Employment Law Daily In-house patent attorney revives whistleblower claims based on refusal to violate ethics rules
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Thursday, July 27, 2017

In-house patent attorney revives whistleblower claims based on refusal to violate ethics rules

By Kathleen Kapusta, J.D.

Calling the allegations of L’Oreal’s in-house patent attorney “more than skin deep,” the Third Circuit reversed the dismissal of his New Jersey Conscientious Employee Protection Act (CEPA) claim, in which he alleged he was fired because he refused to file frivolous or bad-faith patent applications that would have violated various ethical obligations. The failure to follow instructions that effectively disregarded rules of professional conduct serves as an adequate basis for a CEPA claim, the appeals court stated, finding further that the employee alleged a colorable violation of the statute. Judge Chagares filed a separate opinion concurring in part and dissenting in part (Trzaska v. L’Oreal USA, Inc., July 25, 2017, Ambro, T.).

As head of L’Oreal USA’s regional patent team in Clark, New Jersey, the employee oversaw the process for patenting the company’s newly developed products and inventions. In addition to the Rules of Professional Conduct regulating the legal profession, he was also required to follow professional rules promulgated by the United States Patent and Trademark Office (USPTO). These rules of professional conduct (RPCs) barred attorneys from, among other things, filing frivolous or bad-faith patent applications or from knowingly making false statements before a tribunal.

Quota. L’Oreal and its parent company, L’Oreal, S.A., established a global quota of patent applications for each regional office and the annual quota for the employee’s team in 2014 was 40. The employee claimed that management officials told his team that if they failed to meet that quota, “there would be consequences which would negatively impact their careers and/or continued employment.” At the same time, L’Oreal adopted an initiative to improve the quality of patent applications it filed with the USPTO, which resulted in fewer invention disclosures submitted to the patent team for vetting.

Fired. As a result of the two competing policies, the patent team believed it was not able to meet the 2014 quota without filing patent applications for products it did not in good faith believe were patentable. Without identifying any offending patent application he was otherwise instructed to file, the employee nonetheless told his superiors he would not do so should he come across one, even if that meant the annual quota would not be met. He was then offered two incentive packages and when he rejected both, he was fired.

Lower court proceedings. Claiming wrongful retaliatory discharge in violation of CEPA, he sued both L’Oreal entities. In dismissing his claims against both, the district court found that because the RPCs did not govern any activities, ethical obligations, or business decisions of the L’Oreal entities, they did not violate any law on which a CEPA claim could be based. The court also found that he failed to show he had a reasonable belief L’Oreal had violated a law or that a violation was imminent (which it deemed a necessary element for a CEPA claim).

CEPA. On appeal, the Third Circuit explained that CEPA, which is construed flexibly, protects employees from retaliatory actions by employers. Accordingly, a plaintiff must identify a law, rule, regulation, or clear mandate of public policy that supports the basis of his CEPA claim as well as “unacceptable practices in the employer’s business” that contravene the identified authority.

Public policy. Following these guidelines, the appeals court found an allegation that an employer instructed, coerced, or threatened its patent attorney to disregard the RPCs binding him violates a clear mandate of public policy within the meaning of CEPA. Further, terminating the employee for refusing to follow the instruction triggers CEPA protection because the abuse of the patent application system and the violation of RPCs harm the public’s interest. Thus, an employer’s policy effecting the disregard of the RPCs contravenes clear mandates of public policy within the meaning of CEPA and an allegation that an employer promulgates such a policy serves as an adequate basis to bring a CEPA claim. “CEPA is clear: an employee cannot be terminated for refusing to participate in conduct that he reasonably believes violates public policy. This is especially so because we must construe the statute’s protections liberally.”

Employee’s allegations. The lower court found that the employee’s failure to allege that L’Oreal had violated a law or public policy, or that such a violation was imminent, was fatal to his CEPA claim. However, the appeals court again emphasized that professional ethical codes can serve as a basis to state a CEPA claim when an employee is coerced to disregard them. Thus, the employee’s allegations came within the scope of CEPA’s protection.

The appeals court also rejected the lower court’s finding that his claim should be brushed away because his pleadings contained no evidence that L’Oreal demanded or ordered that he or others relinquish their professional judgments or obligations. Concluding that he alleged a colorable violation of CEPA, the appeals court pointed out that he claimed there was a company policy of meeting the patent application quota regardless of whether the applications submitted were for products he did not believe were patentable; that he and other colleagues were implicitly instructed to disregard the RPCs in order to meet the quota; that his supervisors expressly rejected his concern about violating the RPCs; and that L’Oreal threatened to terminate him if he did not meet the quota.

Observing that he also claimed he and his colleagues were instructed to meet the quota “or else,” and that management ignored his concerns about violating his ethical duties, the court found he adequately alleged he had a reasonable belief that his employer was either instructing or coercing him to disregard the RPCs, which was a violation of public policy sufficient to serve as the basis of a CEPA claim.

L’Oreal, S.A.’s motion to dismiss. Finally, finding a lack of prejudice, the court denied the parent company’s motion to dismiss the appeal as to it because the employee only attached to his notice of appeal the order that dismissed his complaint as to L’Oreal USA. The majority rejected the dissent’s assertion that he should be held to a higher standard because he is an attorney, and found the case relied upon by the dissent did not apply as it dealt with an attorney-employer’s own RPC violations.

Partial concurrence and dissent. Judge Chagares would have affirmed the dismissal of the employee’s suit for failure to state a claim. He agreed with the majority that RPCs can serve as an adequate foundation for a CEPA claim, and as to the motion to dismiss filed by L’Oreal, S.A. He did not believe, however, that the district court erred in finding the employee did not plead a viable CEPA claim because he failed to establish that L’Oreal had or would imminently violate a law, rule, regulation, or a clear mandate of public policy.

Chagares also would have held that the employee failed to satisfy the heightened standard applying to him as an attorney. The majority, however, rejected the dissent’s assertion that he should be held to a higher standard because he is an attorney, and found the case relied upon by the dissent did not apply, as it dealt with an attorney-employer’s own RPC violations.

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