Proskauer Whistleblower Defense

SEC Awards $50 Million to Two Whistleblowers

By Lloyd B. Chinn and Pinchos Goldberg on Posted in SEC

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

By Lloyd B. Chinn and Andrew Sherwood on Posted in State-Specific Whistleblower Claims

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

By Erika C. Collins, Daniel Ornstein, Lloyd B. Chinn and Vanessa P. Avello on Posted in Legislation

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.

Tags: whistleblower

LA Jury Awards Whistleblower $1.5 Million

By Steven J. Pearlman, Kate Gold and Pinchos Goldberg on Posted in False Claims Act, Verdicts

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

By Lloyd B. Chinn and Pinchos Goldberg on Posted in OSHA Administration

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.

Ninth Circuit Affirms Most of Jury Verdict in Former GC’s SOX Whistleblower Lawsuit

By Steven J. Pearlman, Lloyd B. Chinn and Pinchos Goldberg on Posted in Foreign Corrupt Practices Act, SOX Whistleblower Decisions

On February 26, 2019, the Ninth Circuit affirmed much of a jury’s approximately $11M verdict finding that a former general counsel was discharged in retaliation for reporting alleged Foreign Corrupt Practices Act (“FCPA”) violations.  Wadler v. Bio-Rad Labs., Inc., No. 17-cv-16193.

Background

Sanford Wadler, then the former General Counsel of Bio-Rad Laboratories, Inc. (the “Company”) filed whistleblower retaliation claims against the Company and its CEO under SOX and Dodd-Frank, along with a wrongful termination claim against the company under California common law.  Wadler’s claims were premised on his allegation that he was discharged for submitting a memorandum to Bio-Rad’s audit committee asserting FCPA violations.

The district court denied the Company’s motion to dismiss after the SEC filed an amicus brief arguing that Dodd-Frank prohibits retaliation based on internal complaints, and the case proceeded to trial.  On the eve of trial, the Company filed a motion to exclude evidence it claimed was shielded by the attorney-client privilege.  The SEC submitted another amicus brief, arguing that federal whistleblower laws are designed to protect all employees of public companies from retaliation, and preempt California’s ethical rules that generally prohibit attorneys from disclosing client confidences.  The motion was denied and a trial was held over several weeks in January and February 2017.  On February 6, 2017, the jury found in Wadler’s favor on each of his claims and awarded him approximately $11M, including $2.96M in backpay, which was doubled under Dodd-Frank, and $5 million in punitive damages under his California public policy claim.  An appeal to the Ninth Circuit followed.

Ruling

The Ninth Circuit upheld the award of damages with the exception of the award of double backpay under Dodd-Frank, recognizing that the U.S. Supreme Court in Digital Realty Trust, Inc. v. Somers, No. 10-1276 (2018), held that Dodd-Frank does not protect purely internal complaints (discussed here).  However, the Ninth Circuit vacated the verdict as to the SOX claim, concluding that the jury instructions erroneously listed the FCPA’s anti-bribery and books-and-records-provisions as “rules and regulations of the SEC” under SOX Section 806.  The court explained that those provisions are not “rules or regulations” of the SEC under Section 806 of SOX because Congress’s use of the phrase “rule or regulation” in conjunction with an administrative agency (the SEC) suggests it was only intended to encompass administrative rules or regulations.  This interpretation was supported by Congress’s use of that phrase in the same list of unlawful activities (in Section 806 of SOX) as violations of “Federal law relating to fraud against shareholders,” which suggests there is a difference between the meaning of a “law”—which encompasses statutes (like the FCPA)—and a “rule or regulation”—which does not.  The Ninth Circuit ruled that the district court erred in instructing the jury otherwise, and that the error was not harmless with respect to the SOX claim.  It remanded the case for consideration of whether a new trial is warranted and directed the district court to consider whether any retrial would result in a double recovery given the portion of the decision affirming the California public policy verdict and the corresponding verdict for compensatory damages for past economic loss.  Notably, the Ninth Circuit did not address the district court’s ruling allowing the use of privileged information at trial.

Implications for Employers

The Ninth Circuit’s narrow reading of what constitutes an SEC “rule or regulation” will make it more difficult for plaintiffs to show they engaged in protected activity under SOX.

CFTC Issues $2 Million Whistleblower Award to Individual Whistleblower for Analysis of Market Data

By Harris Mufson and Andrew Sherwood on Posted in CFTC, Dodd Frank

On March 4, 2019, the U.S. Commodity Futures Trading Commission (CFTC) issued a whistleblower award totaling more than $2 million to be paid to an individual whistleblower, as part of its Dodd-Frank whistleblower program.  This award is particularly interesting because the whistleblower “provide[d] critical information through independent analysis of market data,” according to the CFTC press release, but was not a corporate insider.

The Director of the Whistleblower Office, Christopher Ehrman, said in the press release that the award “illustrates two key aspects of our Whistleblower Program — that an individual doesn’t have to be an insider to receive a whistleblower award and the Commission can pay awards based on related actions brought by other regulators.”

The CFTC Order highlighted that the whistleblower’s original information caused the CFTC to open an investigation and bring a successful covered action.  It also highlighted that the information led, in part, to the initiation and resolution of a related action brought by an unnamed “Federal Regulator.”  The whistleblower was lauded by the CFTC Order for providing the Staff with “assistance and analysis in interpreting voluminous data” during the investigation.

This is the CFTC’s first award of 2019 and only the sixth award issued since the inception of its whistleblower bounty program created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  As is the case with the CFTC’s prior awards, the Agency did not provide details about the whistleblower or the information that led to the enforcement action.

Fifth Circuit Affirms Summary Judgment on SOX Whistleblower Claim

By Steven J. Pearlman, Lloyd B. Chinn and Edward Young on Posted in SOX Whistleblower Decisions

On February 15, 2019, the Fifth Circuit affirmed the grant of summary judgment in favor of Andeavor Corporation f/k/a Tesoro Corporation on a SOX whistleblower claim, concluding that the plaintiff lacked an objectively reasonable belief that the company was misreporting its revenue to the SEC.  Wallace v. Andeavor Corp., No. 17-cv-50927.

Background

Plaintiff, a Vice President of Pricing and Commercial Analysis, was a sub-certifier of the company’s financial statements.  He was tasked with investigating the company’s financial performance in various industry segments, and purportedly concluded that it improperly booked taxes as revenues in certain internal reporting channels.  On February 8, 2010, he reported his concerns to his supervisor.  Yet, shortly thereafter, he certified that he knew of no reason why the company’s 2009 10-K could not be certified.  That 10-K, which was filed on March 1, 2010, included a statement disclosing that certain taxes were included in both the “Revenues” and “Costs of Sales and Operating Expenses.”  Also, on March 12, 2010, Plaintiff certified that he was unaware of any “business or financial transaction that may not have been properly authorized negotiated or recorded” for 2009.

While Plaintiff was investigating the company’s internal profitability and accounting for taxes, the human resources department determined that he had been creating a hostile work environment, and his employment was terminated.  His termination occurred on March 12, 2010, the same day he provided the above-referenced certification.  Plaintiff filed suit in the Western District of Texas under Section 806 of SOX, claiming he was discharged in retaliation for reporting the company’s alleged practice of booking sales taxes as revenues, which he claims was not properly disclosed in SEC filings.  The district court granted summary judgment in the company’s favor, concluding that the decision to terminate the plaintiff’s employment was not prohibited retaliation and that the plaintiff did not have an objectively reasonable belief that the company had misreported its revenue to the SEC.

Ruling

The Fifth Circuit focused on whether Plaintiff had an objectively reasonable belief that the company was misreporting revenue.  In ruling on this issue, it noted that Plaintiff had extensive business experience, including with the company’s accounting systems, and had expertise in SEC financial reporting practices.  It concluded that in light of his position as a sub-certifier with accounting oversight experience, he should have investigated to ensure the reasonableness of his conclusion that the public disclosures contained a reporting violation.  According to the court, had he conducted a limited investigation, he would have determined that the company had properly disclosed its treatment of certain taxes as revenue in the 10K that was filed with the SEC.  Thus, the court concluded, he lacked an objectively reasonable belief that the company had violated the law.

Implications

As we previously reported (here and here), and as set out in the ARB’s seminal holding in Welch v. Cardinal Bankshares Corp., ARB Case No. 05-064 (May 31, 2007), the “reasonable belief” standard looks beyond a plaintiff’s purported subjective belief of wrongdoing to whether that belief is objectively reasonable based on the expertise and background of the complainant.  This decision holds experienced professionals bringing SOX whistleblower claims to a higher standard and considers whether they conducted reasonable investigations in determining whether they held an objectively reasonable belief that unlawful conduct occurred.

First Cir. Sets Pleading Standard For FCA Whistleblower Retaliation Claims

By Steven J. Pearlman and Edward Young on Posted in False Claims Act

On January 15, 2019, the First Circuit ruled that a plaintiff adequately alleges protected activity under the FCA whistleblower protection provision where he asserts that he reported concerns about his employer’s conduct that could reasonably lead to a viable FCA action.  Guilfoile v. Shields, Sr., No. 17-1610.

Background

Plaintiff, a former executive of pharmacy chain Shields Health Solutions who reported directly to owner John Shields, alleged that during the course of his employment he became concerned that Shields was paying a consulting firm $35,000 per quarter for each hospital contract the consulting firm successfully referred to the company.  Plaintiff allegedly believed this violated the federal Anti-Kickback statute, 42 U.S.C. § 1320a-7b(b)(2)(B).  Plaintiff alerted Shields of his alleged concerns, causing Shields to have the consulting firm waive a payment yet to be made for one of two referrals.  Allegedly believing this was insufficient, Plaintiff asked Shields to notify the board of directors, but Shields refused.  On December 22, 2015, Shields told Plaintiff he was concerned that Plaintiff was “going over his head,” and suggested they consider “parting ways.”  A week later, the company terminated Plaintiff’s employment with no further explanation.  Plaintiff then sent the board of directors a letter setting forth the concerns he previously voiced to Shields.  Thereafter, Shields alleged that Guilfoile threatened to sue him for defamation and tortious interference.  On February 26, 2016, Guilfoile received a letter from the company stating for the first time that his employment had been terminated for cause.

Ruling

Plaintiff filed suit against Shields, Shields Health Solutions and several related entities alleging he was retaliated against under the FCA.  He alleged that defendants retaliated against him for his “efforts to stop violations of the [FCA],” specifically his “disclosures … related to kickbacks [defendants] paid [to the consulting firm] in exchange for referrals of federally insured patients.”  Plaintiff further alleged that he reasonably believed the payments violated the Anti-Kickback Statute.  The District of Massachusetts granted a motion to dismiss, determining Plaintiff failed to adequately plead protected activity.

A split panel of the First Circuit reversed the dismissal of Plaintiff’s claim that he was retaliated against under the FCA for complaining of kickbacks.  The majority determined that protected activity under the FCA should be interpreted broadly, and a plaintiff need only plead that he was retaliated against based on conduct that reasonably could lead to a viable FCA action.  In other words, a plaintiff need not plead the existence of the actual submission of a false claim to the government.  Moreover, because an FCA retaliation claim does not require a showing of fraud, a plaintiff alleging retaliation need not meet the heightened pleading standards of FRCP 9(b).

Implications

This decision arguably sets a less stringent pleading standard with respect to protected activity under the FCA.

U.S. Department of Labor Appoints Three New Members to the ARB

By Lloyd B. Chinn and Pinchos Goldberg on Posted in Key ARB Decisions, Uncategorized

On January 8, 2019, the DOL announced Secretary Alexander Acosta’s appointment of three new members to the Administrative Review Board (ARB), filling vacancies that had been open for months, and marking the first appointments to the ARB of the Trump Administration.

The ARB issues final agency decisions on behalf of the Secretary of Labor in cases arising under a number of worker protection laws, including the whistleblower-protection provision of SOX. Cases considered by the ARB arise upon appeal from a decision of an ALJ and the parties may appeal the ARB’s decisions to federal district or appellate courts.

All three new appointees were chosen from within the DOL. William Thomas Barto, who will serve as the chair of the ARB, previously served as an Administrative Law Judge for the DOL. James A. Haynes most recently served as an Appellate Administrative Law Judge for the Employees Compensation Appeals Board. Daniel T. Gresh previously worked as an attorney for the ARB. The new members will serve two-year terms. The ARB consists of a maximum of five members and two vacancies still remain open.

The membership of the ARB is significant, as previous boards have issued widely-divergent decisions regarding the scope of the whistleblower protection laws, which have in turn influenced the courts’ interpretation of those laws. For example, in Platone v. FLYi Inc., ARB Case No. 04-154 (Sept. 29, 2006), the Bush-era ARB introduced an employer-friendly standard for a SOX whistleblower complaint, requiring the whistleblower to describe conduct that “definitively and specifically” relates to one of the six categories of unlawful acts set forth in the statute. That standard was adopted by the First, Second, Fourth, Fifth and Ninth Circuits. But, in 2011, the Obama-era ARB abrogated Platone in Sylvester v. Parexel International LLC, No. 07-123 (ARB May 25, 2011), and dramatically lowered the bar for what constitutes “protected activity” under SOX, holding that an employee’s complaint need not “definitively and specifically” relate to an enumerated legal violation, and that complainants only had to show that they reasonably believed the conduct complained about violated one of the laws enumerated in SOX. Federal courts, including the Second, Third, Sixth and Tenth Circuits, subsequently adopted the ARB’s more liberal Sylvester standard.

The ARB has not issued any decisions since July 2018. This more than five-month hiatus is unprecedented since the ARB was established in May 1996, and we expect that the board will issue a flurry of decisions in the coming months as its works through a backlog of cases. Given the new membership of the board, we would not be surprised to see further developments in the ARB’s shifting interpretation of the whistleblower laws.

We will be monitoring the ARB’s activities closely and will report on future developments of interest.

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