Florida District Court Limits Scope of Protected Activity under the FCA

On March 29, 2022, the U.S. District Court for the Southern District of Florida held that in order to engage in protected conduct under the False Claims Act (“FCA”), a plaintiff must specifically suspect that their employer has made a false claim for payment to the federal government; vague suspicions of fraud or misuse of funds is not enough.  Swartz v. Interventional Rehabilitation of South Florida, Inc., No. 21-14137 (S.D. Fla. 2022).

Background

Plaintiff, a physician who worked for a pain management practice, sued his former employer for retaliation under both the federal False Claims Act and the Florida Whistleblower Act.  Plaintiff alleged that he was terminated after he sent four emails raising concerns about the employer’s policy on recording medical information.  The employer maintained that it made the termination decision before Plaintiff sent the emails after it received several complaints from other employees that he had engaged in unprofessional behavior.

Ruling

The court granted summary judgment in favor of the employer as to both retaliation claims.  To bring a retaliation claim under both federal and Florida law, a plaintiff must first show that they engaged in protected activity.  To engage in “protected activity” under the FCA, a plaintiff must object to a false claim for payment to the federal government.  Citing precedent from the Eleventh Circuit, the court concluded that “it is not enough for an employee to ‘suspect fraud’ or ‘suspect misuse of federal funds.’”  Rather, “an employee must suspect that her employer had made a false claim to the federal government.”  The court concluded that Plaintiff did not engage in protected activity under this standard because his emails did not reference any submission of false claims for payment to the government.

The court also found that, even though some of emails plausibly constituted protected activity under Florida law (because they raised concerns about what Plaintiff believed to be illegal activity by his employer), Plaintiff could not show that these emails were the basis for his termination, since the employer established that the termination decision predated the emails.

Implications

This ruling confirms that “protected activity” for purposes of the FCA is construed narrowly to encompass only objections to a false claim for payment to the federal government.

D.C. Circuit: No Award to Whistleblower Who Made Disclosure Before Enactment of SEC’s Whistleblower Program

On May 27, 2022, the D.C. Circuit Court of Appeals affirmed an order by the Securities and Exchange Commission (“SEC”) denying a whistleblower award under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), holding that information provided to the SEC prior to Dodd-Frank’s enactment did not qualify for a whistleblower award under the statute.  Ross v. SEC, No. 21-1165 (D.C. Cir. 2022).

Background

Plaintiff-appellant Ross appealed the SEC’s denial of his application for a whistleblower award.  Between 2005 and 2008, Ross provided information to the SEC about securities violations that ultimately resulted in a successful SEC enforcement action in which defendants were ordered to pay approximately $100 million.

Among other financial reforms, Dodd-Frank authorized the SEC to give monetary awards to “whistleblowers who voluntarily provided original information to the Commission” when that information led to a successful enforcement resulting in sanctions of over $1 million.  The regulations implementing Dodd-Frank define “original information” in the whistleblower context as, among other requirements, information provided to the SEC “for the first time after July 21, 2010,” Dodd-Frank’s date of enactment.

Ruling

The D.C. Circuit affirmed the SEC’s denial, holding that the information Ross provided did not meet the Dodd-Frank definition of “original information” because it was first provided to the SEC prior to July 21, 2010.

Implications

This ruling confirms that the requirements in Dodd-Frank’s whistleblower award provisions will be strictly construed.

SEC Proposes Amendments to Whistleblower Program Rules, Which May Lead to More SEC Tips

On February 10, 2022, the U.S. Securities and Exchange Commission announced two proposed amendments to its whistleblower program rules.

As we previously reported here, a closely divided SEC adopted a final rule implementing several changes to its whistleblower program in September 2020.  On January 13, 2021, a whistleblower attorney filed a lawsuit in the U.S. District Court for the District of Columbia challenging various aspects of the final rule (our post on that case is here).  After SEC Chair Gary Gensler assumed office, he directed staff to consider revisions to two amendments that could have discouraged tips by allowing the SEC to (1) unilaterally deny “related action” awards where there is another applicable whistleblower award program, and (2) limit the size of some of the largest awards (see our post here).

In announcing the proposed amendments, Chair Gensler noted that “[t]hese amendments, if adopted, would help ensure that whistleblowers are both incentivized and appropriately rewarded for their efforts in reporting potential violations of the law to the Commission.”  He also said that the first proposed rule change was “designed to ensure that a whistleblower is not disadvantaged by another whistleblower program that would not give them as high an award as the SEC would offer,” and that under the second proposed change, “the SEC could consider the dollar amounts of potential awards only to increase the whistleblower’s award.”

The SEC will vote on the proposed amendments after a 60-day public comment period.

New York Department of Labor Issues Required Posting for Expanded Whistleblower Protection Law

The New York State Department of Labor (NYSDOL) has issued a form of required notice regarding the dramatically expanded whistleblower protections under New York Labor Law § 740 that took effect last month.

As we previously reported, the expanded law – which took effect on January 26, 2022 – significantly bolsters protections for private-sector workers alleging retaliation in a variety of ways, including: (1) adding “former employees” and “independent contractors” to those permitted to bring whistleblower claims; (2) removing the previous requirement that there be an actual violation of the law and instead providing protections where a covered individual reasonably believes an employer’s activity or conduct is in violation of a law, rule or regulation or “poses a substantial and specific danger to the public health or safety;” and (3) providing that covered individuals need only make a “good faith effort” to notify their employer of violations before disclosing such violations to a public body, whereas before actual notice to the employer was required.  The amended law also expands the remedies potentially available to whistleblowers, extends the statute of limitations on bringing claims, and affords whistleblowers a right to a jury trial.

The amended law requires that employers notify employees of their rights under the law by posting a notice in a conspicuous, accessible and well-lighted place.  While the law took effect with no model having been issued, the NYSDOL finally released its form of notice on its website, which all covered employers are advised to post immediately in accordance with the law.

CA Supreme Court: Contributing-Factor Standard Applies to Whistleblower Retaliation Claims

On January 27, 2022, the California Supreme Court settled an inconsistency that has divided the courts of appeal with respect to the proper evidentiary standard for whistleblower retaliation claims under California Labor Code section 1102.6.  It ruled that the “contributing-factor” standard applies.  Lawson v. PPG Architectural Finishes, Inc., No. S266001, __ P.3d __, 2022 WL 244731 (Cal. 2022).

Background

Plaintiff-appellant Lawson, who was discharged by his employer PPG Architectural Finishes for alleged poor performance, brought a whistleblower claim against PPG after he allegedly uncovered and reported a supervisor’s scheme to mis-tint unpopular paint colors to avoid buyback requirements.  The district court, applying the three-step framework of McDonnell Douglas v. Green, concluded Lawson did not meet his burden of demonstrating that PPG’s legitimate, non-retaliatory reason for discharging him was pretextual.  Lawson appealed to the Ninth Circuit, which certified to the California Supreme Court the question of which evidentiary standard applies to whistleblower claims under California law.

Ruling

The California courts of appeal have not all applied the same evidentiary standard to whistleblower retaliation claims.  Some courts applied the three-part burden shifting framework established by the U.S. Supreme Court in McDonnell Douglas v. Green, under which (1) the employee first must establish a prima facie case of retaliation, (2) the employer then has the burden to show a legitimate reason for the adverse employment action, and (3) the burden then shifts back to the employee to show the reason given by the employer is pretextual.

Other courts have applied the contributing-factor standard, under which (1) an employee must demonstrate by a preponderance of the evidence that their whistleblowing activity was a contributing factor to the adverse action taken by their employer against them, and then (2) the employer has the burden to show by clear and convincing evidence that they would have taken that action anyways for legitimate, independent reasons, regardless of the employee’s alleged protected activity.

After considering the legislature’s intent behind and the legislative history of section 1102.6, the plain text of the statute, as well as how other courts have addressed and interpreted similar statutes at the federal level, the California Supreme Court rejected the McDonnell Douglas burden-shifting standard in favor of the “contributing-factor” standard.

Implications

Plaintiff’s attorneys are apt to try to capitalize on this ruling, as the “contributing-factor” standard enables a whistleblower to meet their burden by showing their whistleblowing activity was just one factor that contributed to the adverse action, even when there are other, legitimate factors for the employer’s decision.

SDNY: Confidentiality Agreement Impeded Investors from Whistleblowing

On November 17, 2021, the U.S. District Court for the Southern District of New York held that a company and its CEO violated Rule 21F-17 of the Exchange Act by entering into confidentiality agreements with investors that prohibited communications with the SEC, and subsequently attempting to enforce those agreements.  SEC v. Collectors Coffee Inc., No. 19-cv-4355.

Background.  As we previously reported in 2019, the SEC sued Collector’s Coffee, an online auction platform for sports memorabilia, and its CEO, for allegedly defrauding investors and impeding their communications with the SEC in violation of Rule 21F-17.  Rule 21F-17, adopted after the passage of the Dodd-Frank Act, prohibits any person from acting to “impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.”

As discussed in our July 2021 update, the Court previously held that Rule 21F-17 applies to investors as well as employees, finding that the broad definition of “whistleblower” under Section 21F of the Exchange Act extended its protections beyond the employer-employee context.

Ruling.  The Court declined to disturb the prior rulings, holding that the only remaining issue to be resolved is whether defendants’ conduct actually violated Rule 21F-17.  Defendants had entered into agreements with investors that expressly prohibited “communications with any regulatory agencies, such as the United States Securities and Exchange Commission …” and, in at least one instance, sued an investor for breaching this confidentiality clause.  The Court held that such actions were undoubtedly “actions to impede” prohibited by Rule 21F-17, and granted summary judgment in favor of the SEC.

Implications.  The SEC’s successful enforcement of Rule 21F-17 should serve as a reminder that companies must ensure that their agreements and confidentiality provisions include clear carve-outs allowing whistleblowing to the SEC and other regulatory agencies.

EEOC Updates COVID-19 Guidance with Anti-Retaliation Section

On November 17, 2021, the EEOC updated its technical guidance on COVID-19 and anti-discrimination with a new anti-retaliation section.

The new section largely restates existing statutory anti-retaliation protections in the context of COVID-19.  The guidance provides several examples of COVID-related protected activity, which include filing a charge with the EEOC alleging that an employer has unlawfully disclosed confidential medical information (such as a COVID-19 diagnosis), informing a supervisor or HR representative of accusations that Asian coworkers are spreading COVID-19, or reporting harassing comments toward coworkers who remain unvaccinated for religious reasons.  Employers may not retaliate against employees for requesting continued telework as a disability accommodation, or for requesting protective gear that can be worn with religious garb.  Making such requests is protected, even if the requests are later denied; for instance, if the employer determines that the employee does not have a disability under the ADA, or where the requested accommodation would pose an undue hardship.

The guidance reiterates that an employer’s action constitutes retaliation if it could deter a reasonable person from engaging in protected activity.  Retaliatory acts may include denial of promotion or job benefits, non-hire, suspension, discharge, work-related threats, warnings, negative or lowered evaluations, or transfers to less desirable work or work location.  However, employers are permitted to take adverse action based on non-retaliatory and non-discriminatory reasons, such as poor performance or misconduct.

In sum, the EEOC’s updated guidance cautions employers to be mindful of their non-discrimination and anti-retaliation policies in navigating ever-changing federal, state, and local COVID-19 regulations, lest they run afoul of the ADA or other antidiscrimination statutes.

SEC Awards $400,000 to Whistleblower Culpable In Fraudulent Scheme

On November 23, 2021, the SEC issued an award of $400,000 to a whistleblower who voluntarily provided the SEC with original information that assisted the agency in bringing a successful enforcement action that resulted in the termination of an ongoing Ponzi-like scheme.

This award is notable in that the claimant received an award even though they were found to be partially culpable in the fraudulent scheme.  The order granting the award noted that “[w]hile Claimant was not charged in the matter, the record reflects that Claimant became aware of” the scheme, but also recognized several mitigating factors, including that the claimant “was unaware of certain fraudulent aspects of the investment scheme, and took some steps to help remediate the harm.”  The SEC concluded that the award “strikes the appropriate balance between Claimant’s significant contributions to the success of the Covered Action and Claimant’s level of culpability.”

SEC Releases FY 2021 Whistleblower Program Annual Report

On November 15, 2021, the SEC published its annual report to Congress covering the period from October 1, 2020 to September 30, 2021.  The report was prepared by the SEC’s Office of the Whistleblower to summarize its whistleblower bounty program, report on the program’s recent dramatic growth, and highlight key amendments to the SEC’s whistleblower program rules.

Record-Breaking Awards for Whistleblower Bounty Program

The report reveals that in FY 2021, the whistleblower program experienced the largest number of submissions to the program and the largest number of award recipients.  The SEC paid out more in whistleblower awards this fiscal year than in all previous years combined.

The SEC received more than 12,200 whistleblower tips; an increase of 76% from FY 2020.  The tips were received from 99 different countries and all 50 states.  The most common violations reported included: Manipulation (25%), Corporate Disclosures and Financials (16%), Offering Fraud (16%), Trading and Pricing (6%), and Initial Coin Offerings and Cryptocurrencies (6%).

Overall, the SEC awarded approximately $564 million to 108 individuals in FY 2021, including the two largest single award payouts to date—$114 million in October 2020 and $110 million in September 2021—which brought the total amount the SEC has awarded to whistleblowers since the program’s inception to $1.1 billion.  

Amendments to Whistleblower Program Rules

The SEC adopted several changes to its whistleblower program effective as of December 2020, including to its award-setting procedures and to the definition of a “whistleblower” (see our post on those changes here).  According to the report, these amendments “increased efficiencies around the review and processing of whistleblower award claims.”

Under the new rules, the SEC issued two permanent bar orders against serial submitters who were responsible for hundreds of frivolous award applications.

The report also noted that in August 2020, the new SEC Chair, Gary Gensler, directed staff to consider revisions to two amendments that could have discouraged tips by allowing the SEC to limit the size of some of the largest awards and to unilaterally deny “related action” awards where there is another applicable whistleblower award program.

CA District Court: Dodd Frank Whistleblower Provision Does Not Apply Extraterritorially

On June 28, 2021, the United States District Court for the Northern District of California granted the Company’s Rule 12(b)(6) motion to dismiss after an executive claimed he was discharged in violation of the Dodd-Frank Act’s (DFA) whistleblower protection provision for alerting the Company and authorities about possible tax fraud.  Airton Amorim De Almeida v. Western Digital Corp., No. 3:20-cv-04735.  According to the court, the DFA whistleblower provision did not apply because the relevant events occurred in Brazil.

Background

Plaintiff, a citizen and resident of Brazil, brought suit against the company and a Brazilian entity that is wholly owned and operated by the Company.  While working in Brazil for the Company, Plaintiff allegedly became concerned with potentially fraudulent conduct.  He notified the SEC and the DOJ, and allegedly submitted an anonymous email to company executives alerting them of his concerns.  This resulted in both an SEC investigation and an internal investigation.

About a year after lodging his complaints, Plaintiff allegedly was “duped into” participating in a phishing scam that cost the Company $2 million.  As a result, the Company relieved Plaintiff of some of his responsibilities, and in 2017, his employment with the Company ended.  There was some disagreement with respect to whether Plaintiff was terminated or whether there was mutual agreement to end his employment.  Over two years after Plaintiff’s separation, he brought suit against the Company and its wholly owned Brazilian subsidiary, alleging whistleblower retaliation in violation of the DFA.  Both entities sought to dismiss Plaintiff’s claims.

Ruling

The court held that because Plaintiff relied on the DFA anti-retaliation provision and that provision does not apply to alleged retaliatory conduct that takes place overseas, Plaintiff failed to state a claim.  Plaintiff was a resident of a foreign country, was employed by a foreign company, and the allegedly corrupt activities took place in a foreign country.  Further, any potential adverse employment action took place in Brazil.

In addition, even though the court refused to allow such extraterritorial application of the provisions under the DFA, it could rely on the following to conclude that Plaintiff failed to allege sufficient facts to give rise to a plausible inference that he suffered adverse employment actions in retaliation for whistleblowing:  Plaintiff fell prey to a phishing scam, costing the Company $2 million, and the fact that over a year had elapsed between the alleged whistleblowing behavior and Plaintiff’s eventual separation.

Implications

This decision confirms that the DFA whistleblower protection provision does not extend extraterritorially.

LexBlog

This website uses third party cookies, over which we have no control. To deactivate the use of third party advertising cookies, you should alter the settings in your browser.

OK