Wednesday, April 2, 2008

Ohio court finds no public policy for opposing corporate accounting irregularities


One would think that in our post-Enron corporate environment, employees, even in non-public companies, would be free to oppose corporate accounting irregularities without fear of termination. Yet, in Schwenke v. Wayne-Dalton Corp., the Lorain County (Ohio) Court of Appeals ruled that an employee claiming he was terminated for that very reason had no claim.

Ronald Schwenke was the controller for Wayne-Dalton Corp., a privately held manufacturer of garage doors headquartered in Mt. Hope, Ohio. During Schwenke's employment he complained about certain inappropriate accounting procedures engaged in by Wayne-Dalton's President and its CFO, in addition to what he perceived as the misappropriation of corporate assets. His complaints fells on deaf ears, and he was simply told to "make it work," perform his duties as controller, and not question how the business was operated. When he refused to "make it work" he was fired. Schwenke claimed that his termination was in retaliation for his complaints, and that it violated Ohio's public policy against firing employees in retaliation for reporting inappropriate accounting procedures or misappropriation of corporate assets.

Schwenke did not claim protection under Ohio's whistleblower statute because he failed to follow the statute's very specific reporting requirements that one must follow to qualify as a protected whistleblower. Instead, he claimed there is "a public policy in support of not firing an employee, such as appellee, in retaliation for reporting inappropriate accounting procedures or misappropriation of corporate assets." The court of appeals disagreed:

[W]e find that appellee has failed to identify any source of public policy as the basis for his claims. Appellee ... did not identify any constitution, statute or regulation that might provide a basis for his claims. Nor did appellee cite or present the trial court with any legal authority in support of his argument that his termination violated public policy.

In other words, Schwenke lost not because a public policy does not exist, but because he failed to articulate one. I wonder if the result would have been different if Schwenke simply articulated the Sarbanes-Oxley Act, which establishes accountability standards for publicly traded companies, as the public policy supporting his claim.

The concurring opinion, however, goes further, and suggests that there is no public policy sufficient for protection:

Appellee has failed to identify any source of public policy as the basis for his claims. I believe Appellee's best argument is the fiduciary duty which exists between a corporation and its directors and its shareholders warrants recognition as a public policy exception to the at-will employment doctrine. I know of no case law, nor has Appellee identified any, which has recognized the breach of that fiduciary duty rises to the level of a matter of public policy. The fact no such case law exists does not preclude this Court from recognizing, and thereby creating, new common law. While the facts of this case suggest doing so may be equitable, I join my colleagues in refusing to do so....

While I agree the corporate management practices found to exist by the jury in this case demonstrate a breach of the fiduciary duty to the corporation's shareholders ... I do not feel such rises to the level of a great societal wrong. This case brought to mind the Enron scandal. Unlike Enron, no corporate officer or board of directors' member of Wayne-Dalton has been alleged, much less shown, to have committed a criminal offense. Unlike Enron, Wayne-Dalton is not involved in the supply of public utilities. Unlike Enron, Wayne-Dalton's corporate management practices cannot be said to have any impact on the general public health and safety. Wayne-Dalton "wrongs" as found by the jury are not "societal" in nature.

The Enron analogy is fallacious. Enron was a publicly traded company. If Wayne-Dalton was a public company, Schwenke could have had a statutory whistleblower claim under Sarbanes-Oxley. The existence of that statutory remedy, however, would most likely nullify his public policy wrongful discharge claim, under the holding of Leininger v. Pioneer National Latex.

Nevertheless, the Schwenke case sends the wrong message to Ohio's privately held companies -- that they can terminate corporate watchdogs without fear of retaliation liability. Employees have to be free to oppose corporate accounting irregularities, even in non-public companies. Sarbanes-Oxley should provide a sufficient public policy to support these claims against non-public companies. I hope it does in the next case of this ilk.

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