Proskauer Whistleblower Defense

SEC Announces $20 Million Award to Whistleblower

By Pinchos Goldberg on Posted in SEC

On November 28, 2022, the SEC announced an award of $20 million to a whistleblower who provided new and critical information that contributed to a successful enforcement action.  (The order granting the award can be accessed here.)  The SEC noted that in determining the appropriate award amount, it considered that the whistleblower provided significant information and continuing assistance that helped Enforcement Division staff more quickly and efficiently investigate complex issues.

Creola Kelly, Chief of the SEC’s Office of the Whistleblower noted that “[w]histleblowers can help advance existing investigations in meaningful ways when their information saves the agency time and resources, and when their contributions allow SEC staff to better understand complicated issues.”

Since issuing its first whistleblower award in 2012, the SEC has awarded more than $1.3 billion to 283 individuals.

Ninth Circuit Takes Broad View of Protected Activity under the California Whistleblower Protection Act

By Steven J. Pearlman, Pinchos Goldberg and David Gobel on Posted in State-Specific Whistleblower Claims

On October 20, 2022, the Ninth Circuit reversed in part a grant of summary judgment in favor of an employer, finding that the district court misapplied the substantive law of California in holding that Plaintiff’s disclosures to his supervisor and to a third-party contractor did not constitute protected activity under the California Whistleblower Protection Act.  Killgore v. Specpro Pro. Serv., LLC, No. 21-15897.

Background

Plaintiff worked as a consultant for a firm retained by the United States Army Reserve (“Reserve”) to conduct an independent environmental assessment, pursuant to the National Environmental Policy Act (“NEPA”), in connection with a proposal to modify the use of certain helicopter landing sites.  Plaintiff alleged that he was discharged after he raised concerns to his supervisor and to the project leader at the Reserve that he was being required to prepare the environmental assessment in a manner that violated a requirement of the NEPA.

Plaintiff filed suit in California state court alleging various claims, including claims of unlawful retaliation and wrongful termination under the California Whistleblower Protection Act, Cal. Lab. Code § 1120.5(b).  After the case was removed to federal court, the U.S. District Court for the Northern District of California granted summary judgment in favor of Plaintiff’s former employer.  The district court held that any complaints Plaintiff made to his supervisor did not constitute protected activity because California law only protected disclosures to a person who both had (i) authority over the employee, and (ii) authority to correct the alleged violation or noncompliance.  The district court concluded that Plaintiff had not engaged in protected activity because his supervisor lacked the power to correct the Reserve’s alleged noncompliance.

The district court also held that Plaintiff’s disclosure of potential violations to the Reserve project leader was not protected activity because: (i) such communications were part of Plaintiff’s “normal duties” as part of his employment; and (ii) Plaintiff’s disclosure to the project leader of the project leader’s own wrongdoing was not a “disclosure” to her, and therefore did not qualify as protected activity.

Ruling

On appeal, the Ninth Circuit reversed the district court’s ruling in part, holding that the California Supreme Court would likely construe § 1102.5(b) to protect employees who disclose wrongdoing to a supervisor, even if the supervisor lacked authority to correct the issue.  The Ninth Circuit relied on dicta in the California Supreme Court’s recent decision in Lawson v. PPG Architectural Finishes, Inc., 12 Cal. 5th 703 (2022)—which drew a distinction between disclosures to government agencies, persons with authority over the whistleblower, or other employees with authority to investigate or correct the violation—to support a reading of the statute that makes these avenues of reporting independent of one another.  (See our post on Lawson here.)

The Ninth Circuit also concluded that the district court misapplied California law in holding that Plaintiff’s disclosures to the Reserve project leader were not protected activity.  First, the record did not support the conclusion that the Reserve project leader was Plaintiff’s supervisor with authority over him; rather, Plaintiff was an employee of the government contractor and the project leader was an employee of the Reserve who affirmatively disclaimed any supervisory authority over Plaintiff.  Plaintiff’s disclosures to her therefore were disclosures to a “government agency” under the plain language of the statute.  Second, to the extent that Plaintiff’s disclosures could be considered part of Plaintiff’s “normal duties,” amendments to the statute in 2014 expressly extended protection to a whistleblower’s disclosures “regardless of whether disclosing the information is part of the employee’s job duties.”  Cal. Lab. Code § 1102.5(b).  Finally, the Ninth Circuit relied on several state appellate court decisions holding that communications with the alleged wrongdoer are protected under § 1102.5(b).

Implications

The Ninth Circuit’s broad reading of § 1102.5 (b) may ease plaintiffs’ ability to show that they engaged in protected activity under the California Whistleblower Protection Act.

OSHA Orders Company to Reinstate Whistleblowers and Orders Payment of Over $800k for Purported SOX Violations

By Steven J. Pearlman, Pinchos Goldberg and Alisha Bruce on Posted in OSHA Administration, SOX Whistleblower Decisions

On October 7, 2022, OSHA announced that it had ordered ExxonMobil Corp. to immediately rehire two computational scientists who alleged that they were fired in retaliation for leaking to the media their concerns about improper conduct by the company.  In addition to reinstatement, the former employees were also awarded over $800,000 in back-pay, interest and compensatory damages.

Background

In April 2019, Complainants raised concerns with the company’s Human Resources department about a financial disclosure filed with the SEC, which they purportedly believed contained overinflated production estimates and valuations concerning certain oil and gas wells.

On August 27, 2020, the Wall Street Journal (“WSJ”) contacted the company for comment in connection with an article it intended to publish which would mention the concerns raised by Complainants about the allegedly misleading statements.  On September 13, 2020, the WSJ published an article titled “Exxon Used to Be America’s Most Valuable Company. What Happened?’  The WSJ noted in the article that it had interviewed over 20 current and former employees, but did not identify either of the Complaints as sources.

According to OSHA, after conducting an investigation, the company determined that Complainants had access to the data that was shared with the WSJ and might have given the information to the publication.  The company subsequently fired them.

In February 2021, Complainants filed a complaint with OSHA claiming they were terminated in violation of SOX’s whistleblower retaliation protection provision.

OSHA’s Order

OSHA interpreted SOX to protect employee communications with the media that could result in the exposure of employer wrongdoing.  According to Assistant Secretary for Occupational Safety and Health Doug Parker: “[w]histleblower protection is integral to ensuring that financial disclosure laws work.”  Parker further explained that “[a]s was the case in this instance, OSHA will aggressively protect the rights of employees who raise concerns related to financial.”

Implications

This order shows that OSHA is taking an aggressive approach to enforcing SOX’s whistleblower retaliation provision.  And we expect a debate to ensue as to whether complaints to the media constitute protected activity under SOX.

Tenth Circuit Affirms $1 Million Jury Award to Whistleblower

By Steven J. Pearlman, Pinchos Goldberg and E. Sydney Cone on Posted in Defense Contractor Whistleblower Protection Act

On July 20, 2022, the Tenth Circuit affirmed a $1 million jury award to a former employee who claimed he was demoted in retaliation for reporting that his supervisor instructed him to falsify test results on a program used by the U.S. military.  Casias v. Raytheon Co., Nos. 21-1195 and 21-1205 (10th Cir. 2022).

Background

Plaintiff alleged that his supervisor instructed him to change certain data on a GPS project designed for the U.S. Air Force, which made the project appear more successful.  Plaintiff allegedly complied and then immediately notified leadership of his superior’s instruction.  A few months later, Plaintiff was reassigned from his testing role, where he managed dozens of employees, to a minor role managing only two employees.  Plaintiff eventually accepted a position at a different defense contractor where his salary, benefits and rank were lower.

Plaintiff filed suit in the U.S. District Court for the District of Colorado alleging various claims, including a claim under the Defense Contractor Whistleblower Protection Act (“DCWPA”).  The jury found for Plaintiff, and awarded him $43,000 in backpay and $1,000,000 in noneconomic damages.  The district court struck the backpay award but confirmed the noneconomic damages award.  The company filed a motion for judgment notwithstanding the verdict and remittitur after trial, arguing: (1) Plaintiff did not show an adverse employment action or causation; (2) the noneconomic damages were excessive; and (3) the weight of evidence was against Plaintiff.

Ruling

On appeal, the Tenth Circuit affirmed the $1 million jury award, finding that Plaintiff presented enough evidence for a reasonable jury to find for him on all of the issues appealed.  First, the Tenth Circuit found that it was reasonable for the jury to infer Plaintiff suffered an adverse employment action because Plaintiff’s reassignment was a change in responsibilities with a decrease in reputation and job prospects, and Plaintiff was hired at a lower rank and salary at his subsequent job.  Second, the jury could reasonably infer Plaintiff’s superior retaliated against him, even though the superior lacked a personal reason for doing so.  Finally, the Tenth Circuit found the damages were not excessive because the act of falsifying information used by the U.S. military could have far reaching repercussions, and retaliating against an employee for reporting that falsification is a serious violation of the DCWPA.  Although the $1 million jury award was indeed large, the Tenth Circuit found that the award did not represent a “miscarriage of justice” given the circumstances.

Implications

This sizeable adverse jury verdict highlights the risks that employers may face in trying whistleblower retaliation suits to a jury and may lead to further similar lawsuits.

Second Circuit: SOX Whistleblower Claims Require Retaliatory Intent

By Pinchos Goldberg and Alisha Bruce on Posted in SOX Whistleblower Decisions

On August 5, 2022, the Second Circuit overturned a nearly $1 million jury award granted to a former employee of UBS Securities LLC (“UBS”).  The Court held that the judge’s instruction to the jury—that Plaintiff was “not required to prove that his protected activity was the primary motivating factor in his termination”—was incorrect as a matter of law.  Instead, the Sarbanes-Oxley Act (“SOX”) requires whistleblowers to specifically prove that the employer took the adverse employment action “with retaliatory intent.”  Murray v. UBS Securities LLC et al., No. 20-4202.

Background

Trevor Murray sued UBS in 2014, alleging that he was terminated by UBS after he complained that he was pressured to alter his research, in violation of SOX’s antiretaliation provision, 18 U.S.C. § 1514A.  Section 1514A prohibits publicly traded companies from taking adverse employment actions to “discriminate against an employee… because of” any lawful whistleblowing activity.  18 U.S.C. § 1514A(a).  At trial, the district court instructed the jury on the elements of a section 1514A claim as follows:

First, that plaintiff engaged in activity protected by Sarbanes-Oxley;

Second, that UBS knew that plaintiff engaged in the protected activity;

Third, that plaintiff suffered an adverse employment action — here, the termination of his employment at UBS; and

Fourth, that plaintiff’s protected activity was a contributing factor in the termination of his employment.

*     *     *

For a protected activity to be a contributing factor, it must have either alone or in combination with other factors tended to affect in any way UBS’s decision to terminate plaintiff’s employment.  Plaintiff is not required to prove that his protected activity was the primary motivating factor in his termination, or that UBS’s articulated reasons for his termination . . . was a pretext, in order to satisfy this element.

While UBS contended that it had terminated Plaintiff in connection with a large reduction in force triggered by substantial recent financial losses, the jury found UBS liable and issued an advisory verdict on damages awarding Plaintiff $653,300 in back pay, no front pay, and $250,000 in non-economic damages.  The district court subsequently adopted the jury’s advisory verdict on damages, and awarded an additional $1,769,387.52 in attorney’s fees and costs.

At issue on appeal was whether the district court properly instructed the jury on the fourth element.  UBS argued that the district court erred by failing to instruct the jury that Murray had to prove UBS’s retaliatory intent to prevail on his section 1514A claim.  Plaintiff responded that retaliatory intent is not an element of such a claim.

Ruling

Relying on the plain meaning of the statutory language and its interpretation of a nearly identical statute, the Second Circuit concluded that “retaliatory intent is an element of a section 1514A claim” and that “[t]he district court committed a non-harmless error by failing to instruct the jury accordingly.”

First, the Second Circuit determined that the “plain meaning” of the statutory language makes clear that retaliatory intent is an element of a section 1514A claim because the text of the statute prohibits discriminatory actions “because of” whistleblowing, which necessarily requires retaliatory intent – i.e., the employer’s adverse action must be motivated by the employee’s whistleblowing.

Second, the Second Circuit found that reading retaliatory intent into this provision is consistent with the Court’s previous interpretation of nearly identical language in the Federal Railroad Safety Act, and that “[w]e generally interpret identical language in different statutes to have the same meaning.”

The panel concluded that it was “unconvinced” that the erroneous jury instruction did not influence the verdict, and therefore vacated the jury’s verdict and remanded to the district court for a new trial.

Implications

This narrow interpretation of section 1514A will make it more challenging for plaintiffs within the Second Circuit’s jurisdiction to prove causation.  As the Second Circuit acknowledged, however, this decision is at odds with the approach of the Fifth and Ninth Circuits, which have specifically read the statute not to require retaliatory intent.  It remains to be seen whether the United States Supreme Court will ultimately resolve this circuit split.

SEC Adopts Amendments to Whistleblower Program Rules

By Steven J. Pearlman and Pinchos Goldberg on Posted in SEC

On August 26, 2022, the U.S. Securities and Exchange Commission announced that it had adopted two amendments to its whistleblower program rules proposed earlier this year (see our post here).

The first amendment allows whistleblowers who would have been eligible for an award under another whistleblower program that would not give them as high an award as under the SEC’s program—such as the whistleblower programs run by the Commodity Futures Trading Commission (CFTC) or the Internal Revenue Service (IRS)—to receive an award from the SEC.  Under the previous version of the final rule adopted on September 23, 2020 (see our post here), whistleblowers were not eligible for awards under the SEC’s whistleblower program if the SEC determined that some other award program more appropriately applied.

The second amendment affirmed the SEC’s authority to consider the dollar amount of a potential award for the limited purpose of increasing an award, but not to lower an award.  Under the previous version of the rule, the SEC retained discretion to make downward adjustments to award amounts in excess of $5 million.

In announcing the new amendments, Chair Gensler noted:

Today’s amendments enact two changes to help enhance the whistleblower program.  The first amendment expands the circumstances in which a whistleblower who assisted in a related action can receive an award from the Commission for that related action rather than from the other agency’s whistleblower program.  Under the second amendment, when the Commission considers the size of the would-be award as grounds to change the award amount, it can do so only to increase the award, and not to decrease it.  I think that these rules will strengthen our whistleblower program.  That helps protect investors.

The SEC also published a fact sheet summarizing the whistleblower rule amendments, which will become effective 30 days after publication in the Federal Register.

These amendments are likely to result in increased tips to the SEC and larger payouts to successful whistleblowers.

First Circuit: FCPA is not a “Rule or Regulation of the SEC” Under SOX Whistleblower Provision

By Steven J. Pearlman, Pinchos Goldberg and E. Sydney Cone on Posted in SOX Whistleblower Decisions

On July 13, 2022, the First Circuit reversed a denial of summary judgment, finding plaintiff could not satisfy his burden of showing he engaged in protected activity under the SOX whistleblower protection provision.  Baker v. Smith & Wesson, No. 21-2019 (1st Cir. 2022).  The decision affirms that protected activity under SOX is limited to reporting violations of “any rule or regulation” of the SEC, which does not include federal statutes like the Foreign Corrupt Practices Act (“FCPA”).

Background

Plaintiff filed a complaint against his former employer, Smith and Wesson (“S&W”), alleging S&W retaliated against in violation of SOX for reporting allegedly illegal conduct by S&W employees.  S&W moved for summary judgment, arguing Plaintiff failed to show that he engaged in protected activity.  Plaintiff responded that he reasonably believed the reported conduct violated 15 U.S.C. § 78m(b)(2), (5) of the FCPA, and that the FCPA is a “rule or regulation of the SEC” (and thus falls under the protected activity provision of SOX).  The district court agreed with Plaintiff and denied S&W’s motion for summary judgment.

Ruling

On appeal, the First Circuit disagreed with the district court’s interpretation of the “any rule or regulation of the SEC” provision in SOX, finding that the statute’s plain text makes clear that the FCPA is not a rule or regulation of the SEC.  Section 806 limits protections of whistleblower claims to violations of (1) sections 1341, 1343, 1344, or 1348; (2) any rule or regulation of the SEC; or (3) any provision of federal law relating to fraud against shareholders.  Relying on the Ninth Circuit’s explanation in Wadler v. Bio-Rad Laboratories, Inc. that there is a difference between the meaning of “rule or regulation” and “law” (access our post on that decision here), the First Circuit agreed that a “law” encompasses statutes – like the FCPA – whereas a “rule or regulation” does not.  Further, the inclusion of “of the SEC” in Section 806 of SOX makes clear that the phrase “any rule or regulation” does not include federal statutes because the SEC does not possess the authority to enact statutes.  Finally, “of” also does not mean “relating to,” as Plaintiff argued, because “relating to” appears in the next provision of Section 806 (“any provision of federal law relating to fraud against shareholders”) and thus demonstrates Congress’ intent to use “of” in the context of “any rule or regulation of the SEC.”

Implications

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

SEC Announces $17 Million Award to Whistleblower

By Steven J. Pearlman and Pinchos Goldberg on Posted in SEC

On July 19, 2022, the SEC announced an award of more than $17 million award to a whistleblower who provided critical information and assistance to the SEC in a covered action and related action.  (The order granting the award can be accessed here.)  The SEC noted that because the same information provided led to the success of the related action, the whistleblower is also entitled to an award based on amounts collected in the related action.

Creola Kelly, Chief of the SEC’s Office of the Whistleblower noted that “[t]oday’s award underscores the SEC’s commitment to rewarding meritorious whistleblowers who provide valuable information and exemplary cooperation that advance the agency’s enforcement efforts.”

Since issuing its first whistleblower award in 2012, the SEC has awarded approximately $1.3 billion to 278 individuals.

CA District Court: SOX and Dodd-Frank’s Whistleblower Provisions Do Not Apply To Individual Employed Abroad

By Lloyd B. Chinn, Pinchos Goldberg and Hayden F. Bashinski on Posted in Dodd Frank, SOX Whistleblower Decisions

On June 7, 2022, the United States District Court for the Northern District of California, relying on recent ARB decisions, held that a plaintiff who lived and worked for a Canadian subsidiary of a US company could not avail himself to the anti-retaliation provisions of SOX and the Dodd-Frank Act.  Daramola v. Oracle Am., Inc., No. 19-cv-07910.  In so doing, the court solidified an increasingly well-defined test for what constitutes a domestic application of these statutes.

Background

Plaintiff lived in and worked in Montreal, Canada, where he worked for Oracle Canada (the “Company”).  Following his resignation, Plaintiff sued the Company in the United States, alleging, inter alia, whistleblower retaliation in violation of SOX and Dodd-Frank.  He alleged that the Company made millions of dollars selling subscriptions for software that did not exist to colleges throughout the United States.  He further alleged that he was constructively discharged after he internally reported his concerns that the Company had engaged in fraud.  The Company moved to dismiss on the grounds that SOX and Dodd-Frank do not apply extraterritorially.

Ruling

The court first observed that the anti-retaliation provisions in both SOX and Dodd-Frank do not apply extraterritorially, i.e., outside the United States.  While the Ninth Circuit has not expressly addressed the issue, the court relied on the Second Circuit’s holding in Liu Meng-Lin v. Siemens AG, 763 F.3d 175 (2d Cir. 2014), that the anti-retaliation provisions of SOX and Dodd-Frank do not apply outside of the United States.  (See our post on Liu here.)  Indeed, as neither statute indicates any affirmative intent to apply outside the US, there appears to be little debate on this point.  See, e.g., Villanueva v. United States Department of Labor, No. 12-60122, 2014 WL 550817 (5th Cir. Feb. 12, 2014)[1] (See our post on Villanueva here.); Ulrich v. Moody’s Corp., No. 13 Civ. 00008 (VSB), 2014 WL 4977562, at *7 (S.D.N.Y. Sept. 30, 2014) (“There is no clear indication of extraterritorial application in…the anti-retaliation provision of the SOX Act.”).

The court also held that two more-recent ARB decisions which reached the same conclusion were entitled to Skidmore deference.  Specifically, in Garvey v. Morgan Stanley, ARB Case No. 2020-0034 (ARB July 16, 2021), the ARB determined that the complainant’s “daily interactions” with supervisors and colleagues in the United States, and allegations that U.S. customers were being harmed, did not demonstrate “sufficient, tangible domestic contacts” to apply SOX.  In Hu v. PTC, Inc., ARB Case No. 2017-0068 (ARB Sept. 18, 2019), the ARB similarly held that “the location of the employee’s permanent or principal worksite is the key factor to consider when deciding whether a claim is a domestic or extraterritorial application.”  At bottom, “an adverse action which affected an employee at a principal worksite abroad does not become territorial because the alleged misconduct occurred in the U.S., or because it had, or would have, effects on U.S. securities markets, or because the alleged retaliatory decision was made in the United States.”  Id.  (See our post on Garvey and Hu here).

The court concluded that because Plaintiff lived and worked in Canada, he failed to state a claim under the SOX and Dodd-Frank anti-retaliation provisions.

Implications

This decision confirms that employees of multinational employers who live and work abroad cannot invoke the whistleblower protections of SOX and Dodd-Frank.

[1] Villaneuva v. Core Labs. NV Saybolt de Columbia Limitada, ARB Case No. 09-108, ALJ Case No. 2009-SOX-006, slip op. at 12 (ARB Dec. 22, 2011) (“Section 806(a)(1) does not allow for its extraterritorial application.”).

Florida District Court Limits Scope of Protected Activity under the FCA

By Lloyd B. Chinn, Pinchos Goldberg and Dixie Morrison on Posted in False Claims Act, State-Specific Whistleblower Claims

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.

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