to File a Complaint in District Court. The Administrative
Law Judge accordingly dismissed the complaint.
Day filed his federal court complaint on April 11, 2006,
alleging SOX and state-law claims. On February 7, 2008, the
district court granted Staples's motion for summary judgment on all
counts and denied Day's cross-motion for summary judgment.3 The
court held that Day's SOX claim failed as a matter of law because
his belief that Staples was engaged in accounting fraud was not
reasonable. The court reasoned that although "[Day's] concerns were
stated with adequate particularity, Plaintiff's belief that he had
uncovered fraud was not reasonable." Day, 573 F. Supp. 2d at 346.
It based its decision in part on a determination that "Day lack[ed]
2
Day also filed a complaint against Staples in state
court, but withdrew the action before the court reached a decision
on Staples's motion for summary judgment.
3
Day does not appeal from the district court's entry of
summary judgment on his state law promissory estoppel claim.
-17-
the knowledge, training and experience to harbor a reasonable belief
of fraud." Id. The court emphasized that Day "had little relevant
work experience" and had only worked in the Department for seven
weeks before complaining of fraud. Id.
The court further held that Day's state-law claims failed
because Staples had violated neither SOX nor its Code of Ethics.
On February 11, Day filed a Motion to Amend Findings and Vacate
Order, arguing the court erred in assuming that Day lacked
experience and attempting to introduce evidence about Day's prior
financial work experience. The court denied Day's motion. Day
appeals only from the court's February 7, 2008 summary judgment
ruling.
II.
We review a district court's grant of summary judgment de
novo and may affirm the district court's decision on any grounds
supported by the record. Collazo v. Nicholson, 535 F.3d 41, 44 (1st
Cir. 2008) (quoting Estades-Negroni v. Assocs. Corp. of N. Am., 377
F.3d 58, 62 (1st Cir. 2004)). Summary judgment is appropriate where
"there is no genuine issue as to any material fact and . . . the
movant is entitled to judgment as a matter of law." Fed. R. Civ.
P. 56(c).
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III.
DAY'S SOX WHISTLEBLOWER CLAIM
A. Statutory Background
SOX protects "whistleblower" employees of publicly-traded
companies by prohibiting employers from retaliating against
employees because they provided information about specified
potentially unlawful conduct. 18 U.S.C. § 1514A; see Welch v. Chao,
536 F.3d 269, 275 (4th Cir. 2008). The provision states, in
relevant part:
No [publicly traded company] . . . may
discharge, demote, suspend, threaten, harass,
or in any other manner discriminate against an
employee in the terms and conditions of
employment because of any lawful act done by
the employee . . . to provide information,
cause information to be provided, or otherwise
assist in an investigation regarding any
conduct which the employee reasonably believes
constitutes a violation of [18 U.S.C. § §] 1341
[mail fraud], 1343 [wire fraud], 1344 [bank
fraud], or 1348 [securities fraud], any rule or
regulation of the [SEC], or any provision of
Federal law relating to fraud against
shareholders, when the information or
assistance is provided to . . . a person with
supervisory authority over the employee . . . .
18 U.S.C. § 1514A(a)(1). There is no dispute that Staples is
subject to the SOX whistleblower protection provision. It is useful
to set this language in the context of the problem Congress was
trying to address. Congress passed this protection in response to:
[A] culture, supported by law, that
discourage[s] employees from reporting
fraudulent behavior not only to the proper
authorities . . . but even internally. This
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"corporate code of silence" not only hampers
investigations, but also creates a climate
where ongoing wrongdoing can occur with
virtual impunity.
S. Rep. No. 107-146, at 5 (2002). Section 1514A was enacted to
remedy this problem. The § 1514A whistleblower provision thus
serves to "encourage and protect [employees] who report fraudulent
activity that can damage innocent investors in publicly traded
companies." Id. at 19. It also aimed "to provide federal
protection to private corporate whistleblowers, as was already done
with government employees, in light of the 'patchwork and vagaries
of current state [whistleblower protection] laws.'" Carnero v.
Boston Scientific Corp., 433 F. 3d 1, 11 (1st Cir. 2006) (emphasis
omitted) (quoting S. Rep. 107-146, at 10).
An employee seeking § 1514A protection must first file an
administrative complaint with the Department of Labor ("DOL").
§ 1514A(b)(1)(A).4 An administrative appeal to the DOL
Administrative Review Board ("ARB") is available, but not
mandatory.5 After exhaustion of the DOL complaint procedure, the
4
The Secretary of Labor has delegated responsibility for
receiving and investigating whistleblower complaints to OSHA, an
agency within the DOL. See Carnero,433 F.3d at 3, n.1; Delegation
of Authority and Assignment of Responsibility to the Assistant
Secretary for Occupational Safety and Health, 67 Fed. Reg. 65,008,
65,008 (Oct. 22, 2002); see 29 C.F.R. § 1980.103(c).
5
If the Secretary of Labor has not issued a final decision
within 180 days of the filing of the complaint and there is no
showing that such delay is due to the bad faith of the claimant,
the claimant may file suit for de novo review in the appropriate
federal district court, which will have jurisdiction over such
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employee may then file a federal civil cause of action, or may, if
he has chosen an administrative appeal, thereafter seek judicial
review under the APA. See Carnero, 433 F.3d at 16-17 & n.16. An
employee must file a complaint with the Secretary no later than
ninety days after the date on which the alleged violation occurred.
§ 1514A(b)(2)(D).
The statute specifies that § 1514A claims are governed by
the procedures applicable to whistleblower claims brought under the
Wendell H. Ford Aviation Investment and Reform Act for the 21st
Century, 49 U.S.C. § 42121(b). 18 U.S.C. § 1514A(b)(2); see also
Carnero, 433 F.3d at 13 n.12. Under this burden-shifting framework,
the employee bears the initial burden of making a prima facie
showing of retaliatory discrimination because of a specific act.
See 49 U.S.C. § 42121(b)(2)(B) ("The Secretary of Labor shall
dismiss a complaint filed under this subsection and shall not
conduct an investigation . . . unless the complainant makes a prima
facie showing that [a whistleblower complaint] was a contributing
factor in the unfavorable personnel action alleged in the
complaint."). The burden then shifts to the employer to rebut the
employee's prima facie case by demonstrating by clear and convincing
evidence that the employer would have taken the same personnel
action in the absence of the protected activity. 49 U.S.C.
action regardless of the amount in controversy. 18 U.S.C.
§ 1514A(b)(1)(B).
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§ 42121(b)(2)(B); see also Welch, 536 F.3d at 275; Allen v. Admin.
Review Bd., 514 F.3d 468, 475-76 (5th Cir. 2008).6
The requirements for a prima facie case are articulated
in the DOL regulations. To make a prima facie showing, the
employee's complaint must allege the existence of facts and evidence
showing that: "(i) the employee engaged in a protected activity or
conduct; (ii) the [employer] knew or suspected, actually or
constructively, that the employee engaged in the protected activity;
(iii) the employee suffered an unfavorable personnel action; and
(iv) the circumstances were sufficient to raise the inference that
the protected activity was a contributing factor in the unfavorable
action." 29 C.F.R. § 1980.104(b)(1).
SOX authorizes an award of make-whole relief to an
employee who prevails in the DOL administrative proceedings. This
can include reinstatement with "the same seniority status that the
employee would have had but for the discrimination," "back pay, with
interest," and compensation for any special damages sustained,
6
This prima facie case under SOX is not identical to that
under Title VII and McDonnell Douglas, which requires the plaintiff
to show (1) he is a member of a protected class; (2) he was
qualified for the job; (3) the employer took an adverse employment
action; and (4) the position remained open or was filled by a
person with similar qualifications. See St. Mary's Honor Ctr. v.
Hicks, 509 U.S. 502, 506 (1993). Indeed, the SOX burden may be
more difficult to meet because an inference does not arise
automatically if the four criteria are met, but only when the
circumstances are sufficient to raise an inference and because the
employee must show that he engaged in the protected activity.
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including litigation costs, and reasonable attorneys' fees. See 18
U.S.C. § 1514A(c)(2); see also 29 C.F.R. § 1980.105(a).
B. Application of SOX Whistleblower Provision to the Facts
of Day's Case
This case turns on the appropriate interpretation of the
applicable legal standards.
We focus on the statutory requirement that a SOX
complainant be a person who "provide[s] information . . . regarding
any conduct which the employee reasonably believes constitutes a
violation" of the pertinent laws listed in § 1514A, here securities
fraud or shareholder fraud. Here, the complaint alleges Day
reasonably believed that Staples violated § 1514A through its
manipulation of accounting data, and that the data manipulation
violated an unidentified "relevant provision" of federal law
relating to fraud against shareholders. The issue is what
constitutes a reasonable belief that the conduct constitutes
securities fraud.
There are some common understandings about the viewpoints
with which to approach the question of what is a reasonable belief.
Both the DOL regulations, which are entitled to Chevron deference,7
7
Chevron deference is appropriate when it appears from the
"statutory circumstances that Congress would expect the agency to
be able to speak with the force of law." United States v. Mead
Corp., 533 U.S. 218, 229 (2001); see also Rucker v. Lee Holding
Co., 471 F.3d 6, 11-12 (1st Cir. 2006). The Supreme Court has
instructed that "Congress['s] contemplat[ion] [of] administrative
action with the effect of law [can be assumed] when it provides for
a relatively formal administrative procedure" such as formal
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and the caselaw8 establish that the term "reasonable belief" has
both a subjective and objective component. We agree. That two-
component approach is consistent with the legislative history of the
provision.9
As to the subjective component, the law is not meant to
protect those whose complaints are not undertaken in subjective good
faith. Here, there is no evidence that Day did not make his
complaints in subjective good faith.10
adjudication. Mead, 533 U.S. at 230 & n.12. Congress explicitly
delegated to the Secretary of Labor authority to enforce § 1514A by
formal adjudication, see 18 U.S.C. § 1514A(b)(1)(A), and the
Secretary has delegated her enforcement authority to the ARB, see
Delegation of Authority and Assignment of Responsibility to the
Administrative Review Board, 67 Fed. Reg. 64,272 (Oct. 17, 2002).
8
See Welch, 536 F.3d at 275 (holding that an employee had
to show both a subjective belief and an objectively reasonable
belief that the conduct he complained of constituted a violation of
relevant law); Livingston v. Wyeth, Inc., 520 F.3d 344, 352 (4th
Cir. 2008); Allen, 514 F.3d at 477; Melendez, ARB No. 96-051 (July
14, 2000), available at http://www.oalj.dol.gov/PUBLIC/
WHISTLEBLOWER/DECISIONS/ARB_DECISIONS/ERA/93ERA06E.HTM.
9
The legislative history states that Congress "intended to
impose the normal reasonable person standard used and interpreted
in a wide variety of legal contexts . . . ." S. Rep. No. 107-146,
at 19. It also states that "[t]he threshold is intended to include
all good faith and reasonable reporting of fraud, and there should
be no presumption that reporting is otherwise, absent specific
evidence." 148 Cong. Rec. 57420 (daily ed. July 26, 2002)
(statement of Sen. Leahy).
10
We consider the district court's concern about the
plaintiff's particular educational background and sophistication to
be relevant to the subjective component. Subjective reasonableness
requires that the employee "actually believed the conduct
complained of constituted a violation of pertinent law." Welch,
536 F.3d at 277 n.4.
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We focus on whether Day had an objectively reasonable
belief that the conduct constituted securities fraud or shareholder
fraud. The plain language of SOX does not provide protection for
any type of information provided by an employee but restricts the
employee's protection to information only about certain types of
conduct. Those types of conduct fall into three broad categories:
(1) a violation of specified federal criminal fraud statutes: 18
U.S.C. § 1341 (mail fraud), § 1343 (wire fraud), § 1344 (bank
fraud), § 1348 (securities fraud); (2) a violation of any rule or
regulation of the SEC; and/or (3) a violation of any provision of
federal law relating to fraud against shareholders. The first and
third categories share a common denominator: that the conduct
involves "fraud," and many of the second category claims (violations
of SEC rules or regulations) will also involve fraud.
The employee must show that his communications to the
employer specifically related to one of the laws listed in § 1514A.
We agree with the Fourth Circuit in Welch, 536 F.3d at 275, that
§ 1514A requires, in addition to a subjective belief, an objectively
reasonable belief that conduct complained of constituted a violation
of the relevant law set out in the statute. The employee is not
required to provide the employer with the citation to the precise
code provision in question.11 The employee is not required to show
11
In comments to the final regulations implementing the
whistleblower provision, DOL stated it:
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that there was an actual violation of the provision involved. See,
e.g., Fraser v. Fiduciary Trust Co. Int'l, 417 F. Supp. 2d 310, 322
(S.D.N.Y. 2006) ("While a plaintiff need not show an actual
violation of law, or cite a code section he believes was violated,
'general inquiries . . . do not constitute protected activity.")
(alteration in original) (citations omitted) (quoting Fraser v.
Fiduciary Trust Co. Int'l, No. 04 Civ. 6958 (RMB)(GWG), Slip op. at
16 (S.D.N.Y. June 23, 2005)). Here, plaintiff's theory, both before
the employer and before the court is a generalized theory that
shareholder fraud resulted from three specific practices at
Staples.12
[B]elieve[d] that it would be overly
restrictive to require a complaint to include
detailed analyses when the purpose of the
complaint is to trigger an investigation to
determine whether evidence of discrimination
exists . . . . Although the [SOX] complainant
often is highly educated, not all employees
have the sophistication or legal expertise to
specifically aver the elements of a prima
facie case and/or supply evidence in support
thereof.
Procedures for the Handling of Discrimination Complaints Under the
Sarbanes-Oxley Act, 69 Fed. Reg. 163, 52106 (Aug. 24, 2004).
12
Day specifically theorizes that all three practices
"violated the Act's enumerated laws," without citing a specific
statue or SEC regulation. Although he has waived the argument on
appeal, with respect to the use of log notes in issuing credits to
contract customers, he also alleges a violation of the Foreign
Corrupt Practices Act's ("FCPA") requirement that publicly traded
companies "make and keep books, records, and accounts, which, in
reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the issuer." 15 U.S.C.
§ 78m(b)(2)(A). This claim is subject to the same infirmities as
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The reasonableness of Day's belief for purposes of § 1514A
must be measured against the basic elements of the laws specified
in the statute. "Fraud" itself has defined legal meanings and is
not, in the context of SOX, a colloquial term. "The hallmarks of
fraud are misrepresentation or deceit." Ed Peters Jewelry Co. v.
C & J Jewelry Co., 215 F.3d 182, 191 (1st Cir. 2000). That is the
dictionary definition, as well. See Black's Law Dictionary 685 (8th
ed. 2004) (defining fraud as the "knowing misrepresentation of the
truth or concealment of a material fact to induce another to act to
his or her detriment"). Wire or mail fraud is "broader than the
common law definition [of fraud]" but also emphasizes the deceit
requirement. Ed Peters Jewelry Co., 215 F.3d at 192.
To have an objectively reasonable belief there has been
shareholder fraud, the complaining employee's theory of such fraud
must at least approximate the basic elements of a claim of
securities fraud. "Securities fraud" itself has additional relevant
elements. The elements of a cause of action for securities fraud
"resembl[e] . . . common-law tort actions for deceit and
misrepresentation." Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341
(2005). Those elements typically include a material
misrepresentation or omission, scienter, loss, and a causal
connection between the misrepresentation or omission and the loss.
See, e.g., Media Gen., Inc. v. Tomlin, 532 F.3d 854, 858 (D.C. Cir.
his other claims, as explained later.
-27-
2008). Securities fraud under section 10(b) and Rule 10b-5
requires: "(1) a material misrepresentation or omission; (2)
scienter; (3) connection with the purchase or sale of a security;
(4) reliance; (5) economic loss; and (6) loss causation." Ezra
Charitable Trust v. Tyco Int'l, Ltd., 466 F.3d 1, 6 (1st Cir. 2006).
The employee need not reference a specific statute, or prove actual
harm, but he must have an objectively reasonable belief that the
company intentionally misrepresented or omitted certain facts to
investors, which were material and which risked loss.
Day's assertions do not meet the basic components of fraud
or of securities fraud. A disagreement with management about
internal tracking systems which are not reported to shareholders is
not actionable. Several of Day's complaints amount to allegations
that the company's practices did not maximize shareholder profits.13
Day's belief is not itself an objectively reasonable belief that
shareholders have been or are likely to be defrauded. A company may
legitimately decide for a number of reasons that maximizing short-
term profits through certain practices is not its goal, particularly
if the practices lead to consumer unhappiness. Further, a company's
management may legitimately decide that certain practices are more
efficient than others. A complaint about corporate efficiency is
also not within the intended protection of SOX.
13
This is true of the two claims about the company's
practices that benefit Staples customers or couriers to the
possible detriment of the company's bottom line.
-28-
Similarly, Day's belief that the process of canceling and
reissuing return orders constituted fraud on shareholders because
it permitted courier overbilling lacks objective reasonableness.
The aging days metric that Day describes as "data manipulation" was
unrelated to the financial condition of the company, and it was
never reported to shareholders. Day argues that the practice led
to a "needless loss of revenue [that] detrimentally affected
Staples' shareholders." A claim of "needless loss of revenue" is
not a claim of fraud. Even if Staples's pick-up order system
allowed the possibility of overbilling by a delivery company, as Day
alleged, that is a far cry from fraud. Moreover, Day had no
reasonable basis for his erroneous belief that Julio's bonus
depended on the aging days metric.
One practice was said to benefit Staples to the detriment
of its customers -- that the Reverse Logistics Department "was
knowingly refusing to provide its customers with monetary credit
they were entitled to," thus giving Staples an "unfair benefit."
This is not even plausibly a situation of shareholder fraud. "[A]
billing discrepancy, without more, does not equal fraud." Platone
v. U.S. Dep't of Labor, 548 F.3d 322, 327 (4th Cir. 2008) (holding
that under § 1514A, "a complainant must alert management to more
than the fact that the company's near-term profits were affected by
billing discrepancies in order to meet the standard of definitively
and specifically alleging mail or wire fraud" and rejecting claim
-29-
of plaintiff who never articulated theory of how employer was
defrauding shareholders to the employer). Day may have made a
complaint related to consumer protection, but he does not have an
objectively reasonable belief there was shareholder fraud under
§ 1514A.
Day attempts to connect these allegations to violations
of "general accounting principles" and then to connect violations
of accounting principles to "shareholder fraud."14 Indeed, he was
explicit with Staples "that [its] accounting methods are inaccurate"
and that "the information [Staples] sends to Wall Street is
inaccurate." This theory does not work either. He has not alleged
that the numbers he complained were inaccurate (1) were reported to
shareholders, (2) were inconsistent with generally accepted
accounting principles ("GAAP"), or (3) constituted fraud. A
generalized allegation of inaccuracy in accounting is insufficient
to establish a reasonable belief in a violation of GAAP, much less
a reasonable belief in shareholder fraud. See DSAM Global Value
Fund v. Altris Software, Inc., 288 F.3d 385, 390 (9th Cir. 2002)
("'[T]he mere publication of inaccurate accounting figures, or a
failure to follow GAAP, without more, does not establish scienter'"
in a securities fraud action) (quoting In re Software Toolworks
Inc., 50 F.3d 615, 627 (9th Cir. 1994)).
14
The brief also makes an unspecified reference to SEC
regulations; without more, the argument is waived.
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Further, "merely stating in conclusory fashion that a
company's books are out of compliance with GAAP would not in itself
demonstrate liability under section 10(b) or Rule 10b-5." In re
Cabletron Sys., Inc., 311 F.3d 11, 34 (1st Cir. 2002). Even when
a company's accounting method is in violation of GAAP, "some
techniques . . . might prove to be entirely legitimate, depending
on the specific facts." Id. at 34-35. Claims that there has been
accounting fraud thus require evidence beyond a belief in a mere
accounting irregularity, and not even an accounting irregularity can
be reasonably alleged here. See Novak v. Kasaks, 216 F.3d 300, 309
(2d Cir. 2000) ("[A]llegations of GAAP violations or accounting
irregularities, standing alone, are insufficient to state a
securities fraud claim. Only where such allegations are coupled
with evidence of 'corresponding fraudulent intent,' might they be
sufficient." (citations omitted) (quoting Chill v. Gen. Elec. Co.,
101 F.3d 263, 270 (2d Cir. 1996))). Day's allegations are not of
"accounting fraud"15 within the meaning of securities law. See,
e.g., Joy, Case No. 2007-SOX-74, 2008 DOLSOX LEXIS 5, at *20 (2008)
15
Day's citation to the FCPA does not help him. Even
assuming arguendo that the FCPA falls within the scope of § 1514A,
but see Diamond, Case No. 2006-SOX-00044, 2007 DOLSOX LEXIS 97, at
*15-16 (2007) (questioning whether FCPA sufficiently relates to
fraud against shareholders within the meaning of § 1514A), Day's
argument that Staples inaccurately "report[ed] increased revenues"
is itself inaccurate in two ways: first, his criticism about the
practice attacks the fairness, rather than the accuracy per se of
Staples's calculation of its total revenues; second, Day's claim is
unreasonable in light of the business reasons Staples articulated
for adopting its policies.
-31-
("[SOX] does not provide whistleblower protection for all employee
complaints about how a public company spends its money and pays its
bills.").
Day's belief was also objectively unreasonable because he
has made no showing that any inaccuracy was material to
shareholders. This materiality requirement means the complainant
must believe there is a "likelihood that the disclosure of the
omitted fact would have been viewed by the reasonable investor as
having significantly altered the total mix of information made
available." Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)
(quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976)) (internal quotation marks omitted). Thus complaints about
purely internal practices that are not financial in nature and are
not reported to shareholders do not meet the materiality requirement
for an objectively reasonable belief in shareholder fraud.
A company's explanations given to the employee for the
challenged practices are also relevant to the objective
reasonableness of an employee's belief in shareholder fraud. As the
district court observed, Day's complaints, which, assuming arguendo,
initially reflected a reasonable concern, "ceased to be reasonable
after Staples' employees reiterated the rationales for the returns
process, and assured Plaintiff that no fraud was being committed."
Day, 573 F. Supp. 2d at 347. Here, Day's beliefs were not initially
-32-
reasonable as beliefs in shareholder fraud and they became less
reasonable as he was given explanations.
Because, on the undisputed facts, Day did not have the
needed objectively reasonable belief of violation of one of the laws
set forth in § 1514A, we need not determine whether Staples has
proved by clear and convincing evidence that Day would have been
discharged notwithstanding his complaints.
IV.
DAY'S STATE LAW CLAIMS
We also review de novo entry of summary judgment against
Day's state claims for breach of contract and wrongful termination
under Massachusetts law. Both claims fail.
A. Breach of Contract Based on Staples's Code of
Ethics
Day argues that Staples's Code of Ethics, which contains
an anti-retaliation provision protecting employees who report legal
or ethical violations to their supervisors,16 was an implied part of
his employment contract, and that Staples breached its obligations
under the Code by firing him.
In Massachusetts, employment is presumed to be at-will
unless there exists an express or implied contract governing its
terms and conditions. Hinchey v. NYNEX Corp., 144 F.3d 134, 141
16
This provision states, "Staples will not tolerate
retaliation against anyone who in good faith reports a violation or
potential violation of this Code."
-33-
(1st Cir. 1998). Day argues that under O'Brien v. New England
Telephone & Telegraph Company, 664 N.E.2d 843, 847 (Mass. 1996), the
terms of the Code became an implied part of the at-will employment
relationship between Day and Staples.17
The Massachusetts Supreme Judicial Court has held that
there is no implied contract based on the terms of a personnel
manual where: (1) the employer retained the right to unilaterally
modify terms; (2) the terms of the manual were not negotiated; (3)
the manual stated that it provided only guidance regarding the
employer's policies; (4) no term of employment was specified in the
manual; and (5) the employee did not sign the manual to manifest
assent. Jackson v. Action for Boston Cmty. Dev., Inc., 525 N.E.2d
411, 415-16 (Mass. 1988). There is no "rigid list of prerequisites,
but rather . . . factors that would make a difference or might make
a difference in deciding whether the terms of a personnel manual
were at least impliedly part of an employment contract." O'Brien,
664 N.E.2d at 847; see also LeMaitre v. Mass. Tpk. Auth., 897 N.E.2d
1218, 1218-19 (Mass. 2008) (finding enforceable an incentive program
17
Day cites Noonan v. Staples, Inc., 539 F.3d 1 (1st Cir.
2008), for the proposition that this court has previously treated
the Code as a binding contract, and that Staples cannot fire Noonan
for a violation of the Code in one case while arguing that Day
lacks a reasonable belief in shareholder fraud. Day's reliance is
misplaced. Noonan examined the Code in the context of a claim for
breach of a severance agreement where the terms of the severance
agreement stated that Staples could rely on a violation of the Code
to establish cause for termination. See id. at 14. Noonan has no
bearing on Day's case.
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described in employee handbook and clarifying that the case did not
raise claim that handbook modified at-will status of a dismissed
employee).
Day's characterization of the Code of Ethics as a contract
ignores the express contrary language in the documents accompanying
the Code. Day's initial offer explicitly stated, "[t]his letter,
along with the enclosures [including the Code of Ethics], contains
our complete offer of employment and in no way changes your status
as an at-will employee." Further, the Associate Handbook
Acknowledgment Form, contained within the Staples Associate
Handbook, states (in all capital letters): "I also understand that
this handbook is not a contract of employment, and that employment
with Staples is on an at-will basis." The Associate Handbook also
contains a notification that the first 90 days of an associate's
employment are considered the introductory period, and that "[s]ince
employment is at the will of the company and of the associate,
completion of the introductory period is not a guarantee or a right
to continued employment." These statements make clear that the Code
and benefits provided in the Handbook did not alter Day's at-will
employment status.
Given these disclaimers, the absence of any negotiation
over the terms, and the absence of any specified term of employment,
Day could not "reasonably have believed that the 'employment manuals
he . . . was given constituted the terms or conditions of
-35-
employment, equally binding on employee and employer.'" Hinchey,
144 F.3d at 141 (quoting Derrig v. Wal-Mart Stores, Inc., 942 F.
Supp. 49, 55 (D. Mass. 1996)).
B. Wrongful Termination Claim Based on Public Policy
Exception to Massachusetts's Doctrine of At-Will
Employment
Lastly, Day argues that Staples's violation of § 1514A
provides him with a basis for a wrongful discharge claim pursuant
to the public policy exception to Massachusetts's employment-at-will
doctrine. He further relies on Massachusetts case law giving
protection to whistleblowers under state law. See, e.g., Mello v.
Stop & Shop Cos., 524 N.E.2d 105, 108 n.6 (Mass. 1988).
Massachusetts courts recognize an exception to the general
at-will employment rule "when employment is terminated contrary to
a well-defined public policy." Wright v. Shriners Hosp. for
Crippled Children, 589 N.E.2d 1241, 1244 (Mass. 1992). Under this
doctrine, employees may seek redress if they "are terminated for
asserting a legally guaranteed right (e.g., filing workers'
compensation claim), for doing what the law requires (e.g., serving
on a jury), or for refusing to do that which the law forbids (e.g.,
committing perjury)." Smith-Pfeffer v. Superintendent of the Walter
E. Fernald State Sch., 533 N.E.2d 1368, 1371 (Mass. 1989). This
public policy exception is construed narrowly. King v. Driscoll,
638 N.E.2d 488, 492 (Mass. 1994).
-36-
Day does not have a claim for wrongful termination under
Massachusetts common law. In passing SOX, Congress aimed to create
comprehensive legislation to fill the gaps in a patchwork of state
laws governing corporate fraud and protections for whistleblowers.
It would be entirely inappropriate for plaintiff to be able to use
a federal statute designed to address the inadequacies of state law
to create a new common law cause of action under Massachusetts law.
Nor does Day meet the requirements of existing state law. The
Massachusetts public policy exception for whistleblowing does not
protect "an employee's internal complaint about company policies."
Shea v. Emmanuel Coll., 682 N.E.2d 1348, 1350 (Mass. 1997).
V.
The district court's grant of summary judgment to Staples
is affirmed.
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