A Transformative Year In Whistleblowing & Retaliation
Written By Steven J. Pearlman
2013 was a transformative year in the whistleblower world, as the stakes rose while two prominent whistleblower laws— Section 806 of the Sarbanes-Oxley Act (SOX) and Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)—took shape. Some of the key whistleblower events that occurred this year include the following: the Securities and Exchange Commission (SEC) issued a bounty exceeding $14,000,000; the Supreme Court heard argument in the first SOX whistleblower case to reach that level; a circuit split deepened regarding the scope of protected activity under SOX, which means that issue, too, could ascend to the Supreme Court; and the Occupational Safety and Health Administration (OSHA) issued awards exceeding $1,000,000 in whistleblower cases.
These events are clear and unmistakable signs of things to come for employers in 2014 and beyond. Employees across industries have gained a greater awareness of their rights and potential remedies under myriad whistleblower laws as a result of a variety of factors, such as the SEC’s effective efforts to publicize its whistleblower bounty program and media focus on international whistleblower matters. Employees received further encouragement from a range of judicial and administrative awards, substantial settlements and other relief. And the plaintiffs’ bar, which has grown in sophistication in this space as the stakes have risen, smells blood in the water.
DODD-FRANK GAME-CHANGERS
A. Whistleblower Retaliation
Although the Dodd-Frank whistleblower protection provision is still fairly new, having been enacted in 2010, it took shape in 2013 in the following ways:
First, 2013 saw numerous judicial battles over the scope of protected activity under the Dodd-Frank anti-retaliation provision. Multiple district courts ruled that to qualify for protection under that provision, an individual need not report directly to the SEC. However, this year, the first federal circuit court to tackle this issue departed from that approach. Specifically, on July 17, 2013, the Fifth Circuit ruled that an individual must complain to the SEC to be protected under the Dodd-Frank whistleblower retaliation provision. Following that decision, though, another district court reached the contrary conclusion. It is likely that this issue will percolate up to another federal circuit court, with a potential circuit split looming in 2014. The Supreme Court thus could be called upon to resolve this dispute sometime soon.
This debate led to the question of whether a narrow interpretation of the Dodd-Frank anti-retaliation provision is appropriate as a matter of policy. The plaintiffs’ bar maintains that employers have fervently argued that Dodd-Frank, principally through its bounty provision, has the undesirable effect of encouraging employees to bypass internal compliance channels, and a narrow interpretation requiring a report to the SEC will have the effect of heightening the likelihood that employees will not use internal compliance channels. In other words, they submit, the Fifth Circuit’s approach leaves individuals who only report internally without a remedy. Much to the contrary, however, Section 806 of SOX provides the whistleblower who purports to have been retaliated against for reporting a securities violation internally with a robust remedy. Accordingly, one reasonably may conclude that this is not a realistic concern.
Second, this year, the Chief of the SEC Office of the Whistleblower made clear that the SEC believes it has the authority to pursue a whistleblower retaliation claim under Dodd-Frank, and that it is apt to do so. To illustrate, in a September 24, 2013 interview with the Wall Street Journal Risk and Compliance Journal, he said:
We are actively looking for ways to be proactive in pursuing, under appropriate circumstances, a retaliation claim, either as an add-on to an instance where there was substance to the underlying report, but also if we are given evidence that a person reported to us in good faith and it turned out that they were wrong, but they had reason to believe that what they reported to us was true and the company took unfortunate employment action just because they reported to us.
Litigating an employment retaliation claim against the SEC is sure to be a unique challenge, the specter of which will catch the attention of employers (as well as both sides of the bar).
Third, in 2013, a federal district court erected a high barrier to the extraterritorial application of the anti-retaliation provision. Specifically, on October 21, 2013, the Southern District of New York ruled in Liu v. Siemens A.G. that Dodd-Frank has no extraterritorial application. It added that a complaint regarding a violation of the Foreign Corrupt Practices Act (FCPA) does not amount to protected activity under Section 806 of SOX. These rulings are a boon to employers faced with whistleblower complaints by individuals located overseas, many of which often involve allegations of bribery of foreign officials.
Lastly, on November 12, 2013, the Northern District of Georgia ruled in Pruett v. BlueLinx Holdings, Inc. that Dodd-Frank whistleblowers are not entitled to a jury trial or punitive damages. This first-impression decision is likely to impact the valuation of Dodd-Frank whistleblower claims. Employers are likely to capitalize on it in the litigation and settlement contexts, as it eliminates the inherent risks attendant to a jury trial. It remains to be seen whether this decision will have the effect of encouraging whistleblowers to pursue their claims before the U.S. Department of Labor (DOL) rather than in federal court.
B. Bounties
Who can forget the 1980’s catchphrase “where’s the beef”? Many were asking that question when evaluating the DoddFrank bounty program … until September 30, 2013, that is. On that date, the SEC issued a bounty exceeding $14,000,000 to a tipster who provided details that led to a substantial recovery of investments in an enforcement action. Prior to that, the SEC’s awards were fairly modest: in August 2012, an award of approximately $50,000 was issued; and in August and September of 2013, the SEC gave awards in the neighborhood of$125,000.
It is plausible this award will engender an influx of tips, as it exposes the enormity of the potentially available whistleblower jackpot. Query whether this will lead to a “lottery” dynamic, and consider how such a dynamic could drain the SEC’s resources and compromise the effectiveness of the bounty program.
The expected implications of the September 30, 2013 award are not reflected in the SEC November 15, 2013 Annual Report on the Dodd-Frank Whistleblower Program to Congress (Annual Report). Instead, that report shows an 8% rise in tips originating from all over the globe. Though the Annual Report provides a number of categories into which complaints have fallen, a significant number of the tips are categorized by the SEC as “other,” which makes it difficult to determine their nature.
A major concern remains in 2013 and beyond: the bounty program still encourages employees to bypass internal corporate compliance channels. Such circumvention is problematic, as it could cause investigations to become delayed, which could lead to the loss of evidence and the maturity of fraudulent schemes. Though the SEC indicated that it will favorably consider internal reporting when fashioning awards (by statute, the SEC may exercise discretion to give the complainant a cut of 10% to 30% of its recovery), the orders reflecting the awards issued thus far do not indicate whether the recipients reported internally, nor does the Annual Report. Thus, it is a must that employers take concerted steps to heighten the likelihood that employees will report internally.
SOX WHISTLEBLOWER LANDSCAPE
SOX whistleblower litigation continues to proliferate in the wake of employee-friendly decisions rendered by the Administrative Review Board (ARB) of the DOL under the Obama Administration. The following highlights key events that profoundly impacted the SOX whistleblower landscape.
A. OSHA’s Shot Across The Bow
Some find it surprising that OSHA investigates claims under and enforces over 20 whistleblower laws, including SOX. In 2013, OSHA sent a loud and clear message that it will vigorously enforce these laws in the face of perceived violations.
Specifically, on September 30, 2013, OSHA awarded more than $1.9 million to a company’s former CFO based on its finding that the company violated Section 806 of SOX by discharging the CFO in retaliation for his warning the board of directors about financial concerns raised by a proposed merger. OSHA ordered the company to: pay the complainant more than $486,000 in lost wages, bonuses, stock options and severance pay; pay over $1.4 million in compensatory damages for pain and suffering, damage to career and professional reputation, and lost 401(k) employer matches and expenses; post OSHA’s findings in a Form 8-K submission to the SEC; and pay reasonable attorney’s fees. Consider how OSHA’s compensatory damage award nearly dwarfs the lost wages and query whether OSHA is authorized to require a company to include particular items in its SEC filings.
Then, on November 13, 2013, in a matter arising under the whistleblower protection provision in a similar whistleblower law, the Surface Transportation Assistance Act, OSHA ordered a company to pay a total of $1,070,123 to four whistleblowers, and to reinstate the whistleblowers.
OSHA’s orders are issued before an employer has an opportunity to participate in a full evidentiary hearing and confront its accuser in a meaningful way. Though OSHA determinations technically qualify as “preliminary orders,” their import cannot be discounted, as the DOL regularly makes substantial efforts to enforce them, and they embolden whistleblowers to pursue their claims. In short, it is imperative that employers approach claims before OSHA with a high degree of diligence and caution.
B. A Circuit Split Deepened Over The Scope Of Protected Activity
The ARB issued a decision back on May 25, 2011, in Sylvester v. Parexel International LLC, expansively interpreting the scope of protected activity under SOX. That decision is at odds with decisions issued by a number of federal circuit courts of appeal. A circuit split has widened in the wake of that decision. Indeed, on March 19, 2013, in Wiest v. Lynch, the Third Circuit Court of Appeals gave Chevron deference to the ARB’s interpretation of “protected activity” under SOX, concluding that a whistleblower’s complaint need not “definitively and specifically” relate to one of the categories of misconduct set forth in Section 806.
That decision is at odds with decisions issued by the First, Fifth, Sixth and Ninth Circuits, and employers are concerned that it may open the floodgates to claims that bear a highly attenuated relationship to the categories of fraud listed in Section 806. Moreover, given this circuit split, it may be just a matter of time before the matter ascends to the Supreme Court.
C. A SOX Whistleblower Case Finally Reaches The Supreme Court
On November 12, 2013, the Supreme Court heard oral argument in the first whistleblower case to reach this tribunal, Lawson v. FMR LLC. The issue before the Court is whether the whistleblower protection in Section 806 extends to employees of a publicly traded company’s contractors. If the Court sides with the employees’ position, the employees of millions of private companies that are contractors to public companies may have new causes of action. This decision also raises the question of the extent to which the Supreme Court will give deference to the ARB, as it addresses a conflict between a decision from the First Circuit favoring the employer position and a decision from the ARB to the contrary.
During oral argument before the Court, several of the Justices questioned the propriety of the application of the statute to small “mom-and-pop”-type private employers, perhaps suggesting the Court disagrees with the expansive approach advocated by the petitioners (employees) and the ARB. Notably, the government conceded during the oral argument that, at a minimum, only employees of contractors engaged in work connected with the public company could bring a claim under Section 806. The petitioners’ counsel, however, refused to agree to a limiting principle.
When considering the Court’s approach to retaliation claims, it is worth noting that, on June 24, 2013, the Court issued a highly favorable ruling for employers in a case arising under Title VII of the Civil Rights Act of 1964. Specifically, the Court adopted a “but-for” causation standard for Title VII retaliation claims. The Court rejected, by a vote of 5 to 4, a decision of the Fifth Circuit applying a less burdensome standard, i.e., that a plaintiff only need show that retaliation was one “motivating factor,” among others, that resulted in the adverse action.
In so ruling, the Court stressed that:
Claims of retaliation are being made with ever-increasing frequency. The number of these claims filed with the Equal Employment Opportunity Commission (EEOC) has nearly doubled in the past 15 years—from just over 16,000 in 1997 to over 31,000 in 2012. … Indeed, the number of retaliation claims filed with the EEOC has now outstripped those for every type of status-based discrimination except race. … In addition, lessening the causation standard could also contribute to the filing of frivolous claims, which would siphon resources from efforts by employer, administrative agencies, and courts to combat workplace harassment.
This language reflects the Court’s recognition that retaliation claims are being filed (albeit outside of the whistleblower context) at an exceptional rate, and a strict causation standard serves the necessary purpose of weeding out questionable claims. Although SOX employs a “contributing factor” causation standard that is less demanding than the “but for” standard the Court adopted for the Title VII context, the issue of causation is not presently before the Court. Still, employers can take some degree of comfort in noting that the Court has recently expressed its awareness of the rather extreme use of the retaliation sword.
Conclusion
These events may be the tip of the iceberg, as whistleblower lawsuits are proliferating at an alarming rate in courts around the country and before the DOL. As the rate of whistleblower claims continues to grow, corporations can expect to see a corresponding increase in government and public scrutiny on their compliance functions, as well as their employment practices. This will be exacerbated by significant judgments, settlements and government actions and investigations.
In addition, we can expect to see a spike in tips to the SEC over the next year, and a growth in law firms focused on pursuing whistleblower awards, given the recent $14,000,000 bounty. It’s also just a matter of time before we see employment retaliation litigation initiated by the SEC.
Thus, it is imperative that companies modernize their compliance programs. “Blocking and tackling” includes such basics as: creating incentives for employees to report internally; implementing whistleblower specific training for employees; and promulgating robust whistleblower protection policies and protocols and develop whistleblower protocols. Employers also need to focus on the tone at the middle, as well as the tone at the top, in developing a culture of compliance. For these steps to be effective, employers should approach matters with the mindset that whistleblowers are potentially valuable assets who can provide unique insight into fraudulent schemes rather than opportunistic and/or disgruntled employees with an axe to grind. This perspective encourages positive treatment of whistleblowers, which minimizes the risk of retaliation claims while garnering information and data that enables companies to ferret out fraud. Employers who use it have seen that it also serves to smoke out frivolous claims.
EXPERT BIO
Steven Pearlman is a partner in Proskauer’s Labor & Employment Law Department and co-head of the firm’s Whistleblowing & Retaliation Group.
