Hendrick v. ITT Corporation

Filing 40

MEMORANDUM OPINION re 39 Order on Motion for Summary Judgment. Signed by District Judge Sharion Aycock on 2/12/2018. (adm)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF MISSISSIPPI
ABERDEEN DIVISION
PHILLIP A. HENDRICK

PLAINTIFF

V.

CIVIL ACTION NO.: 1:16-cv-204-SA-DAS

ITT ENGINEERED VALVES, LLC

DEFENDANT

MEMORANDUM OPINION
This matter arises on Defendant’s Motion for Summary Judgment, wherein it argues that
Plaintiff’s claims under the whistleblower protection provisions of the Sarbanes-Oxley Act
(SOX) should be dismissed.
Facts and Procedural History
Phillip Hendrick began working for ITT around July 2013 as the Operational Excellence
Manager in its Amory, Mississippi facility. Beginning in 2014, and as part of his job duties,
Hendrick instituted employee surveys to measure employee morale in an attempt to improve
productivity. Hendrick claims that after instituting the surveys, he began to feel ostracized by
other Amory managers, namely Dennis Jackson, Mike Steele, and David Flippo.
In September of 2015, ITT began to respond to a declining business by considering
termination of certain employees. According to ITT, Hendrick was one such employee. On
September 7, 2015, Hendrick sent Mike Sutter, then Vice President and General Manager of
Industrial Products for ITT, an email recognizing that he may be included in a reduction in force.
He sent a similar email Fred Vos, the General Manager and Executive Director. In both emails,
he attempted to shield himself from termination. He offered to take Fridays off to reduce expense
on the company.

Later that month, Hendrick claims that he observed fraudulent inventory moves of raw
plate steel, which he documented by taking photographs. Hendrick claims that he provided these
photographs to a coworker, Steve Shirley. Shirley accessed the inventory tracking system and
saw that the steel had been removed from the system, suggesting an intent to create absorption.
Shirley then submitted the photos to ITT along with an anonymous ethics complaint describing
the nature of the matter as “inventory manipulation to ‘cook the books.’” ITT began its
investigation on October 14, and its reports noted that the reporter had been informed by a coworker of the supposed violation, but the investigation was purportedly anonymous.
On that same day, three hours after the report was filed, Vos informed Hendrick of a new
restructuring plan that would remove Hendrick from the umbrella of corporate management and
into local Amory management. Hendrick saw this as a demotion. Also on October 14, Hendrick
emailed Sutter regarding the inventory moves. He said that he “was led to believe that the
financials are smoke and mirrors.” He expressed dissatisfaction with what he perceived as the
ethical violation of falsely expensing material as though it had been used and “fudging” the
numbers. Sutter advised Hendrick to report the moves to Amory managers.
Hendrick and Shirley were both terminated from ITT in January 2016. ITT cited
reduction in force as its reason for the layoffs, but Hendrick believes that he was terminated
because he reported fraudulent activity to Sutter and through Shirley’s anonymous ethics
complaint. Hendrick alleges that such retaliation constitutes a violation of the whistleblower
protection provisions of the Sarbanes-Oxley Act, codified as 18 U.S.C. § 1514A(a)(1)(c).
Summary Judgment Standard
Summary judgment is warranted under Rule 56(a) of the Federal Rules of Civil
Procedure when the evidence reveals no genuine dispute regarding any material fact and the

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moving party is entitled to judgment as a matter of law. The rule “mandates the entry of
summary judgment, after adequate time for discovery and upon motion, against a party who fails
to make a showing sufficient to establish the existence of an element essential to that party’s
case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477
U.S. 317, 322, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986).
The party moving for summary judgment “bears the initial responsibility of informing the
district court of the basis for its motion, and identifying those portions of [the record] which it
believes demonstrate the absence of a genuine issue of material fact.” Id. at 323, 106 S. Ct. 2548.
The nonmoving party must then “go beyond the pleadings” and “set forth ‘specific facts showing
that there is a genuine issue for trial.’” Id. at 324, 106 S. Ct. 2548 (citation omitted). In reviewing
the evidence, factual controversies are to be resolved in favor of the nonmovant, “but only when
. . . both parties have submitted evidence of contradictory facts.” Little v. Liquid Air Corp., 37
F.3d 1069, 1075 (5th Cir. 1994) (en banc). Importantly, conclusory allegations, speculation,
unsubstantiated assertions, and legalistic arguments have never constituted an adequate substitute
for specific facts showing a genuine issue for trial. TIG Ins. Co. v. Sedgwick James of Wash., 276
F.3d 754, 759 (5th Cir. 2002); SEC v. Recile, 10 F.3d 1093, 1097 (5th Cir. 1997); Little, 37 F.3d
at 1075.
Analysis and Discussion
Plaintiff’s anti-retaliation claim arises under § 806 of the Sarbanes-Oxley Act, codified at
18 U.S.C. § 1514A, which “creates a private cause of action for employees of publicly-traded
companies who are retaliated against for engaging in certain protected activity.” Allen v. Admin.
Review Bd., 514 F.3d 468, 475-76 (5th Cir. 2008). The Fifth Circuit recognizes that “[n]o [public
company] may discharge, demote, suspend, threaten, harass, or in any other manner discriminate

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against an employee in the terms and conditions of employment because of [certain protected
whistleblowing activity]” under the Act. Halliburton, Inc. v. Admin. Review Bd., 771 F.3d 254,
258–59 (5th Cir. 2014) (changes in original). To prevail on an anti-retaliation claim under this
provision, the employee must prove, by a preponderance of the evidence, that (1) he engaged in
protected whistleblowing activity, (2) the employer knew that he engaged in the protected
activity, (3) he suffered an “adverse action,” and (4) the protected activity was a “contributing
factor” in the “adverse action.” Allen, 514 F.3d at 475-76.
To qualify as a protected activity, an employee’s complaint must definitively and
specifically relate to an instance of what he reasonably believes to be mail fraud, wire fraud,
bank fraud, securities fraud, a violation of any rule or regulation of the SEC, or a violation of any
provision of federal law relating to fraud against shareholders. Id. at 476–77. Upon an
employee’s showing of the four required elements under § 1514A, an employer may still avoid
liability by showing with clear and convincing evidence that it would have taken the unfavorable
personnel action regardless of the employee’s protected activity. Id. at 476; 49 U.S.C. §
42121(b)(2)(B)(iv).
Defendant argues that Plaintiff cannot meet the first element because he did not identify
the fraudulent activity with sufficient particularity. The Administrative Review Board (ARB) at
one time required employee’s communications to be related “definitively and specifically to the
subject matter of the particular statute under which protection is afforded.” See Platone v. FLYI,
Inc., ARB Case No. 04–154, 2006 WL 3246910, at *8 (ARB Sept. 29, 2006). The Fifth Circuit
adopted this standard in 2008. The ARB has since reconsidered the issue and interpreted SOX
not to require that the communication definitively and specifically relate to one of the six SOX
categories. Sylvester v. Parexel Int'l LLC, ARB No. 07–123, 2011 WL 2517148, at *14–15

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(ARB May 25, 2011). The Fifth Circuit has not reconsidered the standard, but it has quoted
Sylvester’s statement that SOX’s “critical focus is on whether the employee reported
conduct that he or she reasonably believes constituted a violation of federal law.” Villanueva v.
U.S. Dep’t of Labor, 743 F.3d 103, 109 (5th Cir. 2014) (“An employee need not cite a code
section he believes was violated in his communications to his employer, but the employee’s
communications must identify the specific conduct that the employee believes to be illegal”); see
also Wallace v. Tesoro Corp., 796 F.3d 468, 479 (5th Cir. 2015). However, the Fifth Circuit has
made clear that a party is not required to plead with particularity in accordance with Rule 9(b) of
the Federal Rules of Civil Procedure. Id. at 480; FED. R. CIV. P. 9(b) (“In alleging fraud or
mistake, a party must state with particularity the circumstances constituting fraud or mistake”
under 9(b)).
Turning to the court’s “critical focus,” whether or not Plaintiff reported conduct that he
reasonably believed constituted a violation of federal law, in cases involving the sixth “catch-all”
category, the employee must reasonably believe that his or her employer acted with a mental
state embracing intent to deceive, manipulate, or defraud its shareholders. Allen, 514 F.3d at 479.
An employee’s reasonable belief must be scrutinized under both a subjective and objective
standard. Allen, 514 F.3d at 477. Additionally, an employee’s reasonable but mistaken belief that
an employer engaged in conduct that constitutes a violation of one of the six enumerated
categories is protected. Id. The objective reasonableness of an employee’s belief cannot be
decided as a matter of law if there is a genuine issue of material fact. Allen, 514 F.3d at 477.
Defendant argues that Plaintiff’s reports never specifically accused ITT of any SOX
violation, and that, because Plaintiff was unable to articulate fully his fraud claim in deposition
testimony, his claim must fail under this element. Regarding his subjective belief, Plaintiff

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responds that the movement of steel plates over ITT grounds and corresponding movement of
inventory in ITT’s computer system made him believe that fraud against the shareholders was
occurring. He consulted with Shirley who reported that he suspected manipulation in an attempt
to “cook the books.” As to the objective standard, according to the incident report, Nancy Bridy,
the ITT Controller, confirmed that the inventory had been transferred in an effort to create
absorption, and she counseled the General Manager that it was not acceptable. She also spoke
with other managers to ensure that the practice would not be repeated. Thus, other reasonable
minds believed the activity to be questionable, at the least. Plaintiff has created a genuine issue
of material fact that his fraud allegations were reasonable under both an objective and subjective
standard.
Next, Plaintiff must show that ITT knew that he had engaged in the protected activity. It
is uncontroverted that Sutter knew about Plaintiff’s protected activity after he received Plaintiff’s
email complaining about the inventory moves. However, Defendant argues that Plaintiff cannot
link Sutter’s knowledge to the actors who purportedly decided to terminate him—Vos and
Jackson. In response, Plaintiff points to an email from Vos, wherein he instructs Jackson to
“coach” Plaintiff regarding “inappropriate behavior,” including sending emails to colleagues
“bad mouthing” Amory Management. Therefore, Plaintiff alleges that Vos and Jackson knew
that Plaintiff had reported his findings to Sutter, and that the “bad mouthing” referenced the
report of fraud. Furthermore, Shirley’s complaint, although anonymous, stated that a co-worker
told the reporter about the violations. Plaintiff had spoken to Human Resources Manager, Kathy
Ray about inventory moves, and Plaintiff alleges that management could have easily inferred
who the co-worker in question was based on Ray’s knowledge. A question of fact remains as to
whether Defendant knew Plaintiff had engaged in the protected behavior. Such factual disputes

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should be reserved for the jury, for they amount to little more than credibility assessments.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986)
(“Credibility determinations, the weighing of the evidence, and the drawing of legitimate
inferences from the facts are jury functions, not those of a judge”). Thus, the Court turns to the
third element under the rubric, whether Plaintiff actually suffered materially adverse actions.
Plaintiff argues that he suffered three separate materially adverse actions. See Allen, 514
F.3d at 476 n.2 (adopting standard requiring plaintiff to show that reasonable employee would
have found challenged action materially adverse; in other words, it “well might have dissuaded a
reasonable worker from [engaging in protected activity]”) (citing Burlington Northern & Santa
Fe Railway Co. v. White, 548 U.S. 53, 67-68, 126 S. Ct. 2405, 165 L. Ed. 2d 345 (2006)). First,
Plaintiff argues that ITT relegated him to a lower position on its management chart less than
three hours after Shirley filed his complaint. Second, he alleges that he received poor
performance reviews from Jackson. Third, ITT terminated him approximately three months after
he reported the alleged fraudulent moves.
Defendant counters that the restructuring did not result in a demotion, and that it planned
Plaintiff’s termination well before Shirley and Plaintiff reported the activity. The restructuring
did not result in a change to Plaintiff’s compensation, job title, or duties, but Plaintiff alleges that
according to a corporate hierarchy chart, the restructuring placed him in an inferior position than
his previous placement. Defendant does not respond to the accusation that Plaintiff received poor
reviews, but the record is devoid of further information regarding the alleged reviews. One thing
is clear: Plaintiff was terminated approximately three months after the report was made. Thus,
for summary judgment purposes, Plaintiff has produced a prima facie case that the alleged
demotion and termination were adverse actions. See 49 U.S.C. § 42121(a)(1); 49 U.S.C. §

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42121(b)(2)(B) (Complainant must make a prima facie showing that protected behavior was
contributing factor in the unfavorable personnel action alleged in the complaint); see also
Rayborn v. Bossier Par. Sch. Bd., No. 16-30903, 2018 WL 670489, at *4 (5th Cir. Feb. 2, 2018)
(“To be the equivalent to a demotion, a transfer need not result in a decrease in pay, title, or
grade; it can be a demotion if the new position proves objectively worse—such as being less
prestigious or less interesting or providing less room for advancement.”) (quoting Thompson v.
City of Waco, 764 F.3d 500, 503 (5th Cir. 2014)). Thus, the Court moves to the final element,
whether Plaintiff has produced evidence that the protected activity was a “contributing factor” in
the “adverse action.” Allen, 514 F.3d at 476 (citing 49 U.S.C. § 42121(b)(2)(B)(iii)).
Defendant asserts that Plaintiff’s claims are not rational, because if Defendant “demoted”
Plaintiff within three hours of the report, it would not have waited three more months to fire him
if it had retaliatory motives. Defendant also alleges that Plaintiff suspected the real reason for his
termination well before he was terminated. As of September 2015, Plaintiff was aware that the
Amory facility faced economic decline, as indicated by his emails to Sutter and Vos, where he
sought alternatives to being laid off, such as cutting his hours. In his September 16 email to Vos,
he stated, “I have been laid off 3 times in my career . . . so I am very familiar with situations like
the one ITT is in now. I know the risk.” To Sutter, he wrote, “First of all I have been laid off 3
times in my career when economic times went south . . . so I am very familiar with the tendency
to cut OP Ex to save money.” However, Plaintiff alleges that the emails do not suffice as proof
that he would have been laid off. He asserts that he was actually merely seeking time to spend
with ailing family members, and posed the offer to cut hours as a compromise in order to seem
unselfish. Defendant argues that Plaintiff’s intentions do not matter, but merely his admission of
the financial strain. They also point to deposition testimony, where Plaintiff seems to blame the

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termination on the surveys that he mandated in 2014 to encourage employee morale but resulted
in frustration. Again, the dispute results in a credibility assessment requiring a jury to weigh the
pertinent facts.
Even if the Plaintiff has established the four required elements, an employer may avoid
liability if it can prove “by clear and convincing evidence” that it “would have taken the same
unfavorable personnel action in the absence of that [protected] behavior.” Allen, 514 F.3d at 476
(citing 49 U.S.C. § 42121(b)(2)(B)(iv)). Here, Defendant produces its most poignant evidence in
the form of an email from Vos, which contained a “first pass” of names included in the planned
reduction in force. Plaintiff and Shirley’s names were on the list. The email is dated September
2, 2015, five days before Plaintiff sent his emails acknowledging the economic difficulties and
approximately one month before ITT began its investigation into the inventory transfers.
Therefore, Defendant alleges that it intended to terminate Plaintiff before he reported the
inventory moves.
While Defendants’ evidence may suggest that it would have made the decision to fire
Plaintiff even if he had not reported the alleged fraud, it does not amount to “clear and
convincing” evidence as required by Allen. Id. Indeed, Defendants have not shown that the list
was definitive regarding terminations, but rather that it was a “first pass.” The
“clear and convincing” evidence standard is even more stringent than that employers face in
other employment discrimination cases. Mahony v. KeySpan Corp., No. 04 CV 554 SJ, 2007 WL
805813, at *7 (E.D.N.Y. Mar. 12, 2007). There are simply too many factual disputes for the
Court to conclude, as a matter of law, that Plaintiff would have been terminated even without the
protected activity.

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Conclusion
For the reasons stated above, a reasonable jury could find that Plaintiff engaged in
protected activity, that Defendants knew about his activity, that he suffered an adverse
employment action, and that his termination was caused by his protected activity. Further,
Defendant has not presented clear and convincing evidence that Plaintiff’s termination would
have occurred in the absence of his protected activity. Defendant’s Motion for Summary
Judgment [32] is DENIED.
SO ORDERED this the 12th day of February 2018.
/s/ Sharion Aycock
UNITED STATES DISTRICT JUDGE

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