Opinion
Civil Action No. 18-200
10-02-2018
KEVIN WUTHERICH, Plaintiff, v. RICE ENERGY INC also known as EQT RE LLC, Defendant.
Judge Cathy Bissoon
Re: ECF No. 14 REPORT AND RECOMMENDATION
I. RECOMMENDATION
Plaintiff Kevin Wutherich ("Plaintiff") brings this case against Rice Energy Inc., also known as EQT RE LLC, ("Defendant"). Presently before the Court is a Partial Motion to Dismiss. ECF No. 14. For the reasons set forth herein, it is respectfully recommended that the Partial Motion to Dismiss be granted in part and denied in part.
II. REPORT
A. PROCEDURAL HISTORY
Plaintiff filed a Complaint on February 14, 2018. ECF No. 1. Defendant filed a Partial Motion to Dismiss on April 16, 2018. ECF No. 5. On May 4, 2018, Plaintiff filed the operative First Amended Complaint (the "Amended Complaint"). ECF No. 12. Therein he brings the following claims: Count I - retaliation in violation of the Sarbanes-Oxley Act of 2002, ("SOX"); Count II - retaliation in violation of the Dodd-Frank Act, ("Dodd-Frank"); Count III - age discrimination in violation of the Age Discrimination in Employment Act; Count IV - nationality discrimination in violation of Title VII; and Count V - age and nationality discrimination in violation of the Pennsylvania Human Relations Act.
On May 7, 2018, the then-pending Partial Motion to Dismiss was denied as moot. ECF No. 13. On May 21, 2018, Defendant filed the instant Partial Motion to Dismiss and a Brief in Support, seeking dismissal of a portion of Count I and all of Count II. ECF Nos. 14-15. On June 11, 2018, Plaintiff filed a Brief in Opposition. ECF No. 22. On June 25, 2018, Defendant filed a Reply Brief. ECF No. 23. On July 5, 2018, Plaintiff filed a Sur-reply Brief in Opposition. ECF No. 28. The Partial Motion to Dismiss is now ripe for consideration.
In its filing, Defendant mistakenly labels Count I as the Dodd-Frank claim and Count II as the SOX claim. ECF No. 14 at 1; ECF No. 15 at 1. --------
B. FACTUAL BACKGROUND
In the Amended Complaint, Plaintiff makes the following allegations in connection with the relevant claims. Plaintiff was hired by Defendant in May 2015 as Director of Completions. ECF No. 12 ¶ 6. He reported to Tunde Ajayi, Vice President of Completions. Id. ¶ 10. Tunde Ajayi reported to Toby Rice, Founder, Chief Operating Officer and President. Id.
Defendant has stock listed on the New York Stock Exchange. Id. ¶ 19. While working for Defendant, Plaintiff observed unfair bidding practices, abused interlocking interests, and other illegal practices which he believed to be violations of SOX and the rules of the United States Securities and Exchange Commission ("SEC" or the "Commission"). Id. ¶¶ 14-15. Plaintiff reported the irregularities to Tunde Ajayi, Toby Rice and others. Id. ¶ 16. The irregularities concerned two entities: Silver Creek Services and EOG Resources. Id. ¶ 18. He was terminated as a result of his reports. Id. ¶ 17.
1. Silver Creek Services
In May to July 2016, Plaintiff became aware that Tunde Ajayi was a partial owner of Silver Creek Services ("Silver Creek"). Id. ¶ 23. Silver Creek was a provider of services to Defendant. Id. ¶ 25. The aggregate amount for those services to Defendant exceeded the greater of $1.0 million or 5% of Silver Creek's total annual revenues. Id. By the terms of its 2016 Proxy Statement to shareholders, any transaction between Silver Creek and Defendant should have been specifically approved and reported to the shareholders of Defendant. Id. ¶¶ 20, 26. Defendant did not disclose a related-party transaction with Silver Creek. Id. ¶ 39.
Plaintiff became aware of Ajayi's interest in Silver Creek and was at a lunch at which Ajayi informed a group of people that he was a partial owner of Silver Creek. Id. ¶ 27. Ajayi stated that Defendant's executives had asked him to divest his shares of Silver Creek because of a potential conflict of interest. Id. ¶ 28. Ajayi did not divest his shares. Id. ¶ 29.
In September/October 2016, Toby Rice conducted an investigation into Ajayi's conflicting interests. Id. ¶ 30. Plaintiff was asked to participate in the investigation. Id. Plaintiff's role was to provide information by making a presentation reporting his finding. Id. ¶ 32. In the presentation made to Toby Rice, Plaintiff confirmed that Ajayi selected Silver Creek as a service provider even though other providers were more qualified based on the bids submitted. Id. ¶ 32(a), (c). Plaintiff insinuated that Ajayi was self-dealing due to his interest in Silver Creek and making bad business decisions as a result. Id. ¶ 32(e), (f). Plaintiff believed that the selection of Silver Creek constituted a securities violation. Id. ¶¶ 33-34.
Ajayi was terminated after Plaintiff's presentation. Id. ¶ 38(f). Plaintiff was terminated within 30 minutes of Ajayi's termination because of his report to Toby Rice and in order to conceal the violation that Plaintiff reported. Id. ¶¶ 38(g), 40.
2. EOG Resources
In its 2015 and 2016 10-k statements filed with the SEC, Defendant listed certain litigation and liabilities risks. Id. ¶¶ 41, 42. Defendant did not list theft of trade secrets as one of its liability risks. Id. ¶ 43. Plaintiff learned of a theft of trade secrets in the summer of 2016 when he overheard a discussion outside of his office between engineer Jeff Lo and Executive VP of Exploration Derek Rice about data that Lo obtained from EOG Resources ("EOG"), his previous employer. Id. ¶¶ 44-46. The data consisted of the methods by which EOG designed their "frac jobs (completions)" as well as how its wells were producing. Id. ¶ 46. Immediately after the conversation, Plaintiff questioned Lo and learned that Lo had transferred large amounts of confidential data from EOG to his personal hard drive and had provided that information to Defendant. Id. ¶ 47.
Plaintiff verbally reprimanded Lo and directly thereafter reported the incident to Ajayi. Id. ¶¶ 50-51. Lo was subsequently transferred to another department and did not report to Plaintiff. Id. ¶ 51.
Defendant already knew of the theft because Derek Rice was the recipient of the stolen data. Id. ¶ 53. Defendant knew that the theft of EOG's data was a litigation risk but did not report it to shareholders. Id. ¶¶ 53-54. Instead, Defendant used the data to design a November 2016 trial. Id. ¶ 56. Plaintiff opposed the trial, which he demonstrated by telling staff of his opposition, documenting his opposition in emails to Ajayi and others and documenting his opposition in an online data repository owned by Defendant which is read by Toby Rice and others in management. Id. ¶ 57.
Plaintiff believed that the data acquired by Lo from EOG has substantial value. Id. ¶ 59(a). Plaintiff further believed that Defendant's failure to disclose the illegal nature of its revenue was a securities violation. Id. ¶ 60.
Plaintiff was terminated to prevent his receipt of the results of the imminent November 2016 trial, because he was a known whistleblower. Id. ¶¶ 64, 66.
C. STANDARD OF REVIEW
As the United States Supreme Court explained in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), a complaint may properly be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) if it does not allege "enough facts to state a claim to relief that is plausible on its face." Id. at 570. In assessing the merits of a claim subject to a motion to dismiss, a court must accept all alleged facts as true and draw all inferences gleaned therefrom in the light most favorable to the non-moving party. Phillips v. County of Allegheny, 515 F.3d 224, 228 (3d Cir. 2008) (citing Worldcom, Inc. v. Graphnet, Inc., 343 F.3d 651, 653 (3d Cir. 2003)). A pleading party need not establish the elements of a prima facie case at this stage; the party must only "put forth allegations that 'raise a reasonable expectation that discovery will reveal evidence of the necessary element[s].'" Fowler v. UPMC Shadyside, 578 F.3d 203, 213 (3d Cir. 2009) (quoting Graff v. Subbiah Cardiology Associates, Ltd., 2008 WL 2312671 (W.D. Pa. June 4, 2008)).
D. DISCUSSION
1. Count I - SOX
At Count I, Plaintiff claims that, in violation of SOX, Defendant terminated his employment in retaliation for his whistleblowing actions of reporting "a violation of the Securities Act" in relation to both Silver Creek and EOG. ECF No. 12 at 23-26. In support of the instant Motion to Dismiss, Defendant argues that the portion of Count I related to EOG fails to state a claim under SOX. ECF No. 15 at 6-12. In opposition to the Motion to Dismiss, Plaintiff argues that he has alleged sufficient facts to state a claim for relief that is plausible on its face. ECF No. 22 at 9-20.
Plaintiff seeks relief pursuant to Section 806 of SOX, 18 U.S.C. § 15143A, "Civil action to protect against retaliation in fraud cases," which provides, in pertinent part:
(a) Whistleblower protection for employees of publicly traded companies. No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)) including any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company, or nationally recognized statistical rating organization (as defined in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c), or any officer, employee, contractor, subcontractor, or agent of such company or nationally recognized statistical rating organization, 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--
(1) 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] section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by--
18 U.S.C. § 15143A.(A) a Federal regulatory or law enforcement agency;
(B) any Member of Congress or any committee of Congress; or
(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct) ...
The United States Court of Appeals for the Third Circuit has held that, to establish a prima facie case for such a claim, "the employee must allege that he or she (1) 'engaged in a protected activity;' (2) '[t]he respondent knew or suspected that the employee engaged in the protected activity;' (3) '[t]he employee suffered an adverse action;' and (4) '[t]he circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the adverse action.'" Wiest v. Lynch, 710 F.3d 121, 129 (3d Cir. 2013) (citing 29 C.F.R. § 1980.104(e)(2)(i)-(iv)). Defendant argues that Plaintiff fails to allege sufficient facts as to the first and fourth elements of a prima facie case. ECF No. 15 at 7.
a. Protected activity
In support of the Motion to Dismiss, Defendant first argues that Plaintiff fails to allege conduct constituting protected activity. Defendant specifically challenges whether Plaintiff's opposition to the alleged handling of data from EOG amounted to "providing information" and whether Plaintiff's belief that the misappropriation of data constituted a securities violation was reasonable. Id. at 7-11. In opposition to the Motion to Dismiss, Plaintiff asserts that the allegations that he reported the data theft to Ajayi and others in management, coupled with the allegations that he reasonably believed Defendant's failure to disclose the illegal nature of its revenue was a securities violation, are sufficient to support a plausible claim. ECF No. 22 at 11-12.
The United States Court of Appeals for the Third Circuit has held that, to establish this type of "protected activity," it is required "that an employee's communication reflect a subjective and objectively reasonable belief that his employer's conduct constitutes a violation of an enumerated provision in Section 806." Wiest, 710 F.3d at 137.
In the Amended Complaint, Plaintiff alleges, in pertinent part:
57. [Plaintiff] was opposed to the use of the data.
a. The test was scheduled in November 2016.
b. [Plaintiff] told his staff that he opposed using the data.
c. [Plaintiff] documented his opposition to the use of the data in the emails to Mr. Ajayi and others; and
d. [Plaintiff] documented his opposition in [Defendant's] online data repository "salesforce" which is read by Toby Rice and others in management.
58. [Defendant] knew of [Plaintiff's] opposition to the tests because
a. His opposition was well known among the management and staff and
b. [Defendant] inspected Mr. Ajayi's computer (including his e-mail), as part of the [Silver Creek] investigation, and [Plaintiff] documented his opposition to the use of the data in the emails to Mr. Ajayi
c. Toby Rice reads "salesforce".
59. The use of the data was a substantial litigation risk because because of the amount of money involved:
a. Based on his knowledge as a chemical engineer, [Plaintiff] reasonably believed, that the data acquired by Mr. Lo had substantial value.
b. [Plaintiff] reasonably believed that, even though [Defendant] is working on a different reservoir, it is proper to extrapolate the EOG experience to [Defendant] and, in his opinion, EOG's trade secrets have the potential of doubling [Defendant's] production, which is worth $650MM in 2016.
c. EOG investor presentations confirm [Plaintiff's] engineering opinion that the technology had substantial valuable.
i. The 2014 EOG investor presentation said that their "in house" design gave them a "competitive advantage."
ii. The 2017 EOG investor presentation confirms [Plaintiff's] belief that the technology had substantial valuable. EOG credits its technology as the reason that their wells produce approximately double what their peers['] wells produce, and they do that with significantly shorter laterals.
d. the data's retention and use created a substantial litigation risk because people go to jail for trade secret theft.
60. [Plaintiff] believed that the failure to disclose the illegal nature of its revenue to be a securities violation.
a. [Defendant] sells securities on the New York Stock Exchange;
b. [Defendant] has an obligation to disclose the liability risks in its stock prospectus and other securities filings;
c. [Defendant] did not disclose the liability risks for trade secret theft in its stock prospectus and other securities filings, and;
d. [Defendant] has a history of alleged securities violations, [].
61. [Plaintiff's] belief, that the data's retention and use was a securities violation, was reasonable because it was based on his prior Sarbanes-Oxley training that said you can not use illegal means to generate revenue.ECF No. 15 ¶¶ 57-62.
62. [Plaintiff's] belief, that the data's retention and use was a securities violation, was reasonable because a securities violation does occur when a company intentionally misrepresents or omits certain facts to investors, which were material and which risked loss.' " (See, Nielsen v. Aecom Tech. Corp., 762 F.3d 214, 223 (2nd Cir., 2014) quoting Wiest v. Lynch, 710 F.3d 121, 135-37 (3d Cir.2013)[.]
At this early stage of the litigation, the allegations set forth by Plaintiff in the Amended Complaint support an inference that his communication to Ajayi and others in management reflected a reasonable belief that Defendant's conduct constituted a securities violation and thus was protected activity under the statute.
b. Causation
Defendant next argues that Plaintiff has not alleged that management officials involved in or responsible for Plaintiff's termination were aware of Plaintiff's protected activity. ECF No. 15 at 11-12. In opposition, Plaintiff argues that SOX has no such requirement. ECF No. 22 at 16-21.
As set forth above, the causation element of a prima facie case requires allegations that '[t]he circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the adverse action." Wiest, 710 F.3d at 129 (citing 29 C.F.R. § 1980.104(e)(2)(iv)). Further, the United States Court of Appeals for the Third Circuit has held that "a contributing factor [is] any factor, which alone or in combination with other factors, tends to affect in any way the outcome of the decision. A plaintiff need not provide direct evidence to satisfy this element; rather, circumstantial evidence may be sufficient. To that end, temporal proximity between the protected activity and the adverse action is a significant factor in considering a circumstantial showing of causation." Wiest v. Tyco Elecs. Corp., 812 F.3d 319, 330 (3d Cir. 2016) (citations and quotation marks omitted).
Defendant derives the more specific requirement upon which it bases its argument from Wiest v. Lynch, 15 F. Supp. 3d 543, 566 (E.D. Pa. 2014), an opinion from the United States District Court for the Eastern District of Pennsylvania. Therein, the District Court was assessing the plaintiff's allegations as they related to claims against four individual defendants and held that "if the undisputed facts establish that none of the management officials involved in or responsible for the plaintiff's termination were aware of any of his alleged protected activity, the plaintiff cannot prevail." Wiest, 15 F. Supp. 3d at 566 (citation and quotation marks omitted). Defendants argue that, although Plaintiff alleges that he reported the incident to Ajayi, it is clear that Ajayi was not involved in terminating Plaintiff. ECF No. 15 at 12. Defendants further argue that Plaintiff's attempts to impute knowledge of Plaintiff's protected activity to other employees of Defendant fail. Id. The Court disagrees.
As set forth above, Plaintiff need only allege sufficient facts to establish an inference that circumstances were sufficient to raise the inference that his protected activity was a contributing factor in the adverse action, i.e., his termination. Here, Plaintiff alleges, in pertinent part:
[Plaintiff] was a whistleblower and was terminated because of his whistle blowing, because:ECF No. 12 ¶ 64.
a. The test of the EOG data was schedule in November 2016.
b. Ordinarily, [Plaintiff] would get the test results.
c. [Plaintiff] was terminated of employment just before the test results were available.
d. It is believed that he was terminated, at that time, to prevent his receipt of the test results, because he was a known whistleblower.
At this early stage of the litigation, these allegations establish circumstances sufficient to raise an inference that Plaintiff's protected activity was a contributing factor in his termination. Accordingly, it is recommended that the Motion to Dismiss be denied as to Count I.
2. Count II - Dodd-Frank
At Count II, Plaintiff claims that Defendant terminated his employment in violation of Dodd-Frank, which provides protection for whistleblowers. ECF No. 12 at 26-28. In support of the instant Motion to Dismiss, Defendant argues that Count II should be dismissed because Plaintiff was not a "whistleblower" protected by Dodd-Frank at the time he was terminated. ECF No. 15 at 4-6. In opposition to the Motion to Dismiss, Plaintiff asserts that he has met all prerequisites to qualify as a protected whistleblower. ECF No. 22 at 3-7.
Plaintiff seeks relief under 15 U.S.C. § 78u-6(h), which provides:
(h) Protection of whistleblowers.15 U.S.C. § 78u-6(h).
(1) Prohibition against retaliation.
(A) In general. No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower--
(i) in providing information to the Commission in accordance with this section;
(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), including section 10A(m) of such Act (15 U.S.C. 78f(m)), section 1513(e) of title 18, United States Code, and any other law, rule, or regulation subject to the jurisdiction of the Commission.
The statute defines "whistleblower" as "any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission." 15 U.S.C. § 78u-6(a)(6).
Plaintiff did not provide information to the Commission until 2017, after his termination from Defendant. ECF No. 12 ¶ 92(d). Thus, at the time of Plaintiff's termination, he was not a whistleblower as defined by Dodd-Frank. Plaintiff argues that, because he provided information to the SEC before filing the instant lawsuit, he qualifies as a whistleblower entitled to protection under Dodd-Frank. ECF No. 22 at 4.
As the United States Supreme Court has recently explained:
The whistleblower definition operates in conjunction with the three clauses of §78u-6(h)(1)(A) to spell out the provision's scope. The definition first describes who is eligible for protection--namely, a "whistleblower" who provides pertinent information "to the Commission." §78u-6(a)(6). The three clauses then describe what conduct, when engaged in by a "whistleblower," is shielded from employment discrimination. An individual who meets both measures may invoke Dodd-Frank's protections. But an individual who falls outside the protected category of "whistleblowers" is ineligible to seek redress under the statute, regardless of the conduct in which that individual engages.Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767, 770-771 (2018).
In Digital Realty, the plaintiff did not report any alleged law violations to the SEC. Id. at 776. Applying the provisions of Dodd-Frank as set forth above, the United States Supreme Court found that because the plaintiff did not provide information to the Commission before his termination, he did not qualify as a whistleblower at the time of the alleged retaliation and was "therefore ineligible to seek relief under §78u-6(h)." Id. at 778.
Plaintiff argues that this case is distinguishable from Digital Realty because the plaintiff in Digital Realty did not report a violation to the SEC at any time whereas Plaintiff reported one after he was terminated. ECF No. 22 at 6. Plaintiff asserts that the holding in Digital Realty is limited to a case where no report to the SEC ever occurred. Id. For this proposition, he cites to a minority opinion in Digital Realty wherein Justice Thomas framed the relevant question in the case as "whether the term 'whistleblower' in Dodd-Frank's antiretaliation provision, 15 U.S.C. §78u-6(h)(l), includes a person who does not report information to the Securities and Exchange Commission." Digital Realty, 138 S. Ct. at 783. This Court is not persuaded that the holding of Digital Realty is so limited.
Furthermore, this Court recognizes that, faced with facts similar to this case, the United States District Court for the District of New Jersey reached the same conclusion in Price v. UBS Fin. Servs., Civ. A. No. 17-1882, 2018 U.S. Dist. LEXIS 66200 (D.N.J. April 18, 2018). In Price, the plaintiff reported information to the SEC only after he was terminated. Id. at *3. Applying the "unequivocal" holding of Digital Realty, the Price court found that because the plaintiff did not allege that he reported any information to the SEC prior to his termination, he was not a whistleblower under Dodd-Frank. Id. at *6. The court dismissed the plaintiff's Dodd-Frank claim. Id. Further, the court held that any attempt to amend the plaintiff's complaint with facts stating that he disclosed information to the SEC after his termination would be futile in that such facts would not enable him to meet the definition of whistleblower. Id.
The holding in Digital Realty is dispositive of the issue in this case. Because Plaintiff did not provide information to the Commission before his termination, he did not qualify as a whistleblower at the time of the alleged retaliation and is therefore ineligible to seek relief under 15 U.S.C. § 78u-6(h). Thus, it is recommended that the Motion to Dismiss be granted as to Count II.
E. CONCLUSION
For the foregoing reasons, it is respectfully recommended that the Partial Motion to Dismiss, ECF No. 14, be denied as to Count I and granted as to Count II.
In accordance with the Magistrate Judges Act, 28 U.S.C. § 636(b)(1), and Local Rule 72.D.2, the parties are permitted to file written objections in accordance with the schedule established in the docket entry reflecting the filing of this Report and Recommendation. Failure to timely file objections will waive the right to appeal. Brightwell v. Lehman, 637 F.3d 187, 193 n.7 (3d Cir. 2011). Any party opposing objections may file their response to the objections within fourteen (14) days thereafter in accordance with Local Civil Rule 72.D.2.
Respectfully submitted,
/s/_________
MAUREEN P. KELLY
CHIEF UNITED STATES MAGISTRATE JUDGE Dated: October 2, 2018 cc: The Honorable Cathy Bissoon
United States District Judge
All counsel of record via CM/ECF