When Congress passed the Dodd-Frank Act in 2010, it bolstered protections for whistleblowers who report certain kinds of misconduct, such as violations of securities law. At the time, the Sarbanes-Oxley Act already provided many of these whistleblowers with a cause of action for retaliation. But the new Dodd-Frank cause of action included a longer statute of limitations, a more generous damages remedy, and a right to proceed straight to federal court rather than first bringing the claim to the Department of Labor (as Sarbanes-Oxley requires).
Sarbanes-Oxley provides protection for individuals who blow the whistle internally. But courts have struggled with whether Dodd-Frank provides that same protection, or if Dodd-Frank protects only individuals who report misconduct to the Securities and Exchange Commission (SEC) directly.
Ghosts, ghouls, and ghastly liability; the last is certainly enough to spook any employer. For this Halloween, we take a trip down Elm Street to revisit the most startling nightmares we’ve ever covered.
It Came From the General Counsel’s Office. In March of this year, we told the story of an in-house attorney who won a $14.5 million verdict against his employer after he raised concerns about FCPA violations at the company. The company’s case faltered when the trial revealed that a negative review of the attorney had been backdated.
The Dodd-Frank Act, passed in 2010, includes a new cause of action for whistleblowers who claim that their employer retaliated against them for reporting wrongdoing. But it’s not yet certain whether a whistleblower who blew the whistle internally, but not to the Securities & Exchange Commission, can bring a Dodd-Frank claim. As we covered in this post, federal judges have issued conflicting decisions on this issue.
The Supreme Court is now ready to resolve this conflict. Today, the Court granted certiorari in Digital Realty Trust, Inc. v. Paul Somers, which presents the question of whether the Dodd-Frank protection extends to an internal whistleblower.
When Congress passed the Sarbanes-Oxley and Dodd-Frank Acts, it included protections for employees who blow the whistle on wrongdoing by their employers. However, those whistleblower protections don’t apply to every report of wrongdoing. Rather, they come into play only when an employee reports particular types of misconduct.
For example, in a recent decision (Erhart v. BofI Holding, Inc.), a federal court in California dismissed claims by an internal auditor (Erhart) against his employer (BofI Holding), ruling that Erhart didn’t plausibly allege that he had been engaged in the "protected activity" necessary to qualify for the whistleblower protections of those statutes.
In our last post, we discussed the case of Wiest v. Tyco, in which the Third Circuit held that an employer’s investigation of unrelated wrongdoing by an employee insulated it against the employee’s Sarbanes-Oxley whistleblower retaliation claim. Now, we tackle another piece of the Wiest decision: the court’s holding that Wiest’s protected activity did not contribute to the adverse action against him.
To establish a Sarbanes-Oxley claim, an employee must show that there was a causal connection between his or her whistleblowing and an adverse employment action. If the employee can’t show that link, then he or she can’t prevail. In the Wiest case, the court assumed that Wiest did in fact engage in protected whistleblowing activity. But it held that Wiest didn’t have evidence to show that the whistleblowing caused the employer to take action against him.
An employee who has blown the whistle on wrongdoing is not immune from discipline or termination simply because she has engaged in protected activity.
The Third Circuit’s recent decision in Wiest v. Tyco Electronics provides a good example of how an employer can terminate an employee without legal repercussions, even when it is undisputed that the employee was protected against whistleblower retaliation.
Section 1514A of the Sarbanes-Oxley Act shields a whistleblower from retaliation if he reports “conduct [that he] reasonably believes” violates certain laws, including Securities and Exchange Commission regulations. Last month, the Sixth Circuit held that the question of a whistleblower’s “reasonable belief” is a “simple factual question requiring no subset of findings that the employee had a justifiable belief as to each of the legally-defined elements of the suspected fraud.” Rhinehimer v. U.S. Bancorp Investments, Inc., No. 13-6641 (6th Cir. May 28, 2015). Based on this principle, the court affirmed a $250,000 verdict in favor of the plaintiff, Michael Rhinehimer.
According to the Court’s opinion, Rhinehimer was a financial planner for U.S. Bancorp who helped his elderly customer, Norbert Purcell, set up a trust and a brokerage account. In November 2009, Rhinehimer went on disability leave, and asked a colleague not to conduct any transactions with Purcell. The colleague didn’t follow the instructions, and instead put Purcell into investments that Rhinehimer believed were unsuitable. (Unsuitability fraud under the securities laws occurs when a broker knows or reasonably believes certain securities to be unsuitable to a client’s needs, but recommends them anyway.) Rhinehimer complained about the trades, but his superiors warned him that he should “stay out of the matter” and stop criticizing the colleague. After Rhinehimer hired a lawyer, he was placed on a performance improvement plan and fired after he failed to meet it.
After firing its head patent attorney, Steven Trzaska, L’Oreal is now under fire from Trzaska in New Jersey federal court. On April 16, 2015, Trzaska sued L’Oreal, claiming that his firing violated New Jersey’s Conscientious Employee Protection Act (“CEPA”).
In his complaint (available at Law360), Trzaska alleges that L’Oreal had a quota for its New Jersey office of 40 filed patent applications in 2014. But, Trzaska contends, an outside consultant had previously found that many of L’Oreal’s patent applications were purely cosmetic, saying that “the vast majority of its inventions were of low or poor quality.” Trzaska alleges that his superiors pressured him to file applications to meet the quota. However, he told them that “neither he nor the patent attorneys who reported to him were willing to file patent applications that the attorneys believed were not patentable.” Soon after, L’Oreal terminated him, saying that it was hiring a new “head of patents of the Americas.” Trzaska claims that this explanation was pretext and that the company in fact fired him because he refused to file applications that were not patentable.
How do Trzaska’s claims line up with CEPA?
Craig Watts, a chicken farmer from North Carolina, recently brought a whistleblower complaint against Perdue, claiming that the poultry seller retaliated against him for bringing certain animal welfare claims to light. Mr. Watts owns the farm on which the chickens are raised, but, according to the Government Accountability Project, the terms and conditions of the farm operations are strictly governed by the poultry giant. The Food Integrity Campaign (a program operated by the Government Accountability Project) filed the action on behalf of Mr. Watts, defending his right to speak out about the conditions on the farm, which Watts claims run far “afowl” of Perdue’s marketing claims of “cage-free” and “humanely-raised” chickens. After publicizing the conditions on his farm, Watts was placed on a performance improvement plan and is routinely subjected to surprise audits of his farm.
A former executive at L.A.’s Fashion Institute of Design and Merchandising is seeing red over the school’s termination of her employment, which allegedly came after she demanded more diverse branding in the school’s publications. Tamar Rosenthal filed a civil rights complaint in Los Angeles Superior Court alleging that the school, seemingly interested only in shades of white, opposed her attempts to showcase student diversity on the website and explicitly advised her not to showcase gay, black or non-white students in any school publications. According to My News LA, the complaint further alleged that Ms. Rosenthal’s supervisors created an “ultra-conservative, anti-Arab and anti-Muslim political atmosphere in the school’s front office.”
The Sarbanes-Oxley Act’s whistleblower protection provision, 18 U.S.C. § 1514A, allows a wrongfully terminated whistleblower to recover “all relief necessary to make [her] whole.” 18 U.S.C. § 1514A(c)(1). The statute then goes on to say that compensatory damages include reinstatement, back pay, and “special damages,” including expert fees and reasonable attorneys fees. In an opinion issued this week, the Fourth Circuit held that Sarbanes-Oxley damages don’t just include these enumerated damages. Rather, an employee can obtain other compensation for harm, including emotional distress damages. Jones v. SouthPeak Interactive Corp. of Delaware, Nos. 13-2399, 14-1765 (4th Cir. Jan. 26, 2015).
The plaintiff in the case, Andrea Gail Jones, was the former chief financial officer of SouthPeak, a video game manufacturer. According to the opinion, in 2009, SouthPeak wanted to buy copies of a video game for distribution, but didn’t have the cash to buy the games up front. Instead, SouthPeak’s chairman, Terry Phillips, personally fronted Nintendo over $300,000. When SouthPeak didn’t record this debt, Jones raised a stink, eventually telling the company’s outside counsel that the company was committing fraud. The same day, the company’s board fired her.
Last November, we covered the Supreme Court oral argument in the case of Department of Homeland Security v. MacLean. As a refresher, MacLean was an air marshal who was fired by the Transportation Security Administration (TSA) after he blew the whistle to MSNBC on the agency’s plan to cancel marshal missions to Las Vegas. After the argument, Prof. Steve Vladeck of American University predicted that the TSA would lose the case.
He was right. On Wednesday, the Supreme Court issued its opinion, in which it held in favor of MacLean. The TSA argued that it could fire MacLean because his disclosures were “specifically prohibited by law” in two ways: first, it had adopted regulations on sensitive security information, which applied to the information MacLean disclosed; second, a provision of the U.S. Code had authorized TSA to adopt those regulations. Chief Justice Roberts, writing for the Court, rejected both arguments.
As to the regulations, he wrote, Congress could have said that whistleblowers were not protected if their disclosures were “specifically prohibited by law, rule, or regulation,” but did not. Thus, its choice to only use the word “law” appeared to be deliberate. Further, interpreting the word “law” broadly “could defeat the purpose of the whistleblower statute,” because an agency could insulate itself from liability by promulgating a regulation that prohibited whistleblowing. And as to the argument that Congress-passed “law” prohibited the disclosure, Chief Justice Roberts wrote that the statute in question did not prohibit MacLean’s disclosures. Instead, it was the agency’s exercise of discretion, not the statute, that determined what disclosures were prohibited.
In our last post, we counted down our most popular posts of 2014, from A-Rod to Walgreen. Now it’s time to take a look at the issues in executive disputes that are likely to draw plenty of attention in 2015.
1. Dodd-Frank Bounties and Whistleblower Litigation on the Rise
In November 2014, the SEC released its annual report on its Dodd-Frank whistleblower award program. The theme of the report is that Dodd-Frank is paying off – both for the SEC and for whistleblowing employees. The SEC reported that it issued whistleblower awards to more people in its 2014 fiscal year than in all previous years combined, including a $30 million bounty to one whistleblower in a foreign country. The number of whistleblower tips received continues to increase, and we expect news of more substantial awards in 2015. Meanwhile, litigation over various Dodd-Frank issues, such as whether a whistleblower claim is subject to arbitration, whether the shield against whistleblower retaliation applies overseas, and whether a whistleblower must report to the SEC in order to bring a retaliation claim, will continue to percolate in the federal courts.
2. The Supreme Court Weighs in on Employment Issues
A couple of key Supreme Court cases will address employee rights that apply across the board, from the C-suite to the assembly line. In Young v. United Parcel Service, the Court will decide whether, and in what circumstances, the Pregnancy Discrimination Act requires an employer that accommodates non-pregnant employees with work limitations to accommodate pregnant employees who have similar limitations. And in EEOC v. Abercrombie & Fitch Stores, Inc., the Court will address whether an employer can be liable under the Civil Rights Act for refusing to hire an employee based on religion only if the employer actually knew that a religious accommodation was required based on knowledge received directly from the job applicant.
Who doesn’t love the year-end countdown? We’re here to offer you one of our own – our most-read posts in 2014 about executive disputes. The posts run the gamut from A (Alex Rodriguez) to Z, or at least to W (Walgreen). They cover subjects from sanctified (Buddhists and the Bible) to sultry (pornographic materials found in an executive’s email). Later this week, we’ll bring you a look at what to expect in 2015.
Without further ado, let the countdown begin!
8. The Basics: Dodd-Frank v. Sarbanes-Oxley
This post is an oldie but a goodie. It includes a handy PDF chart that breaks down the differences in the Dodd-Frank and Sarbanes-Oxley whistleblower laws. Each of these laws continues to be a hot-button issue for plaintiffs and employers.
7. When Employment Relationships Break Bad
America may have bidden adieu to Walter White and his pals on Breaking Bad, but employment relationships continue to spin off in some very unpleasant ways. Such was the case with Stephen Marty Ward, who ended up in federal prison after he threatened his employer with disclosure of its trade secrets, as we covered in this post.
Recently, in a government investigation by the civil division of a United States Attorney’s Office, an employee of a private company was deposed pursuant to a Civil Investigative Demand (CID). The employee, on the advice of counsel, refused to answer questions on certain topics and invoked the Fifth Amendment right against compulsory self-incrimination (she “took the Fifth” in common shorthand). Several days later, she was fired by her employer for taking the Fifth. (The employer claimed that it wanted to show cooperation with the government’s investigation and taking the Fifth is viewed as being non-cooperative.) When I recounted this story to my non-lawyer fiancée, he was outraged and wondered how could her employer do such a thing? Wasn’t this retaliation? Didn’t she have a clear wrongful termination claim against her employer? Good questions. While most, if not all, states (and the federal government) have enacted provisions to protect employees who blow the whistle on illegal activity from retaliatory discharge, is there any protection from discharge for an employee of a private company who chooses to keep mum to protect herself?
The short answer is no.
In our Bill of Rights, No. 5, it is written that “[n]o person … shall be compelled in any criminal case to be a witness against himself.” Although the text limits the right to stay silent in a criminal case, it is generally accepted that a witness may assert the right in any context in which the witness fears his/her statements may later be used against him/her. Thus, as an American I have the right to refuse to answer questions or offer information which I fear could incriminate me. [A full discussion of the scope of Fifth Amendment protection is beyond the scope of this post. To learn more about the Fifth Amendment protections against self-incrimination, I refer the reader to The Privilege of Silence, authored by my fellow Zuckerman Spaeder attorneys Steven M. Salky and Paul B. Hynes and available here.]
A whistleblower generally shouldn’t break the law in order to prove his claims. Indeed, the Whistleblowers Protection Blog says that this is a “basic rule,” and cautions that an employee who breaks the law while whistleblowing in order to get evidence will suffer from attacks on his credibility and may even be referred for criminal prosecution. However, the parameters of this rule aren’t always so easy to follow, as the Supreme Court heard last week in the case of Department of Homeland Security v. MacLean.
The MacLean case arose from a warning and text message. In July 2003, the Transportation Security Administration (TSA) warned MacLean, a former air marshal, and his colleagues about a potential plot to hijack U.S. airliners. Soon after, however, the TSA sent the marshals an unencrypted text message, canceling all missions on overnight flights from Las Vegas. MacLean was concerned about this reduction in security, and eventually told MSNBC about it. The TSA then issued an order stating that the text message was sensitive security information (SSI). When it found out that MacLean was the one who disclosed the message to MSNBC, it fired him.
MacLean didn’t take this while reclining; he challenged his dismissal before the Merit Systems Protection Board. But he lost. The Board decided that TSA didn’t violate the federal Whistleblower Protection Act by firing MacLean for his disclosure, because MacLean’s disclosure violated a TSA regulation that prohibited employees from publicly disclosing SSI.
On September 22, the Securities and Exchange Commission announced its largest award to date under its whistleblower program: $30 million. The SEC said that the whistleblower, who lives in a foreign country, came to it with valuable information about a “difficult to detect” fraud.
In the order determining the award (which is heavily redacted to protect the identity of the whistleblower), the SEC commented that the claimant’s “delay in reporting the violations” was “unreasonable.” In arguing for a higher bounty, the claimant contended that he or she was “uncertain whether the Commission would in fact take action.” This argument, however, didn’t support a “lengthy reporting delay while investors continued to suffer losses.”
Taiwan and Manhattan’s Foley Square are separated by 7,874 miles, and Taiwanese citizen Meng-Lin Liu couldn’t bridge the distance in federal court. Liu sought to recover in Manhattan under the Dodd-Frank Act’s anti-retaliation provision (15 U.S.C. § 78u‐6(h)(1)). However, on August 14, the Second Circuit, which sits in Foley Square, affirmed the dismissal of his whistleblower retaliation claim. Liu v. Siemens AG, No. 13-4385-cv (2d Cir. Aug. 14, 2014).
As we previously described here, Liu’s case was relatively simple. He alleged that he repeatedly told his superiors at Siemens in Asia, and the public, that Siemens was violating the Foreign Corrupt Practices Act (FCPA). As a result, he claimed, Siemens demoted him, stripped him of his responsibilities, and eventually fired him with three months left on his contract.
Talk about your inter-family disputes: one federal agency – the Department of Labor – has filed suit against the United States Postal Service, an independent federal agency (but one of the few explicitly authorized by the Constitution). The reason for the federal lawsuit, filed in Missouri: the Postal Service’s alleged poor treatment, firing, and alleged harassment of an employee who claims he blew the whistle on safety hazards in a mail facility.
Here’s the background, delivered despite any contrary weather: Thomas Purviance worked for the Postal Service for 35 years, most recently as a maintenance supervisor at a mail distribution center near St. Louis. He had no record of disciplinary or performance issues. In late December 2009, Purviance complained to his supervisors about what he perceived to be carbon monoxide and fuel oil leaks from some of the equipment at the center, as well as a pile of oil-soaked rags which he thought was a safety hazard. Getting no response, Purviance eventually called the local fire marshal and made a 911 call to report the carbon monoxide leak.
The Securities & Exchange Commission gained significant new enforcement powers in the Dodd-Frank Act of 2010. Under the Act, the SEC can award bounties to whistleblowers who provide information leading to successful enforcement actions. It has already exercised this power, making eight whistleblower awards since starting its whistleblower program in late 2011. The Dodd-Frank Act also allows the SEC to sue an employer who retaliates against a whistleblower, but the SEC hasn’t previously taken that step.
Ten days ago, that changed. The SEC announced that it had charged Paradigm Capital Management and owner Candace King Weir with engaging in prohibited trades and retaliating against a head trader who reported the trades to the SEC, and that Paradigm and Weir had settled the charges for $2.2 million. Without its new enforcement authority under Dodd-Frank, the SEC wouldn’t have been able to bring the retaliation charge.
According to the SEC’s press release, Paradigm “removed [the whistleblower] from his head trader position, tasked him with investigating the very conduct he reported to the SEC, changed his job function from head trader to a full-time compliance assistant, stripped him of his supervisory responsibilities, and otherwise marginalized him.”
The formal order issued by the SEC further describes what happened to the whistleblower. The day after the trader told Paradigm that he had reported these particular trades to the SEC, Paradigm removed him from his position. The trader and Paradigm tried to negotiate a severance package, but when that fell through, Paradigm brought him back to investigate trades and work on compliance policies – but not to resume his head trading responsibilities.
We cover a broad range of issues that arise in employment disputes. Occasionally, we also spotlight other topics of relevant legal interest, ranging from health care to white-collar defense to sports, just to keep things interesting.
Led by Jason Knott and Andrew Goldfarb, and featuring attorneys with deep knowledge and expertise in their fields, Suits by Suits seeks to engage its readers on these relevant and often complicated topics. Comments and special requests are welcome and invited. Before reading, please view the disclaimer.