Update on Bofl SOX Whistleblower Litigation

This is an update on our previous blog posts regarding the Erhart v. BofI Holding, Inc. case.

We previously reported in October 2017 and March 2017 on a whistleblower litigation brought by Charles Erhart, a former Bank of Internet Holding, Inc. (Bofl) internal auditor.  In late 2018, the parties filed cross-motions for judgement on the pleadings, including but not limited to Erhart’s SOX retaliation claim.  Bofl specifically alleged that Erhart failed to exhaust his administrative remedies under SOX with regard to his OSHA complaint.  On April 30, 2019, the court denied without prejudice Bofl’s motion to resolve on the pleadings Erhart’s SOX claim. Erhart v. BofI Holding, Inc., No. 15-cv-02287 (S.D. Cal. Apr. 30, 2019).

Prior Ruling

Bofl previously filed a motion to dismiss or in the alternative to strike the portions of Erhart’s complaint that alleged a violation of SOX because he failed to exhaust his administrative remedies. On September 11, 2017, in addition to finding that Erhart sufficiently alleged his whistleblower claims, the court denied Bofl’s motion to strike Erhart’s SOX claim.

SOX Exhaustion Sufficiently Alleged

On April 30, 2019, relying in large part on its September 2017 ruling, the court refused to make a determination on the pleadings as to Erhart’s SOX exhaustion claim. The court reasoned that it was not appropriate to resolve Erhart’s SOX claim on the pleadings without further factual development because Erhart alleged that he exhausted his SOX administrative remedies and the court already determined that Erhart plausibly alleged a whistleblower retaliation claim under SOX.

Outlook

Bofl indicated that it plans to seek summary judgment on Erhart’s SOX claim.  We will continue to monitor this case.

Expansive Amendments to New York Whistleblower Protection Law Introduced

On April 29, 2019, Assemblyman Michael Benedetto introduced Assembly Bill A7384, which would amend and significantly expand New York’s whistleblower statute, N.Y.L.L. §§ 740, 741.  The identical Senate version of this bill, Senate Bill S3683, was introduced by Senator Brad Hoylman on February 12, 2019.  The proposed amendments aim to bolster whistleblower protections for employees who disclose information about “illegal business activities” and could expose employers to significant additional liability.

The Current Whistleblower Law

New York Labor Law § 740, which was enacted in 1984, is designed to protect employees who report a violation of the law that either “creates and presents a substantial and specific danger to the public health or safety, or…constitutes health care fraud.”  N.Y.L.L. § 740(2).  In 2002, a parallel whistleblower statute was enacted to provide health care employees with additional protections.  N.Y.L.L. § 741.

The protection for employees who do not work in health care is focused on alleged harm to the public at large.  The whistleblower employee must demonstrate that there was an “actual violation” of a safety statute or regulation creating a substantial and specific danger to the public health or safety, and that the harm that results from the violation affects the public-at-large, as opposed to an individual plaintiff or group.  The statute also contains a broad election of remedies provision which states that “institution of an action in accordance with this section shall be deemed a waiver of the rights and remedies available under any other contract, collective bargaining agreement, law, rule or regulation or under the common law.”  N.Y.L.L. § 740(7).

The statute of limitations for a § 740 claim is one year and employees who successfully prove that they were retaliated against can recover back pay, but cannot recover compensatory or punitive damages.  They also are not entitled to a jury trial.

The Proposed Amendments

The proposed amendments would significantly expand the protections afforded to employees under New York’s whistleblower law and increase the potential liability to employers.  The proposed legislation would remove the requirement that the reported wrongdoing must constitute a threat to public health or safety and extend whistleblower protection to any employee who reports information about an “illegal business activity” under federal, state or local law, regardless of whether or not that activity is within the scope of the employee’s job duties.  It would also get rid of the statute’s election of remedies provision.

The proposed legislation also removes the requirement that there be an actual violation of the law.  Employees would only have to show that they “in good faith reasonably believe[] that an illegal business activity has occurred or will occur, based on information that the employee in good faith reasonably believes to be true.”

It also contains an employee-friendly standard of proof: a whistleblower would only need to show that his or her actions were a contributing factor in the adverse employment action, as opposed to the “but-for” causation standard applicable to certain federal retaliation claims.

The proposed legislation would expand the remedies potentially available to whistleblowers to include front pay, compensatory damages for economic loss and for emotional distress, and liquidated damages doubling any back pay and compensatory damages awarded where the court finds that the employer retaliated against the employee in bad faith.

And it would also extend the statute of limitations from one year to two years and add a right to a jury trial.

Finally, employers would have to inform their employees of their rights under the whistleblower law by posting a notice in a conspicuous place.

Implications for Employers

The proposed legislation, at least on its face, is extremely broad and would expose New York employers to a dramatically altered regulatory environment.  Viewed in the context of the proliferation of whistleblower laws under a variety of state laws around the country and the focus in New York on expanding employee protections, it would not be surprising if the proposed legislation advances.  We will closely monitor this development and keep you posted.

Hospital Sues Whistleblower for Failing to Report Information And Choosing Instead to Use As Basis for Claim

In an unusual and eye-catching case, a hospital facing a whistleblower lawsuit from a former senior executive under the False Claims Act (“FCA”) has brought suit against that individual, alleging he breached his fiduciary duty by failing to report the unlawful conduct internally and instead using that information as the basis for a whistleblower claim.  Wheeling Hospital, Inc. v. Louis Longo, No. 19-cv-000032 (N.D. W. Va. Mar.13, 2019).

The Whistleblower’s Complaint

Longo, an accountant and former senior executive at Wheeling Hospital (the “Hospital”), was discharged in August 2015.  In December 2017, he brought a complaint in the U.S. District Court for the Western District of Pennsylvania under the qui tam provisions of the FCA (the “FCA Lawsuit”).  He alleged the Hospital and its CEO defrauded Medicare and Medicaid through a scheme of inflated payments to physicians with high patient volumes in return for referrals to the Hospital, in violation of the Stark Law and the Anti-Kickback Statute.  The United States intervened in the FCA Lawsuit in December 2018 and filed its Complaint in Intervention on March 25, 2019.

The Hospital’s Complaint

On March 13, 2019, the Hospital filed suit against Longo in the U.S. District Court for the Northern District of West Virginia, alleging he breached his fiduciary duty and abused the legal process.  The Hospital’s breach of fiduciary duty claim asserts Longo had a fiduciary duty to report internally any illegal conduct, and that he instead capitalized on his alleged knowledge of the conduct to “extort a settlement” through a “false and frivolous” whistleblower action.  It further alleged that Longo misleadingly failed to disclose in the FCA Lawsuit that the IRS had previously audited the compensation paid to the same physicians named in his complaint.  According to the Hospital, “Longo’s threats and the legal action he filed [under the FCA] are consistent with a concerted effort to contort the legal process to his own personal advantage and wealth.”    In support of its abuse of process claim, the Hospital asserts that Longo “willfully and maliciously misused and misapplied a legal process … to obtain a pecuniary award and to inflict harm” on the Hospital.

Implications

The Hospital’s lawsuit is a novel reaction to a whistleblower complaint, and the court’s ruling could have significant implications, particularly in instances where an individual does not report unlawful conduct despite a duty to do so, and brings a whistleblower action premised on that information.  We will be monitoring this case and will report on future developments.

Alabama Federal Court Denies Motion for Summary Judgement on SOX Whistleblower Claim

On April 2, 2019, the U.S. District Court for the Northern District of Alabama denied a defendant-employer’s motion for summary judgment on a SOX whistleblower retaliation claim, finding genuine issues of material fact existed as to the basis for Plaintiff’s discharge, whether his complaint qualified as protected activity, and whether he had a reasonable belief that the complained-of activity was unlawful.  Shea v. Kohl’s Dept. Stores, Inc., No. 16-cv-01155.

Background

Defendant, a retailer, employed Plaintiff as a regional District Manager for Alabama and Georgia.  Defendant used a number of performance metrics used to evaluate stores, including daily credit applications.  It offered monetary incentives to encourage sales associates to ask each customer about opening a credit account.  Additionally, store managers’ bonuses were tied to the store’s performance on credit solicitation metrics.  In September 2015, Plaintiff allegedly began receiving reports from store managers that certain stores were creating fraudulent credit applications to increase reported numbers.  He allegedly became aware that one store in particular reported a credit application for every $96.00 in sales, compared to the usual average of one application for every $2,500 to $3,500 in sales.  These numbers allegedly concerned Plaintiff, who allegedly discovered sales associates at the store were submitting fraudulent credit applications using the social security numbers of customers and others without authorization.  Plaintiff sent an e-mail to the manager of the store and the District Loss Prevention Manager.  The e-mail was then forwarded to the Regional Vice President, who was Plaintiff’s supervisor.  Plaintiff’s employment was terminated shortly thereafter.  Plaintiff proceeded to file suit claiming he was retaliated against in violation of SOX for complaining of allegedly fraudulent conduct.

Ruling

Defendant moved for summary judgment, arguing Plaintiff did not engage in protected activity under SOX because he did not raise his concerns to the appropriate person in the company under the company policy (the policy required employees to raise concerns directly to their supervisor).  The court denied the motion, finding Plaintiff had engaged in protected activity because the person he notified, the District Loss Prevention Manager, had authority to investigate the alleged misconduct.  The court also rejected Defendant’s argument that Plaintiff lacked a subjectively reasonable belief; it found there was a genuine issue of material fact as to whether Plaintiff had a reasonable belief that unlawful activity was occurring, noting he had said “shady” activity was occurring, which raised a question as to whether he subjectively believed something unlawful was afoot.  Finally, the court found Defendant had not substantially rebutted Plaintiff’s prima facie case with its alternative reason for Plaintiff’s termination, noting the close temporal proximity between the reports of the fraud and the termination, and Plaintiff’s favorable performance reviews.

Implications

This court appears to have employed a relatively employee-friendly standard of determining whether an employee has met his or her burden of identifying a violation of one of the types of misconduct enumerated in Section 806 of SOX.

The European Parliament Approves EU-Wide Standard for Whistleblower Protection

Per our previous post, the European Parliament and the Member States agreed to adopt new rules that would set the standard for protecting whistleblowers across the EU from dismissal, demotion, and other forms of retaliation when they report breaches of various areas of EU law. According to a press release issued by the European Parliament on April 16, 2019, the Parliament approved these changes by an overwhelming majority. The new rules require that employers create safe reporting channels within their organization, protect whistleblowers who bypass internal reporting channels and directly alert outside authorities, including the media under certain circumstances, and require that national authorities provide independent information regarding whistleblowing. This legislation marks a significant departure from the jurisdiction-specific approach that has resulted in disparate protection across Europe, with some jurisdictions, like Germany and France, offering relatively limited protection when compared to other jurisdictions, such as the UK. These changes, if approved by the EU ministers, will set a uniform baseline and therefore considerably increase whistleblower protections in the EU. Member States will have two years to achieve compliance. For an additional discussion as to the implications of this legislation, see this article by The New Times. We will continue to monitor this development.

SEC Awards $50 Million to Two Whistleblowers

On March 26, 2019, the SEC’s Office of the Whistleblower announced two multi-million dollar awards to whistleblowers who provided the SEC with information that assisted the agency in bringing a successful enforcement action.  The larger of the two awards, $37 million, is the SEC’s third-highest award to date, after a $50 million award in March 2018 and a $39 million award in September 2018.

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said in a press release that “[w]histleblowers like those being awarded today may be the source of ‘smoking gun’ evidence and indispensable assistance that strengthens the agency’s ability to protect investors and the capital markets.”  She added, “[t]hese awards show how critically important whistleblowers can be to the agency’s investigation and ability to bring a case to successful and efficient resolution.”

Since the inception of the whistleblower program in 2011, the SEC has received over 22,000 whistleblower tips and awarded approximately $376 million to 61 individuals.

Minnesota Federal Court Rejects Employer’s Attempt to Litigate State-Law Whistleblower Claim in Federal Forum

On March 11, 2019, a federal court in Minnesota rejected an employer’s attempt to litigate a plaintiff’s state-law whistleblower claim in a federal forum, ruling it was insufficient that the plaintiff alleged violations of federal regulations because the narrow exception to federal-question jurisdiction was not present.  Martinson v. Mahube-Otwa Cmty. Action P’ship, Inc., No. 18-cv-03001.

Background

Plaintiff’s employer operated a Head-Start program, which is a federally funded program that provides early childhood education, health, nutrition, and other services to low-income children and their families.  Plaintiff, a manager of enrollment for the program, alleged that she was terminated after she raised concerns that her supervisor instructed her to enroll ineligible applicants in the program in violation of federal regulations concerning a person’s eligibility under Head Start.  Plaintiff filed suit in state court, asserting a single state-law claim under the Minnesota Whistleblower Act, Minn. Stat. § 181.931-935, and the defendant removed the action to federal court.  Plaintiff moved for remand, arguing the district court did not have subject-matter jurisdiction over the state claim between non-diverse parties.

Ruling

The district court remanded the action back to state court.  In so ruling, it explained the parties were not diverse and plaintiff asserted a single state-law claim that was premised on alleged violations of federal regulations.  The only basis for federal jurisdiction, therefore, was if the state-law claim “implicate[s] significant federal issues.”  The court reviewed Supreme Court authority that permits federal jurisdiction under 28 U.S.C. § 1331 “if a federal issue is:  (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.”  That rule applies to a “special and small category of cases that present a nearly pure issue of law, one that could be settled once and for all and thereafter would govern numerous cases.”

First, the court held that plaintiff’s claim did not present a substantial issue of federal law because the Head Start regulations at issue were not important to the federal system as a whole.  The task of interpreting the federal regulation would be merely one step in the adjudication of plaintiff’s fact-specific claims and the case did not present a pure issue of law.  The federal government also did not have a direct interest in the case and there was no indication that the resolution of plaintiff’s case would control a large number of other cases.

Second, the court held that the case did not qualify for a federal forum because it would disrupt the federal-state balance.  Under prevailing Supreme Court precedent, extending federal jurisdiction to state-law causes of action with an embedded federal issue requires sensitive judgments about congressional intent, made with an eye toward the practical implications of the decision.  Citing state tort law as an example, the court explained that the “violation of federal statutes and regulations is commonly given negligence per se effect in state tort proceedings,” but the Supreme Court had declined to permit federal jurisdiction for such actions.  The court emphasized that a contrary finding in this case would “risk tilting the balance of employment-law litigation toward the federal courts in a way that is at odds with § 1331,” and without an obvious limiting principle.

Finally, the court found that numerous state laws, including the Minnesota Whistleblower Act, permit an alleged violation of federal law to establish an element of the claim.  Permitting federal jurisdiction on that basis would effectively allow a state to expand federal-question jurisdiction, abrogating the role of Congress.

Implications

The decision limits the availability of a federal forum for state-law whistleblower claims premised on alleged violations of federal laws or regulations.  Employers can expect to continue to litigate these whistleblower claims in state court, even where the alleged protected activity concerns complex federal statutes and regulations.

EU Agrees to Set the Floor for Whistleblower Protection Across All Member States

According to a press release issued by the European Commission today, the European Parliament and the Member States have agreed to adopt new rules that set the standard for protecting individuals who blow the whistle on breaches of EU law from dismissal, demotion, and other forms of retaliation. This reform, which was first proposed by the European Commission in April 2018, seeks to replace the patchwork of whistleblower protections that currently exist across the Member States with a uniform approach. If formally adopted by the Parliament and Council, the new rules would protect those who report violations of various areas of EU law, including data protection, and Member States could extend protection to other areas of the law as well. Employers would have an obligation to create safe reporting channels within the organization, and whistleblowers, while encouraged to report internally first, also would be protected when reporting to public authorities. Additionally, whistleblowers could safely report violations directly to the media if no action was taken, if a report to the authorities would be futile, or when the violation is an “imminent” or “manifest” danger to the public interest. Lastly, the new rules would require that national authorities inform citizens and train public authorities on various aspects of whistleblowing. We will continue to monitor this development.

LA Jury Awards Whistleblower $1.5 Million

On February 28, 2019, a Los Angeles jury issued a verdict of $1.5 million in damages to a former employee who alleged his employer retaliated against him for reporting misconduct in violation of the False Claims Act (“FCA”), 31 U.S.C. § 3730(h), the Defense Contractor Whistleblower Protection Act (“DCWPA”), 10 U.S.C. § 2409, and California’s whistleblower statute, California Labor Code section 1102.5.  Lillie v. ManTech Int’l Corp, No. 17-cv-02538 (C.D. Cal.).  The verdict form can be accessed here.

Plaintiff, a former NASA Mars mission engineer at ManTech International Corp. (the “Company”), alleged his employment was terminated because he reported that he had received unauthorized access to classified and proprietary information owned by a third-party government contractor in violation of federal rules governing sensitive United States government procurement contracts.  He alleged that he had previously received positive performance evaluations and generous pay increases, but after he raised his concerns he was sent home without pay, placed on furlough, and then discharged.

Plaintiff brought claims for retaliation under the FCA, the DCWPA and California’s whistleblower statute in the U.S. District Court for the Central District of California.  Finding in his favor on all of these claims, the jury awarded Plaintiff approximately $522,000 for past lost wages, $340,000 for future lost wages, and nearly $644,000 for past and future emotional distress damages.

This case is consistent with a trend of sizable jury verdicts in whistleblower retaliation claims.  We recently reported on an $11 million whistleblower verdict in San Francisco, much of which was upheld on appeal, and other large whistleblower verdicts in Missouri, Oregon and Illinois.  This trend highlights the risks employers face under federal and state whistleblower laws, and serves as a wake-up call for employers to carefully review their whistleblower protection policies and related protocols.

Whistleblower Complaints Down in 2018

According to data released by OSHA, the number of whistleblower complaints filed under SOX and the Consumer Financial Protection Act (“CFPA”) declined in 2018.  OSHA received 45 complaints under the CFPA in 2018 (down 50% from the 90 complaints received in 2017) and 155 complaints under SOX (down from the 186 received in 2017).

Whistleblower complaint determinations were also down in 2018, from 3,432 cases resolved in 2017 (whether on the merits, or because the cases were dismissed, settled, or withdrawn) to 2,964 in 2018.

Although the total number of whistleblower complaints under all of the whistleblower protection statues OSHA enforces were also down year over year (from 3,303 in 2017 to 3,007 in 2018), the overall trend is that the number of whistleblower complaints has generally increased over the past ten years (from 2,219 in 2008 to 3,007 in 2018).

Although complaints were temporarily down in 2018, we expect the overall upward trend to continue in future years.

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