CEO’s failure to act promptly results in an inability to demonstrate wrongful termination

Executives often find themselves in a dilemma when they discover that, due to no fault of their own, their employer may be running afoul of the law.  If they report the illegal activity, they may face demotion or termination.  On the other hand, if they remain silent or acquiesce to the activities, they run the risk of becoming accessories to the actions and can potentially face criminal or civil liability themselves. 

Fortunately, employees are not without legal protections of their own.  For example, the Sarbanes-Oxley Act (“SOX”) protects whistleblowers of publicly-traded companies by prohibiting employers from retaliating against them for providing information about potentially illegal conduct.  However, a recent opinion from the Fourth Circuit (which is the judicial Circuit in which Maryland sits) reinforces the point that if employees wish to preserve the protections afforded to them by SOX, it is crucial that they act promptly in asserting their rights.  The case is Feldman v. Law Enforcement Associates, Inc., 2014 U.S. App. LEXIS 8833 (4th Cir., May 12, 2014).

Paul Feldman became the CEO of Law Enforcement Associates, Inc. (“LEA”) in 2001.  In 2005, LEA’s founder, John Carrington, pled guilty to criminal export violations involving another company he owned.  Despite his criminal conduct, Carrington remained a major stockholder of LEA and actively involved in the company.  Then, in December of 2007, Feldman expressed concern that Carrington was engaged in illegal exports involving LEA.  On January 14, 2008, Feldman wrote the United States Department of Commerce about the suspected illegal activity, which resulted in a federal investigation and a raid shortly thereafter.  Feldman also notified the government of suspected insider trading. 

Twenty-months later, on September 23, 2009, LEA terminated Feldman despite his having recently secured a $225 million business contract and leading LEA to a record high 260% increase in income.  Feldman proceeded to file suit against LEA alleging he was unlawfully fired in retaliation for engaging in activities protected under SOX (byway of his reporting LEA’s suspected illegal activity to the government 20-months prior).

In dismissing his case, the Court found that Feldman failed to sufficiently establish that his protected activities were a contributing factor to his termination.  The Court emphasized that the protected activities “occurred roughly twenty months before his termination” and “such a lengthy gap in time weighs against a finding” that his protected activities played a role in his termination.

Importantly, the Court noted that Feldman did not need to prove that his protected activities were the sole factor in LEA’s decision to terminate his employment; rather, he only had to demonstrate that they were a “contributing factor.”  The Court emphasized that this is a “rather light burden.”  However, in dismissing Feldman’s case even under this minimal standard, the Court stated:

The contributing factor standard in SOX cases is indeed meant to be quite broad and forgiving.  However, under the particular circumstances presented here, the standard would simply be toothless if we held that a preponderance of the evidence shows that these long-past activities affected Feldman’s termination[.]

Executive takeaways.

SOX was enacted to protect employees and eliminate situations such as the foregoing.  However, when employees allow a significant amount of time to pass from when they engaged in their protected activities, the protections available to them can be greatly diminished or even completely extinguished.  Accordingly, when employees find themselves in situations where they have to report potentially illegal actions by their employers or engage in any other protected activities, it is critical that they immediately seek out legal counsel to ensure that their rights and legal remedies are preserved.