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Employee of Delaware corporation can bring whistleblower suit

R.I. Supreme Court reinstates complaint

The Rhode Island Supreme Court has reversed a Superior Court judge’s decision to dismiss a claim brought under the Rhode Island Whistleblowers’ Protection Act by a plaintiff employee of a defendant Delaware corporation doing business in Rhode Island.

The court concluded that the plaintiff’s complaint sufficiently pleaded a Whistleblowers’ Protection Act claim: The plaintiff reasonably believed that the defendants violated the Rhode Island Business Corporation Act, and the plaintiff complained to his supervisors of the alleged violations and was subsequently terminated, which the plaintiff alleged was causally related to his whistleblowing conduct.

The 15-page decision is Rein v. ESS Group, Inc., et al.

‘Reasonable belief’?

The employee was represented by Gina A. DiCenso of North Kingstown and Cranston attorneys V. Edward Formisano and Michael D. Pushee. William R. Grimm and Ryan M. Gainor, both of Providence, appeared for the defendant corporation.

Andrew W. Berg of East Greenwich, who was not involved in the case, said the decision leaves it up to a jury to determine whether the employee’s suspicion of law-breaking by the corporation was based on a “reasonable belief,” as required by the Whistleblowers’ Protection Act, G.L. §28-50-3.

“The court recognized the reality of the situation that most employees who suspect wrongdoing don’t have the knowledge or expertise to conduct a thorough legal analysis before complaining about it,” Berg said.

“The standard is not what a reasonable attorney would do,” he added.

The fact that the plaintiff held a high-level position — senior consultant and senior project manager — did not preclude him from getting his whistleblower claim before a jury even though his belief that the corporation was governed by the Business Corporation Act rather than Delaware law turned out to be incorrect.

“The reasonableness of the whistleblowing conduct must be determined as of the time the events are going on, not in hindsight,” Berg stated. “The question for the jury is what’s reasonable, whether for a low-level employee or a corporate officer.”

Termination

The plaintiff, Christopher G. Rein, began working for defendant ESS Group in 2007 as a senior consultant and senior project manager. Previously, he had worked for ESS’s predecessor, Environmental Science Services, for approximately 13 years.

A shareholder agreement resulted in the plaintiff owning 5,000 shares of stock.

In his complaint, Rein alleged that, in 2013, he became concerned about the use of ESS’s assets and funds by co-defendant Charles J. Natale Jr., who was the president and chief executive officer.

On Dec. 11, 2014, Natale and the plaintiff met to discuss matters related to ESS’s year-end. Thereafter, Natale gave the defendant the minutes of the meeting, which Natale characterized as an ESS shareholder meeting.

The plaintiff alleged, however, that his Dec. 11 meeting with Natale was not a shareholder meeting because it was not conducted pursuant to ESS’s corporate bylaws or the provision of the Rhode Island Business Corporation Act pertaining to shareholder meetings, G.L. §7-1.2-701.

The plaintiff further claimed that the minutes falsely represented that certain topics were discussed and voted on at the purported shareholder meeting. He alleged that he also asked for and was denied permission to review ESS’s books and records.

On May 27, 2015, the plaintiff was terminated from his position as senior vice president. He alleged that he was fired due to his complaints to his supervisors, including Natale, that the defendants had violated state and municipal laws.

After his termination, the plaintiff initiated a shareholder derivative action against the defendants in Delaware, where ESS is incorporated. That action was dismissed on July 27, 2015.

On Oct. 23, 2015, the plaintiff filed a two-count complaint in Rhode Island Superior Court, alleging that the defendants had violated the Whistleblowers’ Protection Act and the Business Corporation Act. Judge Richard A. Licht dismissed both counts of the complaint.

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“The court recognized the reality of the situation that most employees who suspect wrongdoing don’t have the knowledge or expertise to conduct a thorough legal analysis before complaining about it.”

— Andrew W. Berg, East Greenwich, Rhode Island

‘Internal affairs’

The plaintiff claimed that the defendants violated the BCA by improperly conducting the shareholder meeting and by not allowing the plaintiff to examine ESS’s financial records.

He argued that ESS, despite being incorporated in Delaware, was subject to the BCA because §7-1.2-1402 provides that “[a] foreign corporation which has received a certificate of authority under this chapter … except as otherwise provided in this chapter, is subject to the same duties, restrictions, penalties, and liabilities now or subsequently imposed upon a domestic corporation of like character.”

The Supreme Court pointed out, however, that §7-1.2-1401(a), which governs the admission of foreign corporations to transact business in Rhode Island, provides that “nothing contained in this chapter authorizes this state to regulate the organization or the internal affairs of the corporation.”

Therefore, the court found that, although §7-1.2-1402 states that a foreign corporation is subject to the same duties as domestic corporations “except as otherwise provided[,]” §7-1.2-1401(a) expressly provides that Rhode Island is not authorized to regulate the internal affairs of a foreign corporation.

“[W]e are convinced, as was the hearing justice, that defendants’ alleged violations of the BCA qualify as ‘internal affairs,’ which Rhode Island is unauthorized to regulate,” Chief Justice Paul A. Suttell wrote for the court.

“This Court is of the opinion that the manner in which a corporation conducts its shareholders meetings, §7-1.2-701, and the processes by which shareholders and others exercise their right to review a corporation’s books and records, §7-1.2-1502, qualify as ‘matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders,’” Suttell added.

Therefore, the court concluded that ESS’s alleged BCA violations were “internal affairs” that Rhode Island had no authority to regulate.

WPA claim

The plaintiff asserted that his WPA count was nevertheless viable.

“From our review of the four corners of the complaint, Rein sufficiently alleged that defendants violated the BCA by refusing to allow him to review ESS’s records and by failing to conduct the shareholders meeting in accordance with the BCA,” Suttell said.

The court also found that the plaintiff adequately alleged that he complained of violations of “state and/or municipal laws and/or regulations” and, as a result, was terminated from his position.

Despite the court’s holding that the defendants were not subject to the BCA, the plaintiff maintained that for there to be a viable claim under the WPA, he need not prove that an actual violation of a law, such as the BCA, occurred, only that he reasonably believed that a violation occurred.

The Supreme Court determined that the plaintiff’s belief that the defendants were subject to the BCA could be found by a factfinder to have been reasonable.

“Such a determination, however, is more appropriately assigned to a jury,” Suttell stated.

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