Jury’s Rejection of Sarbanes-Oxley Whistleblower Retaliation Suit May Comfort Employers

Michael J. Fortunato, Karen P. Gaster

August 11, 2008

This article appeared in the August 11, 2008 edition of The National Law Journal. Story by Pamela A. MacLean.

A Philadelphia jury’s recent rejection of one of the first Sarbanes-Oxley suits on whistleblower retaliation to go to trial may give comfort to employers worried about taking employment actions against corporate executives.

“The Sarbanes-Oxley case is instructive because with it you have the first set of jury instructions on the issue and one of the first cases to be fully litigated,” said Michael Fortunato, a shareholder at Rubin, Fortunato & Harbison in Philadelphia, who represented the company.

Areas of the law remain unsettled. It is an open question in many jurisdictions whether a retaliation claimant is entitled to a jury trial and whether the fraud claim must relate to shareholders or other types of fraud, said Fortunato.

The verdict in federal court in July rejected the whistleblower retaliation claim by Richard Blagrave, a former senior vice president and chief operating officer of Nutrition Management Services Co., which provides meals to hospitals, retirement communities and schools.

Blagrave v. Nutrition Management Services Co., No. 05-cv-6790 (E.D. Pa.) The 2002 passage of Sarbanes-Oxley in the wake of the Enron Corp. and WorldCom scandals included provisions to protect senior company executives from retaliation if they report fraud up the corporate ladder to managers or the board of directors.

Within a year of the law’s passage, a cause of action for retaliatory discharge existed in 42 states.

As a result of the whistleblower protections, Fortunato said companies have been faced with whistleblower protection claims only after employees were about to be fired or disciplined in routine employment actions.

No outside complaints

He said Blagrave “never complained outside the company and never complained about fraud.” Fortunato said Blagrave made no internal complaints of fraud.

“If there is a lesson in this case, it is that employers need not worry about the whistleblower law if there is a legitimate reason for the employment action,” he said.

Blagrave alleged he was forced to resign in 2004 after complaining to management that the company received kickbacks from vendors who shipped food directly to some facilities and that the company engaged in securities fraud by overstating amounts it was owed, while understating the amount of its own bills, according to a pretrial memorandum by Nicholas Harbist, a partner in the Cherry Hills, N.J., office of Blank Rome

He sought more than $500,000 in damages from lost wages, bonus and other compensation.

Jurors rejected the retaliation claim but awarded Blagrave $1,700 in unpaid medical insurance and $900 for unpaid business expenses, according to the verdict form.

Harbist could not be reached for comment.

 
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