Seventh Circuit Affirms Grant of Summary Judgment on Terminated CEO’s SOX And DFA Claims

Last week, the Seventh Circuit Court of Appeals held that a terminated CEO’s complaints about his board of directors’ managerial decisions did not qualify as protected whistleblowing under the Sarbanes-Oxley Act of 2002 (“SOX”) nor under the Dodd-Frank Act of 2010 (“DFA”).  Verfuerth v. Orion Energy Sys., Inc., No. 16-3502, 2018 WL 359814 (7th Cir. Jan. 11, 2018).

Background.  Plaintiff was the founder and former CEO of a company that specializes in energy-efficient lighting.  In November 2012, following a series of disputes between Plaintiff and the company’s board of directors, Plaintiff was terminated for incurable cause.  A year and a half after his termination, Plaintiff brought a lawsuit that alleged that he was retaliated against, in violation of SOX and DFA, for his complaints to various board members about the company’s business practices.  Practices about which Plaintiff alleged to have complained included attorney over-billing, intellectual property disputes, conflicts of interest, and violations of internal company protocol.  The Company moved for summary judgment, arguing in part that Plaintiff’s complaints did not qualify as whistleblowing entitled to protection from adverse employment actions.

Rulings.  Chief Judge Griesbach granted the Company’s Motion for Summary Judgment on Plaintiff’s SOX and DFA claims.  Chief Judge Griesbach held (1) that SOX protects complaints about securities fraud, not “run-of-the-mill corporate problems,” which is what he believed Plaintiff raised here, and (2) that Plaintiff’s complaints to various board members about what he thought they should be doing did not amount to whistleblowing, because “[s]imply telling a person he might be committing fraud is not whistleblowing” and “airing concerns is not whistleblowing.”  Verfuerth v. Orion Energy Sys., Inc., No. 14-CV-352, 2016 WL 4507317 (E.D. Wis. Aug. 25, 2016).

The Seventh Circuit Court of Appeals agreed, holding that “[a]n executive who advises board members to disclose a fact that the board already knows about has not ‘provide[d] information’ about fraud.  At most, he has provided an opinion.”  Verfuerth­ No. 16-3502, 2018 WL 359814 at *4.  The Court emphasized that nothing in SOX, or any other federal statute, prevents a company from firing its executives over differences of opinion. Continue Reading

Maryland District Court Denies Summary Judgment on CFPA Whistleblower Claim

The U.S. District Court for the District of Maryland recently denied a motion for summary judgment in a whistleblower retaliation claim under the Consumer Financial Protection Act of 2010 (CFPA), Section 1057 of Dodd-Frank, which was brought by an ex-foreclosure attorney, finding there were issues of material fact as to, among other things, the basis for the termination of the Plaintiff’s employment and whether he engaged in protected activity. Yoder v. The O’Neil Group, LLC, No. 16-cv-0900 (D. Md. Dec. 8, 2017).

Background.  Plaintiff was hired to lead the foreclosure practice at an entity that handled foreclosure referrals from a mortgage loan servicer. He alleged that the Company was overbilling clients for title reports and title updates in violation of the Fair Debt Collection Practices Act (FDCPA). After he had a confrontation with the founders of the Company regarding these alleged billing practices and other issues, the founders allegedly told Plaintiff he could either sign a resignation letter or “[i]f you do not want to resign, then I will accommodate your insistence that you be fired.” Plaintiff refused to sign the letter, prompting the Company to conclude that he quit.  Plaintiff then filed suit in the District of Maryland, alleging that his employment was terminated in violation of the whistleblower protection provisions of the CFPA.

Rulings.  The Company moved for summary judgment, arguing that Plaintiff could not prove that he engaged in protected activity, suffered an adverse employment action, or that his alleged protected activity contributed to an adverse employment action. The court rejected the Company’s argument that summary judgment as warranted on the issue of protected activity, concluding that there was a dispute of fact as to whether it was objectionably reasonable for Plaintiff to believe that the alleged overbilling violated the FDCPA. The court also determined that there were genuine disputes of material fact as to whether Plaintiff voluntarily quit and whether the Company asking Plaintiff to resign or be fired was based on economic circumstances.

Implications.  This is one of a fairly limited number of cases filed under the CFPA and it illustrates the degree to which some courts will scrutinize factual submissions on issues of protected activity and causation in the summary judgment context.

SEC Issues $4.1 Million Award to Overseas Whistleblower

On December 5, 2017, the SEC announced a whistleblower award of more than $4.1 million to an overseas former company insider.  The SEC declined to disclose the identity of the whistleblower or the company at issue.

The order noted that the tipster voluntarily reported original information that prompted an SEC investigation which uncovered an extensive securities law violation spanning multiple years.  In determining the award amount, the SEC also took into account that the individual provided continued assistance and information to the Commission throughout its investigation.

Although the SEC reduced the whistleblower’s bounty award due to “unreasonable delay in reporting the misconduct,” the reduction was tempered by the presence of two mitigating factors.  First, the SEC’s whistleblower award program had not yet been established when the delay occurred.  And second, the SEC acknowledged that the whistleblower likely could not assert a retaliation claim because the whistleblower is a foreign national working beyond United States borders.  See Liu v. Siemens A.G., No. 13-cv-4385, 2014 WL 3953672 (2d Cir. Aug. 14, 2014) (holding that Dodd-Frank’s anti-retaliation provisions do not apply extraterritorially).

In the SEC’s press release, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated the case demonstrated “[t]he breadth of the SEC’s whistleblower program.”  The award was the third among over $20 million issued to whistleblowers within the last week.  On November 30th, the SEC awarded two whistleblowers over $16 million.

SEC Awards Over $16 Million to Two Whistleblowers

On November 30, 2017, the SEC Office of the Whistleblower issued a bounty award of more than $16 million to two tipsters; each received an award of more than $8 million. The SEC denied awards to five other claimants.

The first whistleblower provided original information, including the identity of relevant documents and witnesses, which became the foundation for the SEC’s investigation and subsequent action against the company.  The second whistleblower provided the SEC with original information and submissions that enabled the SEC to “more fully and quickly understand the [Company’s] misconduct and to assess the legal consequences.”  Order at 5.

The SEC denied awards to two claimants who were purported experts retained by the second whistleblower in furtherance of their whistleblowing activities. Although the second tipster consented to the experts becoming whistleblowers in their own right, the SEC determined that the experts were not an “original source” under Rule 21F-4(b)(5).  The SEC concluded that “where an expert is retained by a whistleblower to provide information and analysis to the Commission on the whistleblower’s behalf, the retained expert should be deemed to have forfeited and waived any subsequent claim to being the original source of that information if such information was previously provided to the Commission by or on behalf of the whistleblower who retained the expert.”  Order at 12.  A contrary finding, the SEC reasoned, would create an incentive for experts to abdicate their contractual obligations with whistleblowers and pursue their own claims.  Id.

In its release, the SEC noted that this award pushed the amount of financial remedies ordered against wrongdoers past $1 billion.  The SEC has now awarded more than $175 million to 49 whistleblowers since it issued its first award in 2012.

E.D. Virginia Allows FCA Whistleblower Retaliation Claim To Proceed

On October 23, 2017, the Eastern District of Virginia rejected a motion to dismiss a former employee’s claim for whistleblower retaliation under the False Claims Act (“FCA”).  Andrews v. City of Norfolk, No. 2:16-cv-681, 2017 WL 4837707 (E.D. Va. Oct. 23, 2017).  The Court ruled on whether the defendants themselves must be involved in the alleged fraud under the FCA’s whistleblower protection provision and whether complaints about future fraudulent acts qualified as protected activity.

Background.  Plaintiff worked with the Senior Advisor for Veteran Employment for the Department of Veteran Affairs (“Senior Advisor”) to develop an online veterans’ employment assistance program.  The Senior Advisor’s husband had a company that sold software to help veterans transition to new careers.  In 2014, certain incidents allegedly caused Plaintiff to become concerned regarding the alleged overlap between the Senior Advisor’s husband’s software and the Senior Advisor’s employment program initiative.  Plaintiff sent an e-mail to the Deputy City Manager expressing his concern and subsequently e-mailed the Senior Advisor to ask whether her husband was associated with employment assistance program’s operations.  The next week, Plaintiff’s employment was terminated by the City Manager, who allegedly stated that “[t]his is just not a good fit.”

Procedural History.  On November 23, 2016, Plaintiff filed a complaint against the City of Norfolk, Virginia, the City Manager, and Interim City Manager for, among other things, whistleblower retaliation in violation of the FCA.  He alleged that he was discharged for investigating a potential FCA claim—i.e., that the Senior Advisor’s husband was pursuing a business relationship with the City that would result in inappropriate financial benefit to the Senior Advisor.

Ruling.  Defendants moved to dismiss, arguing that Plaintiff failed to engage in protected activity because Defendants themselves did not engage in any acts that potentially violated the FCA, there was no pending “claim” for government money (since the City of Norfolk had not yet contracted with the Senior Advisor’s husband), and there was no “false or fraudulent conduct”—only speculation that such conduct may occur in the future.  Plaintiff responded that Defendants did not have to commit any fraud themselves to be liable for retaliation under the FCA, and that the Senior Advisor’s financial interest in her husband’s software foreseeably tainted her husband’s ability to certify that his software was free from conflicts of interest, which would later result in a claim for government funds.  Denying the motion to dismiss the FCA claim, the court ruled that Defendants themselves did not have to engage in the underlying fraud to be liable for retaliation under the FCA.  The court also found that Plaintiff could have formed a good-faith belief that the Senior Advisor and her husband intended to perpetuate fraud upon the government based on the facts alleged, that such a belief was objectively reasonable, and that Plaintiff acted in furtherance of that belief.  The court also ruled that Plaintiff took reasonable actions to prevent an FCA violation by attempting to investigate the extent of any potential fraud and raising his concerns to government officials.

Implications.  Plaintiffs can be expected to rely on this case for the proposition that an employer need not be involved in the alleged fraud to be liable for a FCA violation and that complaints regarding alleged future fraudulent acts can amount to protected activity under the FCA.

Tenth Circuit Vacates ARB Whistleblower Decision

On October 17, 2017, the Tenth Circuit overturned the ARB’s decision in favor of complainant for want of protected activity under SOX.  Dietz v. Cypress Semiconductor Corp., No. 16-9529 (Oct. 17, 2017).  This decision rolled back the ARB’s expansive determination that a company violated federal mail and wire fraud laws by implementing a mandatory bonus plan that failed to comply with state wage payment laws.

Background.  Complainant worked for another entity before it was acquired by the Company.  Offer letters were sent to some of the prior company’s employees, including Complainant, which included compensation information.  The offer letters, however, omitted the fact that some of the employees would be subject to an alternative compensation plan (the “Design Bonus Plan”).  The Design Bonus Plan involved a mandatory wage deduction, which would later be recuperated based on the performance of the affected employees’ projects.  The Company did not start making the deductions until approximately nine months after the prior company’s employees started working for the Company.  Training sessions about the Design Bonus Plan were also offered.  In April 2013, after one of the training sessions, Complainant emailed his supervisor to discuss his concerns about the legality of the Design Bonus Plan and also discussed this with the General Counsel.   Additionally, Complainant complained that the Design Bonus Plan took employees by surprise.  Shortly thereafter, the Company disciplined Complainant and allegedly required him to write memos regarding his alleged errors.  Two months later, Complainant informed the Company that he intended to resign.  Instead of beginning the Company’s turnaround process (designed to retain employees), he was scheduled to attend a meeting two days later.

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Sanctions Award Strengthens Fight to Protect Confidential Company Records

On October 18, 2017, a federal district judge in Alaska ordered a former employee to pay nearly $170,000 of his ex-employer’s legal fees as sanction for removing nine attorney-client privileged documents prior to his termination. The ruling was based on a decision this summer that the former employee willfully and deliberately disobeyed established norms of litigation conduct when he took, and then used in litigation, the nine privileged documents. In his decision over the summer, however, Judge Holland stopped short of dismissing the former employee’s claims, finding monetary sanctions adequate to address the conduct. The decision strengthens a growing body of case law holding that potential whistleblowers may not, in the words of another federal district court judge, “pilfer a wheelbarrow full of an employer’s proprietary documents . . . merely because it might help them blow the whistle.”[1]

Ben Ferris served as Chief Compliance Officer at Alutiiq, LLC between 2008 and 2014. While employed by the company, Ferris came to believe that subsidiaries of Alutiiq (“Defendants”) were misrepresenting their small business status when applying for government contracts through a business development program administered by the Small Business Administration. While still working for the company, Ferris downloaded to an external hard drive documents he believed were relevant to his claims. His cache included nine documents protected by the attorney-client privilege. In 2013, Ferris commenced a sealed qui tam action asserting claims under the False Claims Act. In 2014, after the United States declined to intervene in his case, Ferris’ complaint was unsealed. After discovery began in 2015, Ferris disclosed that he had in his possession certain records belonging to his former employer, including the nine privileged documents.

Following demands to destroy the privileged documents and discovery to determine the extent of their misuse, Defendants moved to dismiss Ferris’ action as sanction for his abusive litigation tactics. Ferris, in response, argued that public policy protected qui tam whistleblowers who retain confidential documents for purpose of reporting government fraud.

In June, the court ruled that Ferris had willfully violated established norms of litigation. The court held that even if a public policy protection might apply to a whistleblower who removes documents in certain circumstances, it would not apply to privileged documents removed from employers’ possession. However, the court stopped short of dismissing Ferris’ claims. Recognizing that Defendants were not prejudiced by the actions of Ferris and his attorneys, that the documents had been used only minimally, and the court’s strong preference for cases being resolved on the merits, the court ruled that monetary sanctions could adequately address the misconduct.

Following the court’s decision in June, Defendants asked the court to order Ferris to pay almost $400,000 in fees and costs associated with Ferris’ possession and retention of the nine privileged documents. The court found this amount, and the time it reflected, excessive and reduced it by more than 50%, ordering Ferris to pay $169,994 in attorney’s fees and costs as a sanction for his abusive litigation tactics.

Despite the haircut, Judge Holland’s decision should be viewed as a success for employers as it strengthens a growing body of case law holding that employees considering a whistleblower action cannot simply plunder their employers’ files looking for documents that might support their claims.

As Ferris argued, and Judge Holland recognized, some courts have seemed willing, at least in certain circumstances, to view a whistleblower’s removal of documents as a protected activity. The Ninth Circuit, for example, has recognized that a public policy exception to the typical rule that employers’ documents may not be improperly removed may have “some merit” in the case of whistleblowers. Cafasso v. General Dynamics C4 Systems, Inc., 637 F.3d 1047, 1062 (9th Cir. 2011). Similarly the District of Columbia district court has held that an action by an employer against a former employee (and current qui tam whistleblower) who has failed to return a company document may frustrate the congressional purpose behind the False Claims Act. See Head v. Kane Co., 668 F. Supp. 2d 146 (D.D.C. 2009. Decisions such as Head threaten a certain paralysis among employers who hesitate to act against a thieving employee for fear the employee will claim her termination for stealing records was retaliatory.

More recently, however, courts have seemed more willing to find that being a whistleblower does not give an employee carte blanche to go rifling through the employer’s databases looking for potentially relevant evidence. The district of New Jersey, for example, has allowed a company sued by two former employees to proceed with counterclaims alleging that the plaintiffs breached their employee confidentiality agreements by disclosing confidential company records in support of their False Act claims. U.S. v. Boston Scientific, No. 2:11-cv-1210 (D.N.J. Sept. 4, 2014). Even the Ninth Circuit, despite recognizing the possibility of a public policy protection, held that it would not apply to the whistleblower in Cafasso who, in taking eleven gigabytes of data, committed a “vast and indiscriminate appropriation” of her employer’s files  637 F.3d at 1061.

Decisions such as Ferris, Boston Scientific, and even Cafallo give employers options when they discover an employee is removing company documents, even if that employee is a potential (or current) whistleblower. As with any other form of employee misconduct, the employer should undertake an investigation to determine whether the employee has violated company policy and carefully consider the particular facts of the situation and the applicable legal precedent before deciding whether termination is justified and defensible.

[1] JDS Uniphase Corp. v. Jennings, 473 F. Supp. 2d 697, 702-03 (E.D. Va. 2007).

S.D. Fla. Refuses To Dismiss SOX and Dodd-Frank Whistleblower Claims

The Southern District of Florida recently denied a Rule 12(b)(6) motion to dismiss a former employee’s Sarbanes-Oxley and Dodd-Frank whistleblower retaliation claims, finding that the plaintiff sufficiently alleged that she had an objectively reasonable belief regarding alleged securities violations.  Thomas v. Tyco Int’l Mgmt. Co., LLC, No. 16-cv-80501 (Mar. 31, 2017).  This case is noteworthy because it takes an expansive view of the scope of protected activity under SOX with respect to complaints involving internal controls and data security.

Background.  Plaintiff was a former Manager of Financial Reporting for the Company.  She allegedly learned during her employment that an applicant for a manager position misrepresented her educational qualifications in her resume.  Additionally, she allegedly believed that the applicant did not have sufficient training in generally accepted accounting principles (“GAAP”).  According to her complaint, despite raising these concerns with her direct supervisor, the Company hired the applicant for the new manager position.  Plaintiff claimed that the new manager was responsible for reporting $4 billion per year to the Company’s headquarters and ultimately to the SEC.  Plaintiff also allegedly began doubting the reliability of a new monthly “tie-out” process the Company used to ensure that the financial data in the Company’s ledger system was consistent with the consolidated financial data reported to the SEC.  In December 2013, Plaintiff filed a complaint with the internal ombudsman regarding the new manager’s credentials and the tie-out process.  The ombudsman found no wrongdoing.  In March 2014, Plaintiff filed a whistleblower retaliation complaint with OSHA.  In May 2014, her employment was terminated on the grounds that she allegedly improperly accessed another employee’s records.

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UPDATE: California Federal Court Permits Former Bank Internal Auditor’s Whistleblower Claims to Proceed

A California federal court—in Erhart v. BofI Holding, Inc., 2017 U.S. Dist. LEXIS 14755, Case No. 15-cv-02287 (S.D. Cal. Sept. 11, 2017)—recently denied BofI Federal Bank’s (“BofI’s”) motion to dismiss the Sarbanes-Oxley whistleblower claims plead in their former internal auditor Charles Erhart’s amended complaint. The court also denied BofI’s motion as to Erhart’s defamation claim, allowing it to proceed, but dismissed Erhart’s claims for (i) violation of the Confidentiality of Medical Information Act (“CMIA”); (ii) intentional infliction of emotional distress; and (iii) breach of the implied covenant of good faith and fair dealing. Continue Reading

DOL Allows SOX Claim Where Foreign Whistleblower Alleged Violation of US Law

The Department of Labor’s Administrative Review Board (ARB) recently held that a former employee of Exelis Systems Corporation who was employed in Afghanistan could bring a SOX claim even though he worked exclusively outside of the United States.  Blanchard v. Exelis Systems Corp./Vectrus Systems Corp., ARB Case No. 15-031 (August 29, 2017).  In so ruling, the ARB opened the door to the potential extraterritorial application of SOX, reversing course from its prior decision addressing this same issue. Continue Reading