Federal Court Compels Arbitration of Dodd-Frank Whistleblower Claim

In a recent decision, the U.S. District Court for the Western District of Wisconsin held that Dodd-Frank whistleblower claims (Section 922 claims) are subject to mandatory arbitration.  Wussow v. Bruker Corp., No. 16-CV-444-WMC, 2017 WL 2805016 (W.D. Wis. June 28, 2017).

In Wussow, upon his hire, the plaintiff executed an arbitration agreement in which he “agree[d] that any and all controversies, claims, or disputes with anyone . . . arising out of, relating to, or resulting from [his] employment with the Company or the termination of [his] employment with the Company . . . shall be subject to binding arbitration.”  Id. at *2.  The plaintiff alleged that he discovered that certain company employees were engaging in improper and possibly fraudulent revenue recognition practices that potentially violated company policy, SEC rules, and federal law.  After he reported this conduct, he alleged that the company and the individual supervisory defendants retaliated against him by stripping him of critical job functions and, ultimately, by terminating his employment.  Wussow filed claims under the Sarbanes-Oxley Act (“SOX”) and the Dodd-Frank Act, 15 U.S.C. § 78u-6, alleging that the defendants retaliated against him for engaging in the protected whistleblowing activity.

The court noted, and the defendants admitted, that the arbitration agreement could not be enforced as to plaintiff’s SOX claim because the Dodd-Frank Act’s amendments to SOX state that “[n]o predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.”  18 U.S.C. § 1514A(e)(2).  The court pointed out, however, that “[i]ronically enough . . . a similar cause of action for whistleblower retaliation under Dodd-Frank (15 U.S.C. § 78u-6(h)(1)) includes no express anti-arbitration provision.”  Wussow, 2017 WL 2805016 at *1 (emphasis in original).

Notwithstanding the absence of any anti-arbitration provision in Dodd-Frank itself, Wussow argued that his Dodd-Frank claim, like his SOX claim, was exempt from his arbitration agreement because it too “arises under” SOX.  The court rejected that argument and held that the plaintiff was required to arbitrate his Dodd-Frank retaliation claim.

The Wussow court is not the first court to address this issue.  Indeed, the Third Circuit Court of Appeals is among the courts to have held that mandatory arbitration clauses are enforceable with respect to whistleblower retaliation claims arising under the Dodd-Frank Act.  See Khazin v. TD Ameritrade Holding Corp., 773 F.3d 488, 495 (3d Cir. 2014).

E.D. Pennsylvania Dismisses Dodd-Frank Whistleblower Claim After Plaintiff Fails to Qualify as a Whistleblower

On July 6, 2017, the U.S. District Court for the Eastern District of Pennsylvania dismissed a whistleblower claim after determining that the plaintiff did not qualify as a whistleblower under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Reyher v. Grant Thornton, LLP, No. 16-1757 (E.D. Pa. July 6, 2017).

Background

The plaintiff, Ann Marie Reyher, is a Certified Public Accountant that was hired as a Managing Director in Grant Thornton’s Philadelphia office. Reyher allegedly discovered accounting irregularities within the statements and filings of certain Grant Thornton clients and complained internally to Grant Thornton administrators that such irregularities “amounted to bank fraud, mail fraud, wire fraud, and/or fraud against shareholders.”  Notably, none of the clients implicated in Reyher’s allegations were publicly traded companies.  After seven weeks, Reyher was terminated by the organization.  Reyher alleged that the termination was retaliation for her internal complaints about the accounting irregularities and her refusal to participate in such activities, in violation of section 922 of Dodd-Frank.

Decision

The Eastern District of Pennsylvania dismissed Reyher’s Dodd-Frank whistleblower claim with prejudice, as Reyher did not qualify as a whistleblower. Section 922 of Dodd-Frank lists the different types of whistleblower disclosures that are protected, one being those protected under the Sarbanes-Oxley Act of 2002 (“SOX”). Reyher alleged that her complaints were protected under SOX, specifically 18 U.S.C. § 1514A, titled “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.”

However, Reyher’s complaints only involved non-publicly traded entities (partnerships, S corporations, private corporations, individuals, etc.). She failed to allege that there was any connection between Grant Thornton’s work for their publicly traded company clients and her internal complaints.  While Reyher argued that § 1514A applied because Grant Thornton was a contractor to other publicly traded companies, the court explained that “a purported whistleblower employed by a private company cannot invoke the protections of § 1514A simply because her employer happens to contract with public companies on matters unrelated to the whistleblowing” and that “the connection between Grant Thornton and its public company clients is little more than a coincidence.”

The remaining state law claims were then dismissed without prejudice.

Implications

The decision aligns with a Gibney v. Evolution Marketing Research, LLC, another case in the Eastern District of Pennsylvania that refused to extend the scope of SOX to scenarios where the reported fraud is tangentially related to a publicly traded company.  25 F. Supp. 3d 741 (E.D. Pa. 2014).  Also notable is that the court refused address the question of whether an employee who only reports violations internally may qualify as a whisteblower under Dodd-Frank.  There is currently a circuit split on this issue and the Third Circuit has not yet addressed this question.

U.S. Supreme Court To Review Scope Of “Whistleblower” Under Dodd-Frank

On June 26, 2017, the U.S. Supreme Court agreed to review whether individuals who do not report alleged securities law violations to the U.S. Securities and Exchange Commission are “whistleblowers” protected by the anti-retaliation provision of the Dodd-Frank Act. Somers v. Digital Realty Trust, Inc., 850 F.3d 1045 (9th Cir. 2017), cert. granted, No. 16-1276 (U.S. June 26, 2017).

As previously reported here and here, the Ninth Circuit in Somers held that Dodd-Frank’s anti-retaliation provision extends to individuals who make internal complaints even if they do not complain to the SEC. The Ninth Circuit joined the Second Circuit that similarly held in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015) that a Dodd-Frank “whistleblower” need not report an alleged unlawful violation to the SEC. This is in direct contrast to the Fifth Circuit’s decision in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013) that reached the opposite conclusion. On April 25, 2017, Digital Realty Trust requested the U.S. Supreme Court’s review of the Somers decision, and several organizations and national associations filed amicus curiae briefs urging the Court to grant certiorari. Represented by Proskauer, the Chamber of Commerce of the United States of America submitted its amicus brief in support of review on May 25, 2017.

Having passed on the opportunity to address this issue in Verble v. Morgan Stanley Smith Barney, LLC., No. 16-946 (6th Cir. 2017), the U.S. Supreme Court has now decided to resolve this important question.

N.D. Illinois Dismisses Dodd-Frank Whistleblower Claim For Lack Of Complaint To The SEC

On June 7, 2017, the U.S. District Court for the Northern District of Illinois dismissed a whistleblower retaliation claim under the Dodd-Frank Act because the plaintiff failed to report his complaint of alleged securities violations to the SEC. Martensen v. Chicago Stock Exchange, Case No. 17-cv-1494 (N.D. Ill.) (Shadur, J.)

Plaintiff worked as a supervisor at the Chicago Stock Exchange’s Market Regulation Trading Examinations Unit. He alleged that his employment was terminated in violation of Dodd-Frank’s whistleblower protection provision after he complained to his superiors regarding alleged securities violations.

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Jury Rejects Whistleblower Claim By Former SpaceX Employee

On June 7, 2017, a California jury returned a 9-3 verdict, dismissing whistleblower claims brought by a former Space Exploration Technologies Corporation (“SpaceX”) employee.  Jason Blasdell v. Space Exploration Technologies Corp. et al., Case No. BC 615112 (Cal. Super., LA County).

Jason Blasdell, who was employed as an Avionics Test Technician by SpaceX, a space transport company whose clients include NASA, commenced a lawsuit in April 2016 in the Superior Court of the State of California, alleging that he was improperly fired after informing company officials, including CEO Elon Musk, that his managers pressured technicians to deviate from written test procedures and to sign off on testing that had not been performed on rocket parts as written protocols required.  According to Blasdell, this violated 18 U.S.C. § 38, which prohibits fraud against a customer involving aircraft or space vehicle parts.  Blasdell’s complaint alleged causes of action for wrongful termination in violation of public policy, violation of the California Whistleblower Protection Act, Cal. Labor Code §1102.5, and defamation.

At the close of an eight day trial, the company argued that Blasdell was terminated because he became “unmanageable and disruptive” and “was unable to perform the testing he was hired to perform.” The company also argued that Blasdell’s testimony demonstrated that he never had a reasonable belief that SpaceX was engaging in illegal activity, a requisite element to establishing a whistleblower claim.  The jury ultimately returned a verdict for the company, finding that Blasdell’s termination was not substantially motivated by his reporting of a “reasonably-based suspicion of a violation of a law” or his alleged refusal to illegally falsify test results.

Second Circuit Affirms the Dismissal of a SOX Claim for Failing to Meet the “Reasonable Belief” Standard

Second Circuit SealOn June 1, 2017, the Second Circuit affirmed the dismissal of a Sarbanes-Oxley Act (“SOX”) whistleblower retaliation claim brought by a former Metropolitan Life Insurance Co. (“Company”) employee because the employee lacked a reasonable belief that the Company engaged in any fraudulent conduct.  Kantin v. Metropolitan Life Insurance Co., No. 16-1091-cv (2d Cir. June 1, 2017).  In doing so, the Court of Appeals affirmed its prior ruling in Nielsen v. AECOM Technology Corp. Continue Reading

ACA Retaliation Claim Survives Despite No Complaint About ACA Provisions

ARBOn April 28, 2017, the United States Department of Labor Administrative Review Board (“ARB”) allowed a whistleblower retaliation claim under the Patient Protection and Affordable Care Act (“ACA”) to proceed even though the purported protected activity alleged in the complaint made no reference to ACA provisions.  The case is Gallas v. The Medical Center of Aurora, DOL Administrative Review Board Nos. 16-012, 15-076, ALJ Nos. 2015-ACA-5, 2015-SOX-13 (ARB Apr. 28, 2017). Continue Reading

The First Hundred Days: Whistleblowing in the New Administration

With the new administration comes a new era for whistleblowing. High-risk whistleblower complaints implicating Dodd-Frank, Sarbanes-Oxley and similar state whistleblower retaliation statutes continue to rise. These complaints often rise to the highest levels of a company’s legal and compliance functions, as they present significant financial and reputational risks. Proskauer’s Lloyd Chinn and Harris Mufson recently conducted a webinar examining the status of whistleblowing in the first hundred days of the Trump Administration including topics such as: scrutiny of confidentiality and waiver provisions under President Trump’s administration – focusing on the SEC and the CFTC (including its new regulations announced on May 22); bounties from the SEC and CFTC; Justice Gorsuch on the Supreme Court; and the legislative status of the Dodd-Frank whistleblower provisions. Please click here to view a recording of the webinar.

CFTC Amends Whistleblower Rules to Strengthen Anti-Retaliation Protections and Encourage Whistleblower Tips

cftcOn May 22, 2017, the U.S. Commodity Futures Trading Commission (“CFTC” or the “Commission”) adopted several additions to its whistleblower rules.  Among other things, the amendments expand the Commission’s power to pursue anti-retaliation claims on behalf of whistleblowers and, like the SEC, now prohibit confidentiality agreements that “impede” a whistleblower’s communications with the CFTC.   The CFTC first proposed some form of these amendments to its Whistleblower Rules last year. Continue Reading

The Northern District of New York Applies the “Reasonable Belief” Standard

NewYork-northernOn May 11, 2017, the Northern District of New York applied the Second Circuit’s standard for evaluating a Dodd-Frank retaliation claim in response to a motion to dismiss under F.R.C.P. Rule 12(b)(6).  The court denied the employer’s motion to dismiss unlawful retaliation claims brought by a former employee under Dodd-Frank, finding that the whistleblower had sufficiently alleged a reasonable belief of plausible securities law violations in his complaint.  McManus v. Tetra Tech Construction, Inc., et al., 2017 U.S. Dist. LEXIS 71838 (N.D.N.Y. May 11, 2017). Continue Reading

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