New York District Court Applies Dodd-Frank Retroactively To Permit Employee to Bring Whistleblower Action Against Privately Held Subsidiary of Public Company

By Robert Y. Lewis

In an important decision rendered this summer, a judge in the Southern District of New York has held that the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) giving whistleblower protection to employees of privately held subsidiaries of public companies applies retroactively. Leshinsky v. Telvent GIT, S.A., 2012 WL 2686111 (S.D.N.Y. 2012).

As we reported in our September 27, 2011 E-Update, Dodd-Frank amended the Sarbanes-Oxley Act of 2002 (“SOX”) to make more robust SOX’s protection of whistleblowers from retaliatory firing or other job action for reporting illegal corporate conduct. These amendments included, among others: (i) extending whistleblower protection to employees of rating agencies and of companies providing consumer financial services and products; (ii) lengthening the statute of limitations for whistleblower claims; (iii) giving whistleblowers the right to a jury trial; and (iv) giving whistleblowers monetary awards for reporting illegal conduct to the SEC and CFTC.

Dodd-Frank became effective in July 2010. Since then, courts have grappled with the question whether Dodd-Frank amendments are to be applied retroactively, that is, to conduct that occurred before July 2010. The general rule is that courts do not apply statutes retroactively unless there is clear legislative intent for retroactive application. In accordance with this presumption, courts have generally rejected retroactive application of Dodd-Frank. Thus, in Mejia v. EMC Mortg. Corp., 2012 WL 367364 (C.D. Cal. 2012), the district court rejected retroactive application of Dodd-Frank to deceptive and unfair housing loan practices. In Riddle v. Duncorp Int’l Inc., 666 F.3d 940, 944 (5th Cir. 2012), the Fifth Circuit refused to apply Dodd-Frank’s longer statute of limitations retroactively. And two district courts have ruled that Dodd-Frank’s ban on enforceability of predispute arbitration agreements is not to be applied retroactively. Taylor v. Fannie Mae, 2012 WL 928170, at 8-10 (D.D.C. Mar. 20, 2012); Holmes v. Air Liquide, USA LLC, 2012 WL 267194, at * 6 (S.D. Tex. Jan. 30, 2012)(same); but see Pezza v. Investors Capital Corp., 767 F. Supp. 2d 225 (D. Mass. 2011)(applying the Dodd-Frank ban on predispute arbitration of whistleblower claims retroactively).

Bucking this trend, on July 9, 2012, the Leshinsky court held that at least one Dodd-Frank amendment should be applied retroactively. It ruled that a Dodd-Frank amendment explicitly extending whistleblower protection to employees of subsidiaries of publicly traded companies had simply clarified an ambiguity in SOX and not substantively changed it. Therefore plaintiff-employee of a defendant subsidiary of a publicly traded company could proceed with his action for retaliatory firing.

In July 2008, Telvent Farradyne, Inc. (“Farradyne”), a subsidiary of Telvent GIT, terminated Plaintiff Phillip Leshinsky’s employment. Leshinsky alleged that he was terminated as a result of his raising objections to a proposal to use fraudulent information in connection with a bid for a contract with the New York Metropolitan Transit Authority for the maintenance and repair of the electronic toll registry system for the MTA bridges and tunnels E-Z Pass System. While Telvent GIT was a publicly traded company, Farradyne the subsidiary who actually employed Leshinsky was privately held.

Defendant Farradyne moved to dismiss, arguing that Plaintiff was not protected by SOX because Farradyne was a privately held subsidiary of Telvent GIT, and that in 2008 when Leshinsky was fired SOX only covered publicly held companies. It pointed out that in 2008, SOX §806 was entitled “Whistleblower protection for employees of publicly traded companies.” 18 U.S.C. §1514A. Before Dodd-Frank was passed, several federal courts and administrative law judges at the Department of Labor and OSHA had considered whether SOX whistleblower protection extended to employees of privately held subsidiaries of publicly traded companies. They had come to differing conclusions, although the majority had held the protection did not extend beyond the publicly held companies themselves.

Defendant Leshinsky relied on the Dodd-Frank amendment to SOX §806, which resolved the authorities, providing that no public company, “including any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company”, may retaliate against a whistleblower. Dodd-Frank § 929A. Leshinsky argued that this amendment, although part of the law that became effective after his termination, should apply retroactively because it did not change SOX §806, but clarified it.

After a detailed look at the language of SOX and Dodd-Frank, as well as the legislative history pertaining to the subject amendment and the pre-amendment judicial and administrative construction, the district court determined that before the Dodd-Frank, section 806’s scope was ambiguous. Therefore the amendment was clarifying (not substantive) and should be applied retroactively. The court thus allowed Leshinsky’s case grounded in pre-July 2010 termination to proceed against the privately held subsidiary of a publicly held company.

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