DC Circuit Upholds SEC’s Denial of Dodd-Frank Bounty Award

On March 20, 2018, the DC Circuit upheld the SEC’s denial of a Claimant’s application for a Dodd-Frank whistleblower bounty award because the SEC did not rely on the information provided by the Claimant in pursuing an enforcement action against Management Solutions.   In upholding the SEC determination, for first time, the court identified the standard of review for an appeal of the SEC’s denial of an award in a whistleblower action, holding that the appropriate standard under 5 U.S.C.A. § 706(2)(E) is whether the SEC’s determination was based on “substantial evidence.”  Doe v. SEC, 2018 U.S. App. Lexis 7449 No. 16-1414 (D.C. Cir. Mar. 20, 2018). Continue Reading

Tenth Circuit Reverses Grant of Summary Judgment on SOX Whistleblower Claim

On February 22, 2018, the Tenth Circuit Court of Appeals reversed a district court’s grant of summary judgment against Plaintiff who claimed that his employment was terminated in violation of the SOX whistleblower protection provision.  The court concluded that genuine issues of material fact existed as to whether Plaintiff actually believed that the complained-of conduct was unlawful and whether the complaints were a contributing factor in Plaintiff’s termination. Genberg v. Porter, No. 16-cv-1368.

Background.  Plaintiff was an executive at a biopharmaceutical company.  In March 2010, he sent a pair of e-mails to the company’s board of directors, which alleged, among other things, that the CEO was engaged in insider trading.  The board hired an attorney to investigate, and the investigation found no evidence of insider trading but allegedly uncovered that Plaintiff had been involved in an attempt to acquire the company.  Allegedly on that basis, the board discharged Plaintiff.  Plaintiff proceeded to sue the CEO under SOX in the United States District Court for the District of Colorado, arguing that the e-mails constituted protected activity.  The district court granted the employer’s motion for summary judgment, holding that at least one of Plaintiff’s two e-mails had not been protected by SOX because it did not “definitively and specifically” relate to a violation of one of the laws enumerated in Section 806 of SOX.

Rulings.  The Tenth Circuit reversed the district court, ruling that the lower court had incorrectly applied the “definitively and specifically” standard when it should have applied the standard articulated by the Administrative Review Board in Sylvester v. Parexel, No. 07-123 (ARB May 25, 2011).  The court wrote, “[the district court’s] statement of the burden was incorrect, for the Administrative Review Board of the Department of Labor has explicitly disavowed the definitive and specific evidentiary standard… [and] [u]nder Chevron deference, we follow the Administrative Review Board’s interpretation if it is based on a permissible construction of an ambiguous statute.”  Further, the Tenth Circuit found that genuine factual disputes existed as to whether Plaintiff’s e-mails contributed to the decision to terminate his employment.  The court reasoned that the temporal proximity between the e-mails and the board’s decision to discharge the Plaintiff meant that a reasonable factfinder could potentially conclude that the e-mails had been a contributing factor in the decision.

Implications.  The Tenth Circuit’s opinion is another example of a court deferring to the ARB’s standard in Sylvester, which lowers the burden for a plaintiff who seeks to demonstrate that he or she engaged in protected activity under SOX.

Mississippi Federal Court Denies Summary Judgment on SOX Whistleblower Claim

On February 12, 2018, the United States District Court for the Northern District of Mississippi recently denied a motion for summary judgment in a SOX whistleblower claim where the defendant company alleged that it terminated the plaintiff pursuant to a reduction-in-force (RIF). Hendrick v. ITT Engineered Valves, LLC, No. 16-cv-204.

Background. Plaintiff began working as Operational Excellence Manager at a company that was considering a RIF to respond to a decline business.  Recognizing that he may lose his job, Plaintiff offered to management that he take off Fridays off to reduce expenses.  Later that month, Plaintiff allegedly observed fraudulent inventory figures.  Plaintiff photographed the proof of the alleged fraud and gave the pictures to a co-worker, who submitted an anonymous ethics complaint.  Three hours after the report was filed, Plaintiff was informed that his job was being restructured, and Plaintiff interpreted this as a demotion.  Plaintiff then e-mailed management about the alleged fraud.  He and his co-worker who submitted the anonymous ethics complaint were both terminated months later.  The organization cited a RIF as its reason for the layoffs.  Plaintiff filed suit alleging he was terminated because of his co-worker’s anonymous ethics complaint in violation of SOX.

Rulings. The company moved for summary judgment, arguing that because Plaintiff failed to identify any fraudulent activity that would qualify as a protected activity.  Specifically, it argued that Plaintiff never accused the company of any SOX violation and failed to articulate his fraud claim in deposition testimony.  But the court determined that there were questions as to whether Plaintiff’s purported beliefs were objectively and subjectively reasonable.  The company also argued that there was no materially adverse employment action, as the restructuring was not a demotion and because Plaintiff’s termination was planned prior to the whistleblowing activity.  For summary judgment purposes, however, the court found that Plaintiff established a prima facie case that the alleged demotion and termination were adverse actions. Notably, moreover, even though the organization provided a “first pass” of names to be included in the RIF, it was not deemed to be “clear and convincing” evidence that the organization would have terminated Plaintiff in the absence of his protected activity.

Implications. While a pre-planned RIF may in many cases provide a compelling explanation as to why one was not terminated for whistleblowing activity, this decision shows that this defense is not always an impenetrable shield to a SOX claim at the summary judgment phase.

U.S. Supreme Court Holds That Anti-Retaliation Provisions of Dodd-Frank Apply Only to Whistleblowers Who Report to the SEC

On February 21, 2018, the U.S. Supreme Court unanimously ruled that an individual is not covered by the anti-retaliation provision of the Dodd-Frank Act unless they have provided information regarding a violation of law to the U.S. Securities and Exchange Commission. Digital Realty Trust, Inc. v. Somers, No. 10-1276, 583 U.S. ___ (2018).

Somers was a Vice President of Digital Realty, a real estate investment trust, who filed suit alleging a claim of whistleblower retaliation under Dodd-Frank. Somers alleged that he was terminated for reporting suspected securities law violations to senior management.  Digital Realty moved to dismiss Somers’ claim on the basis that Somers did not qualify as a “whistleblower” because he never reported any alleged violations to the SEC.

The Dodd-Frank Act defines a “whistleblower” as a person who provides “information relating to a violation of the securities laws to the Commission.” The Dodd-Frank Act’s anti-retaliation provision protects a “whistleblower” in three situations, including when he or she makes disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.  Sarbanes-Oxley includes several provisions regarding internal reporting of securities laws violations.  In interpreting this provision, the SEC issued Rule 21F-2, which expressly allows an individual to gain anti-retaliation protection as a whistleblower without providing information to the SEC.

The District Court denied Digital Realty’s motion to dismiss, and the Ninth Circuit affirmed. In particular, the Ninth Circuit found the statutory scheme ambiguous and held that the SEC’s Rule 21F-2 warranted deference under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984).

In reversing the Ninth Circuit’s decision, the Supreme Court unanimously held that the anti-retaliation provision must be interpreted in accordance with the statute’s definition of a “whistleblower.” Because this definition was “clear and conclusive” and “Congress [had] directly spoken to the precise question at issue,” Chevron deference to the SEC’s Rule was not appropriate.  The Court reasoned that this interpretation is in line with Dodd-Frank’s core objective of prompting reporting to the SEC.

Proskauer represented the U.S. Chamber of Commerce in its submission of an amicus brief in support of Digital Realty and a reversal of the Ninth Circuit’s decision.

The Court’s decision settles a circuit split between the Second and Fifth Circuits on the issue. The Ninth Circuit had followed the Second Circuit’s decision in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015), holding that a whistleblower need not report a securities law violation to the SEC.  The Second Circuit concluded that the tension between the definition of “whistleblower” and the protection provided by Dodd-Frank’s anti-retaliation provision was sufficiently ambiguous to warrant Chevron deference to the reasonable interpretation of the SEC.  In contrast, the Fifth Circuit held in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), that employees must provide information to the SEC to avail themselves of the anti-retaliation safeguard. The Fifth Circuit held that Congress defined a “whistleblower” unambiguously and rejected the SEC’s more expansive interpretation of that term.

S.D.N.Y Dismisses Dodd-Frank Whistleblower Action

On February 5, 2018, U.S. District Court for the Southern District of New York granted Defendant Khan Funds Management America, Inc.’s Rule 12(b)(6) motion to dismiss a whistleblower retaliation claim under Dodd-Frank on the grounds that Plaintiff failed to state a claim upon which relief could be granted.  Polite v. Khan Funds Mgmt. Am., Inc., 17-cv-2988.

Defendant employed Plaintiff for approximately one year as its sole accountant.  In April of 2016, he allegedly reported to the Head of Financial Operations his suspicions of deceptive contracting and that the company’s founder was embezzling funds.  Plaintiff alleged that over the following months, he “repeatedly raised these issues,” including requesting “documents to support transactions” appearing on Defendant’s bank accounts, highlighting a failure to recoup on breached international contracts in July 2017, and other instances of underpayment.  Plaintiff alleged that these concerns were either ignored or he was told that because “he was not part of ‘management,’ he did not need to know about certain matters.”  In September 2016, Plaintiff’s employment was terminated.  Plaintiff then pursued a federal action under Dodd-Frank.

The district court dismissed Plaintiff’s complaint pursuant to Rule 12(b)(6).  The court first determined that Plaintiff did not have a claim under Dodd-Frank because he did not complain to the SEC.  (This issue is currently pending before the United States Supreme Court, as noted in our blog post here.)  The court also concluded that Plaintiff did not engaged in protected activity because he did not make disclosures that are “explicitly ‘required or protected’ under a rule or law within the SEC’s purview.”

This case is valuable to employers, as it underscores that one must specifically complain of securities law violations to state a claim under Dodd-Frank.

Court Precludes Parallel Cause of Action Where CEPA Violations Are Plead

On January 30, 2018, the U.S. District Court for the District of New Jersey granted Defendant Public Service Electric & Gas Co.’s motion to dismiss a New Jersey common law wrongful termination claim in a whistleblower retaliation suit after finding that once discovery closes, a plaintiff may not continue pursuing a wrongful termination claim under both common law and New Jersey Conscientious Employee Protection Act (CEPA).  See Hrinuk v. Public Service Electric & Gas Co., No. 2014-cv-00988 (unpublished).

Plaintiff allegedly reported to management that he was “forced and directed to sign off on work that he had not actually inspected” and improperly “charge repairs to capital accounts.”  Plaintiff claimed that after reporting the alleged inspection practices, he was wrongfully terminated.  Shortly thereafter, he filed suit alleging wrongful termination under CEPA and common law.

When discovery in the case closed, Defendant moved to dismiss the common law wrongful termination claim, arguing that, pursuant to a “waiver” provision in CEPA, when a plaintiff brings a suit under the statute, he or she is waiving other rights and remedies available in “contract, collective bargaining agreement, State law, rule or regulation or under the common law.”  N.J. Stat. Ann. Section 34:19-8.  Plaintiff responded that he should be permitted at the summary judgment stage to elect between moving forward with a CEPA claim or any other claim.  The court disagreed, determining that the waiver provision under CEPA activates at the close of discovery and, at that time, bars other causes of action that are based on the same conduct upon which the CEPA claim is based.

This decision benefits employers faced with complaints alleging multiple wrongful termination theories—including CEPA violations—as it enables them to put plaintiffs to an election when discovery closes.

Missouri Court of Appeals Upholds $1.5 Million Whistleblower Jury Verdict

On January 22, 2018, the Missouri Court of Appeals upheld a jury verdict awarding approximately $1.5 million in damages to a radiation oncologist after finding that she had been constructively and wrongfully terminated in violation of Missouri law (specifically, “Missouri public policy”) in retaliation for reporting alleged instances of substandard medical treatment and fraud. Kim v. Mercy Clinic Springfield Communities, Case Nos. SD34547 & SD34561.

Defendant employed Plaintiff as a radiation oncologist from 2006 to 2012. During Plaintiff’s employment, she reported suspected Medicare fraud and violations of patient care standards to Defendant.  Plaintiff claimed that, after raising these concerns, Defendant retaliated against her and ultimately forced her to resign.  Plaintiff filed suit alleging that she had been constructively discharged in violation of Missouri public policy.  The case proceeded to trial and the jury subsequently found that Plaintiff had been constructively discharged in violation of public policy.  The jury awarded her $720,821 in compensatory damages and $800,000 in punitive damages on her wrongful termination claim.  Defendant appealed, contending that the trial court erred in denying its motions for a directed verdict.  The Missouri Court of Appeals denied Defendant’s appeal and upheld the jury’s verdict and award.  The court held that Defendant failed to preserve the issues it raised on appeal.

This sizeable adverse jury verdict highlights the risks that employers may face in trying whistleblowing and retaliation suits to a jury.

 

Portland Jury Awards $1 Million to Whistleblower

On January 17, 2018, a Portland, Oregon jury issued a verdict of $1 million in damages to a former employee who alleged that his employer retaliated against him for reporting misconduct. Zweizig v. Northwest Direct Teleservices, Inc., 15-cv-02401 (D. Or. 2018).

Plaintiff worked for Defendant from 2001 to 2003. After his employment was terminated, he filed suit against the Company and certain officers alleging he was discharged in retaliation for reporting the overbilling of clients to the Oregon Department of Justice and the Lane County, Oregon District Attorney.  Plaintiff prevailed at arbitration on a claim under ORS 659A.230 (Discrimination for Initiating or Aiding in Criminal or Civil Proceedings Prohibited) and wrongful termination, and after judgment was entered in his favor, Defendants allegedly failed to satisfy the judgment.

After allegedly being unable to collect on the arbitration judgment, in 2014, Plaintiff filed suit in the U.S. District Court for the District of Oregon alleging that Defendants had engaged in fraud to prevent him from enforcing the arbitration judgment. Shortly after filing suit in 2014, Plaintiff alleged the owner of his former employer began to spread false information about him on a blog.  On December 24, 2015, Plaintiff filed another lawsuit against his former employer and its owner alleging that they violated:  ORS 659A.230; ORS 659.199 (Prohibited Conduct by Employer); and ORS 659A.030(1)(f) (Retaliation for Opposing Unlawful Conduct and Aiding & Abetting in the Same) as a result of the aforementioned alleged conduct.  After a two day jury trial, the jury found that the Company’s owner had “aided and abetted [the Company] in retaliating against Plaintiff,” and awarded Plaintiff $1 million in non-economic damages.

This case highlights the risk that a company may be found to have engaged in whistleblower retaliation after the employment relationship has ended.

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.

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