4th Circuit Vacates ARB SOX Whistleblower Decision for Lack of Protected Activity

On June 13, 2019, the Fourth Circuit overturned the ARB’s decision in favor of a complainant, ruling that the plaintiff had not engaged in protected activity under the SOX whistleblower protection provision by complaining of a company’s use of a mandatory arbitration policy that allegedly was overly broad.  Northrop Grumman Systems Corp. v. U.S. Dep’t of Labor, No. 17-cv-1811.  In so ruling, the court recognized important limits on the scope of protected activity under this statute.


Plaintiff worked in the company’s Information Systems business sector testing software related to emergency safety systems.  She allegedly sent several emails to company executives reporting what she believed were unlawful practices related to the company’s mandatory arbitration policy which she believed was incorporated into a Conflict of Interest form that employees were required to sign.  Plaintiff’s employment was terminated effective May 17, 2011, due to a reduction-in-force.

Following her termination, Plaintiff filed a complaint with OSHA, which dismissed her claim, and she appealed to the OALJ.  An ALJ found in her favor, holding in relevant part that she engaged in protected activity when she complained to company executives that the company’s Conflict of Interest form incorporated a mandatory arbitration policy she believed violated SOX, which prohibits mandatory arbitration policies.  The company appealed to the ARB, which upheld the ALJ’s findings, and then appealed to the Fourth Circuit.


The Fourth Circuit vacated the ARB’s order and remanded the case to the ALJ with instructions to dismiss Plaintiff’s complaint and enter judgment in favor of Northrup.  The court concluded that Plaintiff did not engage in protected activity under SOX because her complaints about the company’s arbitration policy bore no relation to any of the six enumerated categories of misconduct entitling employees to whistleblower protection under SOX (i.e., mail fraud, wire fraud, bank fraud, securities fraud, any SEC rule or regulation or any federal law relating to fraud against shareholders).  The Court further concluded that even if Plaintiff’s report had related to one of those types of misconduct, she lacked an objectively reasonable belief that the company’s Conflict of Interest form contained an unlawfully broad arbitration policy because (1) the form contained no reference to the arbitration policy, and (2) the arbitration policy explicitly carved out claims “to which an agreement to arbitration . . . is prohibited by law.”


This decision clarifies important limits on the scope of protected activity under Section 806 of SOX, confirming SOX does not extend whistleblower protection to complaints about any form of purportedly improper conduct.  It underscores that complaints which are unrelated to one of the six categories of misconduct specified in SOX will not qualify as protected activity under SOX.

SDNY Dismisses SOX and Dodd-Frank Whistleblower Claims Against Private Company

On June 3, 2019, the U.S. District Court for the Southern District of New York granted a defendant-employer’s motion for summary judgment on SOX and Dodd-Frank whistleblower retaliation claims, finding that the alleged whistleblowing did not involve fraud related to a public company.  Tellez v. OTG Interactive, LLC, No. 15-cv-8984.


Defendants operate restaurants and concession facilities in airports via iPad stations, which allow patrons to order food, access the Internet, and check their flight status.  Plaintiff was hired as President of one of the Defendant entities that develops and provides the software used by the iPad stations.  Shortly after Plaintiff was hired, Defendants decided to begin a “model test” to explore whether Defendants could generate additional revenue by offering video game accessibility on the iPads for a small fee.  The test began in a Delta Airlines concourse on devices displaying the Delta logo.

Approximately one month after the “model test” was implemented, Plaintiff allegedly learned that the paywall software responsible for launching the video games on the iPads created a potential violation of third-party licensing agreements with the game manufacturers.  Plaintiff alleged that he informed Defendants’ General Counsel, Chief Technology Officer, and Chief Executive Officer that the paywall was fraudulent and illegal.  Plaintiff’s employment was terminated shortly thereafter (two months after his hiring).  Plaintiff filed suit claiming he was retaliated against in violation of SOX and Dodd-Frank for reporting this allegedly fraudulent scheme.


Defendants moved for summary judgment, arguing they are not covered by SOX because they are not publicly traded companies and were not acting on behalf of Delta (a public company) by implementing the paywall system on iPads displaying the Delta logo.  Plaintiff relied upon Lawson v. FMR LLC (2014) (discussed here), arguing that a private contractor need not act on behalf of a public company for SOX’s protections to apply and that Defendants’ contractual relationship with Delta itself was sufficient to warrant coverage under SOX.

The court disagreed with Plaintiff, however, and dismissed the SOX claim, holding that a contractual relationship alone is insufficient to impose liability upon a private company under SOX.  The court explained that while Delta stood to benefit from its contractual relationship with Defendants, Plaintiff offered no evidence that could lead a reasonable juror to infer that the paywall model test was undertaken on behalf of Delta, or that Delta had any specific involvement with the program.  The court added that imposing liability under these circumstances would be inconsistent with SOX’s purpose, since the alleged fraudulent activity did not relate to a public company.  Finally, the court clarified that Dodd-Frank only protects against retaliation for making disclosures required under SOX, and because Plaintiff made no such disclosures to the SEC, the Dodd-Frank claim should also be dismissed.


This decision limits the risk that private contractors would be subject to whistleblower liability under SOX merely because they engage in business arrangements with public companies.

SEC Awards Joint Whistleblowers $3 Million Even Though Information Was Not Voluntarily Given

On June 3, 2019, the SEC’s Office of the Whistleblower announced a $3 million award to two whistleblowers who provided the SEC with information that led it to investigate and successfully bring an enforcement action for securities fraud that affected retail investors.  Because the whistleblowers submitted their tip to the SEC jointly, they will share the award.

Prior to the initiation of the SEC investigation, the two whistleblowers had “candid discussions” with a different regulatory authority after that agency sent a query letter to their employer.  Notably, the SEC determined that the information provided by the whistleblowers was not “voluntarily” given under Section 21F(b)(1) and Rule 21F-4(a) because they were legally required to respond to the query letter.

Nonetheless, the SEC exercised its discretionary authority under Section 36(a) of the Exchange Act to issue the award because the whistleblowers were unaware of the request from the other regulatory authority and did not learn of the existence of that authority’s investigation until several months after they reported their information to the SEC.  The SEC explained that it was “in the public interest and consistent with the protection of investors” to waive the voluntariness requirement.

Since the inception of the whistleblower program in 2011, the SEC has awarded approximately $384 million to 64 individuals.

Ill. Supreme Court Affirms Dismissal of Ill. Whistleblower Act and Retaliatory Discharge Claims

On May 23, 2019, the Illinois Supreme Court issued a ruling in Roberts v. Board of Trustees of Community College District No. 508, reaffirming the pleading standards for both common law retaliatory discharge and “refusal-to-participate” claims the Illinois Whistleblower Act (“IWA”) (740 ILCS § 174/1).

Background.  In 2015, Plaintiff was employed as Director of Medical Programs at Malcolm X Community College in Chicago (College).  He was responsible for ensuring professors were qualified and certain classes met accreditation standards.  Shortly after Plaintiff voiced his opinion that an instructor at the College was under-qualified to several of his superiors, the College terminated his employment.  Plaintiff filed suit against the College in the Circuit Court of Cook County alleging (in relevant part) that his termination was retaliatory in violation of Illinois public policy and the IWA.  In support of both claims, Plaintiff alleged that the College engaged in fraud, and identified statutes that he claimed to be implicated by his discharge, including statutes regarding funding requirements, describing accrediting agency standards and prohibiting misrepresentations regarding the employability of college graduates.  The Circuit Court dismissed both claims.  On appeal, the First District reversed the dismissal of the retaliatory discharge claim, but upheld the dismissal of the IWA claim.  Both of the parties appealed to the Illinois Supreme Court.

Retaliatory Discharge Claim.  The Court dismissed Plaintiff’s retaliatory discharge claim because Plaintiff did not sufficiently allege that the College’s conduct violated a “clearly mandated public policy.”  The Court considered each of the statutes Plaintiff identified in his complaint, all of which Plaintiff claimed to support the public policy that “students must have the ability to obtain federal funding for postsecondary education.”  The Court determined that Plaintiff had not sufficiently pled that any of the statutes or regulations he cited contained a clear statement of this public policy, and that Plaintiff had not sufficiently pled that the College had violated any of the statutes or regulations.   For example, putting aside Plaintiff’s opinions about the professor’s qualifications, the Court concluded that Plaintiff had not sufficiently pled that the professor’s continued employment resulted in any misrepresentation to students because the complaint “lack[ed] sufficient facts to infer that students who passed [a class taught by an allegedly under-qualified professor] would have failed to meet a … requirement of a certification [toward employment].”

The Court further concluded Plaintiff had insufficiently pled that the College had committed fraud upon its students, and that “[a]lthough fraudulent conduct is actionable, it is a separate cause of action from a retaliatory discharge claim and is only relevant here to the extent that it undermines [plaintiff’s] … asserted public policy that students must have the ability to obtain federal funding for postsecondary education.”

IWA Claim.  The Court dismissed Plaintiff’s IWA claim on the basis that Plaintiff had not sufficiently alleged the conduct in which he “refused to participate” actually violated any of the statutes or regulations identified in his complaint.  The Court reaffirmed the IWA pleading standard, requiring that “a plaintiff must … sufficiently allege not only that he or she refused to participate in the activity but also that the activity violated a statute, rule, or regulation.”   The Court also relied on its analysis of the public policy claim, noting Plaintiff failed to sufficiently plead that the College violated any mandatory accreditation standards or statutes or committed fraud.

Implications.  This decision reaffirms the pleading standards for public policy retaliatory discharge and IWA retaliation claims, underscoring the substantial burdens plaintiffs must satisfy.

House Financial Services Committee Passes Bill to Expand Dodd-Frank Whistleblower Protection to Internal Whistleblowers

On May 8, 2019, the House Committee on Financial Services passed H.R. 2515, the Whistleblower Protection Reform Act of 2019, which would amend Section 922 of Dodd-Frank to extend the statute’s anti-retaliation protections to employees who report alleged misconduct internally.

Digital Realty Trust v. Somers

H.R. 2515 was proposed in direct response to the U.S. Supreme Court’s holding last year in Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018).  As detailed in our blog, in Digital Realty, the Court unanimously held that Dodd-Frank’s anti-retaliation provision only applied to individuals who provide information regarding a violation of securities law to the SEC.  The Court declined to defer to the SEC’s prior Rule 21F-2, which had permitted an individual to gain anti-retaliation protection without providing information to the SEC.  As we reported, following the Digital Realty decision, the SEC voted in favor of amending Rule 21F-2 so that it comported with the Court’s holding.

H.R. 2515’s Expanded Protections

The language passed by the Financial Services Committee on May 8th extends Dodd-Frank’s anti-retaliation protections to any individual who provides information regarding any conduct that the individual “reasonably believes constitutes a violation of any law, rule, or regulation” subject to the SEC’s jurisdiction to:  “(a) a person with supervisory authority over the … [individual] at the … [individual’s] employer; and/or (b) any person working for the employer who has the authority to “investigate, discover, or terminate misconduct.”

H.R. 2515 was originally introduced by Representative Al Green, D-Texas, on May 3, 2019.  It now moves on to the full House of Representatives.

Implications for Employers

If enacted, H.R. 2515 would significantly expand the scope of protections under the Dodd-Frank Act, and could lead to an increase in claims.  We will monitor this legislation and keep our readers posted on developments.

SEC Awards Whistleblower More Than $4.5 Million

On May 24, 2019, the SEC announced payment of more than $4.5 million to a whistleblower who sent an anonymous tip to the company alleging significant wrongdoing and then submitted the same information to the SEC.  (The order granting the award can be accessed here.)

In connection with this award, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said, “[i]n this case, the whistleblower was credited with the results of the company’s internal investigation, which were reported to the SEC by the company and led to the Commission’s resulting enforcement action and the related action.”  She explained that “[t]he whistleblower gets credit for the company’s internal investigation because the allegations were reported to the Commission within 120 days of the report to the company.”

The SEC noted that this is the first time a claimant is being awarded under the provision of the whistleblower rules designed to incentivize internal reporting, by providing that if a whistleblower “provide[s] information … to … an entity’s internal whistleblower, legal, or compliance procedures for reporting allegations of possible violations of law, and … within 120 days, submit[s] the same information to the Commission … the Commission will consider that [the whistleblower] provided information as of the date of [the whistleblower’s] original disclosure … .”  17 C.F.R. § 240.21F-4(b)(7).

Since issuing its first whistleblower award in 2012, the SEC has awarded approximately $381 million to 62 individuals.

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.


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.


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.


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.


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.


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.