Employment Law Daily Complaint that job offer letter was fraudulent not protected activity under SOX
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Friday, October 20, 2017

Complaint that job offer letter was fraudulent not protected activity under SOX

By Marjorie Johnson, J.D.

An employee did not engage in protected activity under the Sarbanes-Oxley Act when he complained that his employer’s failure to include its unusual compensation scheme in its offer letters to its predecessor’s employees amounted to federal mail fraud and wire fraud. In an unpublished opinion overturning the Administrative Review Board’s ruling in his favor, the Tenth Circuit determined that under the circumstances—including that the terms of the bonus plan at issue were disclosed through other means—the employee could not have reasonably believed that the employer was engaged in a scheme to cheat employees out of their money (Dietz v. Cypress Semiconductor Corp., October 17, 2017, Ebel, D.)

Offer letters don’t explain bonus plan. When his former employer was acquired by Cypress Semiconductor Corporation, the plaintiff and certain other employees were offered employment. In its offer letters, Cypress stated that it would honor the predecessor’s severance package if the employee chose to leave within one year. The letters also included salary information, but did not explain that some employees would be subject to a “unique” compensation scheme called the Design Bonus Plan.

The bonus plan involved a mandatory wage deduction under which certain employees working on certain projects would lose ten percent of their salary until six weeks after the close of each quarter, at which time a bonus would be issued based on the projects’ performance. If the project was behind schedule, bonuses would be less than the initial deductions. However, if a project was ahead of schedule, the bonuses were normally higher than the deductions.

Notice of plan. Cypress claimed that it did not describe the bonus plan in the offer letters because it did not know which employees and/or which projects would be subject to it at the time of the acquisition. However, before it began making the compulsory deductions (about nine months later), it apprised employees of the plan’s details though meetings, training sessions, and the company’s intranet. Moreover, any employee participating in a launched project had to acknowledge having read a document that discussed the plan. Qualifying employees were also required to write a memo acknowledging the relevant aspects of the bonus plan.

Employee’s complaint. After one of the training sessions, the employee emailed his supervisor with concerns about the legality of the plan. He also complained to the general counsel, who assured him that there was no legal problem with the plan and that employees had been properly apprised of the scheme. Shortly thereafter, his supervisor criticized his performance over a phone meeting and placed a written warning in his personnel file warning him that any future infractions could result in termination. He disputed the disciplinary allegations, claiming that they were retaliatory, and refused to admit any wrongdoing. He also resigned, though he was hoping to trigger a retention policy whereby Cypress would react quickly to persuade him to remain. He didn’t believe its actions indicated an attempt to retain his services, and claimed he was constructively discharged.

He filed this action for unlawful retaliation with OSHA, which denied his claim. He appealed to an administrative law judge who found in his favor and awarded him approximately $655K in front pay and $251K in backpay, as well as stock benefits, and attorneys’ fees. Cypress appealed to the Administrative Review Board, which affirmed.

What is mail fraud? The Sarbanes-Oxley Act protects whistleblowers from retaliation for reporting conduct which they reasonably believe violates certain federal laws, including mail fraud and wire fraud. At issue here was whether the plaintiff reasonably believed that Cypress committed mail or wire fraud when it did not disclose the bonus plan in the offer letters. To have committed such an offense, it must have harbored “the intent to deprive a victim of property or honest services.” It is not enough to fraudulently induce a victim to take some action, there must be a “conscious objective” to deprive the victim of property.

No reasonable belief. There was not enough evidence to reasonably conclude that Cypress intended to deprive the predecessor’s employees of their property by nondisclosure of the bonus plan in their offer letters, the Tenth Circuit ruled. At the outset, Cypress offered at least a “plausible, non-nefarious explanation” for the omission—that it did not know which employees and/or which projects would be subject to the bonus plan at the time of the acquisition. But even if that excuse was insufficient, the record did not support a finding that the employee reasonably believed that the employer committed a fraud to deprive the employees of their property.

In addition to being at-will employees, the recruits also could resign within one year and likely receive the same benefits package they would have gotten had they declined to join Cypress. More importantly, Cypress did not start making compulsory deductions under the bonus plan until nine months after they signed on. During that nine-month period, it made sure the employees were aware of and understood the plan. Thus, an employee who did not want to participate in the plan after learning about it had time to decide whether to continue working at Cypress or resign and get the same severance package it would have originally received from the predecessor employer.

Under these circumstances, the employee could not reasonably believe that Cypress was engaged in a scheme to cheat the predecessor’s employees out of their money. Even if it had concealed a material fact in order to lure the employees to work under false pretenses, mail and wire fraud requires more than merely fraudulent inducement. Rather, there must be a scheme designed to deprive the victims of their property, which was lacking here.

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