CA Supreme Court: Contributing-Factor Standard Applies to Whistleblower Retaliation Claims

On January 27, 2022, the California Supreme Court settled an inconsistency that has divided the courts of appeal with respect to the proper evidentiary standard for whistleblower retaliation claims under California Labor Code section 1102.6.  It ruled that the “contributing-factor” standard applies.  Lawson v. PPG Architectural Finishes, Inc., No. S266001, __ P.3d __, 2022 WL 244731 (Cal. 2022).

Background

Plaintiff-appellant Lawson, who was discharged by his employer PPG Architectural Finishes for alleged poor performance, brought a whistleblower claim against PPG after he allegedly uncovered and reported a supervisor’s scheme to mis-tint unpopular paint colors to avoid buyback requirements.  The district court, applying the three-step framework of McDonnell Douglas v. Green, concluded Lawson did not meet his burden of demonstrating that PPG’s legitimate, non-retaliatory reason for discharging him was pretextual.  Lawson appealed to the Ninth Circuit, which certified to the California Supreme Court the question of which evidentiary standard applies to whistleblower claims under California law.

Ruling

The California courts of appeal have not all applied the same evidentiary standard to whistleblower retaliation claims.  Some courts applied the three-part burden shifting framework established by the U.S. Supreme Court in McDonnell Douglas v. Green, under which (1) the employee first must establish a prima facie case of retaliation, (2) the employer then has the burden to show a legitimate reason for the adverse employment action, and (3) the burden then shifts back to the employee to show the reason given by the employer is pretextual.

Other courts have applied the contributing-factor standard, under which (1) an employee must demonstrate by a preponderance of the evidence that their whistleblowing activity was a contributing factor to the adverse action taken by their employer against them, and then (2) the employer has the burden to show by clear and convincing evidence that they would have taken that action anyways for legitimate, independent reasons, regardless of the employee’s alleged protected activity.

After considering the legislature’s intent behind and the legislative history of section 1102.6, the plain text of the statute, as well as how other courts have addressed and interpreted similar statutes at the federal level, the California Supreme Court rejected the McDonnell Douglas burden-shifting standard in favor of the “contributing-factor” standard.

Implications

Plaintiff’s attorneys are apt to try to capitalize on this ruling, as the “contributing-factor” standard enables a whistleblower to meet their burden by showing their whistleblowing activity was just one factor that contributed to the adverse action, even when there are other, legitimate factors for the employer’s decision.

SDNY: Confidentiality Agreement Impeded Investors from Whistleblowing

On November 17, 2021, the U.S. District Court for the Southern District of New York held that a company and its CEO violated Rule 21F-17 of the Exchange Act by entering into confidentiality agreements with investors that prohibited communications with the SEC, and subsequently attempting to enforce those agreements.  SEC v. Collectors Coffee Inc., No. 19-cv-4355.

Background.  As we previously reported in 2019, the SEC sued Collector’s Coffee, an online auction platform for sports memorabilia, and its CEO, for allegedly defrauding investors and impeding their communications with the SEC in violation of Rule 21F-17.  Rule 21F-17, adopted after the passage of the Dodd-Frank Act, prohibits any person from acting to “impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.”

As discussed in our July 2021 update, the Court previously held that Rule 21F-17 applies to investors as well as employees, finding that the broad definition of “whistleblower” under Section 21F of the Exchange Act extended its protections beyond the employer-employee context.

Ruling.  The Court declined to disturb the prior rulings, holding that the only remaining issue to be resolved is whether defendants’ conduct actually violated Rule 21F-17.  Defendants had entered into agreements with investors that expressly prohibited “communications with any regulatory agencies, such as the United States Securities and Exchange Commission …” and, in at least one instance, sued an investor for breaching this confidentiality clause.  The Court held that such actions were undoubtedly “actions to impede” prohibited by Rule 21F-17, and granted summary judgment in favor of the SEC.

Implications.  The SEC’s successful enforcement of Rule 21F-17 should serve as a reminder that companies must ensure that their agreements and confidentiality provisions include clear carve-outs allowing whistleblowing to the SEC and other regulatory agencies.

EEOC Updates COVID-19 Guidance with Anti-Retaliation Section

On November 17, 2021, the EEOC updated its technical guidance on COVID-19 and anti-discrimination with a new anti-retaliation section.

The new section largely restates existing statutory anti-retaliation protections in the context of COVID-19.  The guidance provides several examples of COVID-related protected activity, which include filing a charge with the EEOC alleging that an employer has unlawfully disclosed confidential medical information (such as a COVID-19 diagnosis), informing a supervisor or HR representative of accusations that Asian coworkers are spreading COVID-19, or reporting harassing comments toward coworkers who remain unvaccinated for religious reasons.  Employers may not retaliate against employees for requesting continued telework as a disability accommodation, or for requesting protective gear that can be worn with religious garb.  Making such requests is protected, even if the requests are later denied; for instance, if the employer determines that the employee does not have a disability under the ADA, or where the requested accommodation would pose an undue hardship.

The guidance reiterates that an employer’s action constitutes retaliation if it could deter a reasonable person from engaging in protected activity.  Retaliatory acts may include denial of promotion or job benefits, non-hire, suspension, discharge, work-related threats, warnings, negative or lowered evaluations, or transfers to less desirable work or work location.  However, employers are permitted to take adverse action based on non-retaliatory and non-discriminatory reasons, such as poor performance or misconduct.

In sum, the EEOC’s updated guidance cautions employers to be mindful of their non-discrimination and anti-retaliation policies in navigating ever-changing federal, state, and local COVID-19 regulations, lest they run afoul of the ADA or other antidiscrimination statutes.

SEC Awards $400,000 to Whistleblower Culpable In Fraudulent Scheme

On November 23, 2021, the SEC issued an award of $400,000 to a whistleblower who voluntarily provided the SEC with original information that assisted the agency in bringing a successful enforcement action that resulted in the termination of an ongoing Ponzi-like scheme.

This award is notable in that the claimant received an award even though they were found to be partially culpable in the fraudulent scheme.  The order granting the award noted that “[w]hile Claimant was not charged in the matter, the record reflects that Claimant became aware of” the scheme, but also recognized several mitigating factors, including that the claimant “was unaware of certain fraudulent aspects of the investment scheme, and took some steps to help remediate the harm.”  The SEC concluded that the award “strikes the appropriate balance between Claimant’s significant contributions to the success of the Covered Action and Claimant’s level of culpability.”

SEC Releases FY 2021 Whistleblower Program Annual Report

On November 15, 2021, the SEC published its annual report to Congress covering the period from October 1, 2020 to September 30, 2021.  The report was prepared by the SEC’s Office of the Whistleblower to summarize its whistleblower bounty program, report on the program’s recent dramatic growth, and highlight key amendments to the SEC’s whistleblower program rules.

Record-Breaking Awards for Whistleblower Bounty Program

The report reveals that in FY 2021, the whistleblower program experienced the largest number of submissions to the program and the largest number of award recipients.  The SEC paid out more in whistleblower awards this fiscal year than in all previous years combined.

The SEC received more than 12,200 whistleblower tips; an increase of 76% from FY 2020.  The tips were received from 99 different countries and all 50 states.  The most common violations reported included: Manipulation (25%), Corporate Disclosures and Financials (16%), Offering Fraud (16%), Trading and Pricing (6%), and Initial Coin Offerings and Cryptocurrencies (6%).

Overall, the SEC awarded approximately $564 million to 108 individuals in FY 2021, including the two largest single award payouts to date—$114 million in October 2020 and $110 million in September 2021—which brought the total amount the SEC has awarded to whistleblowers since the program’s inception to $1.1 billion.  

Amendments to Whistleblower Program Rules

The SEC adopted several changes to its whistleblower program effective as of December 2020, including to its award-setting procedures and to the definition of a “whistleblower” (see our post on those changes here).  According to the report, these amendments “increased efficiencies around the review and processing of whistleblower award claims.”

Under the new rules, the SEC issued two permanent bar orders against serial submitters who were responsible for hundreds of frivolous award applications.

The report also noted that in August 2020, the new SEC Chair, Gary Gensler, directed staff to consider revisions to two amendments that could have discouraged tips by allowing the SEC to limit the size of some of the largest awards and to unilaterally deny “related action” awards where there is another applicable whistleblower award program.

CA District Court: Dodd Frank Whistleblower Provision Does Not Apply Extraterritorially

On June 28, 2021, the United States District Court for the Northern District of California granted the Company’s Rule 12(b)(6) motion to dismiss after an executive claimed he was discharged in violation of the Dodd-Frank Act’s (DFA) whistleblower protection provision for alerting the Company and authorities about possible tax fraud.  Airton Amorim De Almeida v. Western Digital Corp., No. 3:20-cv-04735.  According to the court, the DFA whistleblower provision did not apply because the relevant events occurred in Brazil.

Background

Plaintiff, a citizen and resident of Brazil, brought suit against the company and a Brazilian entity that is wholly owned and operated by the Company.  While working in Brazil for the Company, Plaintiff allegedly became concerned with potentially fraudulent conduct.  He notified the SEC and the DOJ, and allegedly submitted an anonymous email to company executives alerting them of his concerns.  This resulted in both an SEC investigation and an internal investigation.

About a year after lodging his complaints, Plaintiff allegedly was “duped into” participating in a phishing scam that cost the Company $2 million.  As a result, the Company relieved Plaintiff of some of his responsibilities, and in 2017, his employment with the Company ended.  There was some disagreement with respect to whether Plaintiff was terminated or whether there was mutual agreement to end his employment.  Over two years after Plaintiff’s separation, he brought suit against the Company and its wholly owned Brazilian subsidiary, alleging whistleblower retaliation in violation of the DFA.  Both entities sought to dismiss Plaintiff’s claims.

Ruling

The court held that because Plaintiff relied on the DFA anti-retaliation provision and that provision does not apply to alleged retaliatory conduct that takes place overseas, Plaintiff failed to state a claim.  Plaintiff was a resident of a foreign country, was employed by a foreign company, and the allegedly corrupt activities took place in a foreign country.  Further, any potential adverse employment action took place in Brazil.

In addition, even though the court refused to allow such extraterritorial application of the provisions under the DFA, it could rely on the following to conclude that Plaintiff failed to allege sufficient facts to give rise to a plausible inference that he suffered adverse employment actions in retaliation for whistleblowing:  Plaintiff fell prey to a phishing scam, costing the Company $2 million, and the fact that over a year had elapsed between the alleged whistleblowing behavior and Plaintiff’s eventual separation.

Implications

This decision confirms that the DFA whistleblower protection provision does not extend extraterritorially.

New York’s Whistleblower Protection Law Is Dramatically Expanded

On October 28, 2021, New York Governor Kathy Hochul signed into law a bill dramatically expanding New York’s whistleblower statute, New York Labor Law § 740, which is scheduled to take effect on January 26, 2022.  S4394A/A.5144A.

The Previous Whistleblower Law

New York Labor Law § 740, which was enacted in 1984, was 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 under the previous statute was focused on alleged harm to the public at large.  The whistleblower employee had to 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 resulted from the violation affected the public-at-large, as opposed to an individual plaintiff or group.  The statute formerly contained a broad election of remedies provision, but it was eliminated in 2019 and replaced with new language stating that “Nothing in this section shall be deemed to diminish the rights, privileges, or remedies of any employee under any other law or regulation or under any collective bargaining agreement or employment contract.”  N.Y.L.L. § 740(7).

The statute of limitations for a § 740 claim was one year and employees who successfully proved that they were retaliated against were entitled to recover back pay, but not compensatory or punitive damages.  They also were not entitled to a jury trial.

As we previously reported, attempts were made in previous years to expand § 740, but, other than the 2019 amendment, none of the proposed bills were signed into law.

The New Expanded Whistleblower Law

The new expanded law significantly bolsters protections for private-sector employees alleging retaliation, and exposes employers to significant additional liability.

Expanded Definition of “Employee”

The amended law adds “former employees” and “independent contractors” to those “employees” permitted to bring whistleblower claims.

Change to Reasonable Belief Standard

The amended law removes the previous requirement that there be an actual violation of the law.  Employees are now protected if they “reasonably believe” an employer’s activity or conduct is (i) in violation of a “law, rule or regulation,” including executive orders and judicial or administrative decisions, rulings, and orders; or (ii) “poses a substantial and specific danger to the public health or safety.”

Expansion of Protected Activity

The prior law required that employees first report violations to their employers before disclosing violations to a public body, thereby providing a reasonable opportunity to correct the alleged violation.  The amended law now requires employees to make a “good faith effort” to notify their employer.  Employer notification is not necessary if (i) there is imminent and serious danger to public health; (ii) the employee reasonably believes reporting of the violation to the employer would result in the destruction of evidence, concealment, or harm to the employee; or (iii) the employee reasonably believe that their supervisor is already aware of the violation and will not correct it.

Expansion of Prohibited Retaliatory Conduct

The amended law expands the definition of prohibited “retaliatory actions” to include (i) adverse employment actions against current employees, such as discharge, suspension, or demotion; (ii) actions or threats that would adversely impact a former employee’s current or future employment; or (iii) contacting or threatening to contact immigration authorities on an employee or their family member.

Additional Remedies, Longer Statute of Limitations, and Right to Jury Trial

The amended law expands the remedies potentially available to whistleblowers to include: front pay, civil penalties not to exceed $10,000, and punitive damages (in addition to back pay).  The statute of limitations is extended from one year to two years, and whistleblowers now have a right to a jury trial.

Notification

Employers must notify employees of their rights under the whistleblower law by posting a notice in a conspicuous place.

Implications

New York’s expanded whistleblower law exposes New York employers to a dramatically altered regulatory environment.  Internal compliance mechanisms as well as whistleblower policies and procedures are thus of even greater importance than before.

SEC Awards $40 Million to Two Whistleblowers

On October 15, 2021, the SEC’s Office of the Whistleblower announced multi-million dollar awards to two whistleblowers who provided the SEC with information that assisted the agency in bringing a successful enforcement action.  (The order granting the awards can be accessed here.)  The larger of the two awards, $32 million, was awarded to the whistleblower whose information caused the opening of the investigation and exposed difficult-to-detect violations.  The second award of $8 million was given to a second whistleblower who submitted important additional information after the investigation was already underway.

Emily Pasquinelli, Acting Chief of the SEC’s Office of the Whistleblower, said in a press release that “[t]hese whistleblowers reported critical information that aided the Commission’s investigation and provided extensive, ongoing cooperation that helped the Commission to stop the wrongdoing and protect the capital markets.”

Since the inception of the whistleblower program in 2011, the SEC has awarded approximately $1.1 billion to 218 individuals.

SEC Announces $36 Million Award to Whistleblower

On September 24, 2021, the SEC announced an approximately $36 million award to a whistleblower who provided critical information to the SEC that contributed to a successful enforcement action.  (The order granting the award can be accessed here.)

Emily Pasquinelli, Acting Chief of the SEC’s Office of the Whistleblower noted that “[w]histleblowers can act as a springboard for an investigation or, like here, they can propel forward an already existing investigation.”

Since issuing its first whistleblower award in 2012, the SEC has awarded approximately $1.1 billion to 214 individuals.

Over $1 Billion Whistleblower Awards Paid to Date by the SEC

On September 15, 2021, the SEC announced accumulated awards of over $1 billion paid to 207 whistleblowers since its first award in 2012.  Over $500 million was awarded in fiscal year 2021 alone.

The SEC crossed the billion-dollar milestone with awards of $110 million and $4 million to two whistleblowers on September 15, 2021.  The $110 million award marks the second-highest award to date and consists of $40 million stemming from an SEC case and $70 million for related actions by another agency.

An examination of the $110 million award order provides important insights into the SEC’s evaluation of whistleblower assistance.  According to the SEC, the information provided by the award recipient was valuable because it was based on the whistleblower’s own examination, evaluation, and independent analysis, and it contributed significant independent “original information” that bridged the gap between certain publicly available information and the possible securities violations that the Commission and the Other Agency were investigating.  For example:

  • The whistleblower used publicly available information to provide the Commission with important insights into the extent of the alleged misconduct.
  • The whistleblower also provided information derived from multiple sources not readily identifiable or accessible by members of the public without specialized knowledge, unusual effort, or substantial cost.
  • The whistleblower’s sources collectively raised a strong inference of securities law violations not otherwise reasonably inferable from any individual source.

The SEC noted that, as a result of this analysis, the whistleblower provided the agency with a detailed suggested witness list and other supporting documentation, thereby saving the SEC significant time and resources.  The whistleblower also provided substantial, ongoing assistance to the staff, including multiple written submissions, communications, and in-person meetings.  The SEC also disclosed that the whistleblower suffered personal and professional hardships as a result of the whistleblower activities (while not providing any details regarding such hardships).

The SEC acknowledged, however, that the whistleblower submitted information after the Commission had already opened an investigation of the potential misconduct, and it assisted with only some of the misconduct the staff was investigating – suggesting even a higher possible award where these circumstances are not present.

The award amount can range from 10-30% of the money collected when the monetary sanctions exceed $1 million.  Rule 21F-5(b).  But, the award is at the discretion of the SEC, and the same order which provided for the $110 million award to a whistleblower denied an award to another whistleblower in an unrelated award claim.

An award can also be provided for an action that results in a non-prosecution agreement (NPA) or deferred prosecution agreement (DPA), based on the amendments to the SEC whistleblower program rules in December 2020.  As such, in February 2021, a whistleblower who had already received an award for an SEC enforcement action received another award for a successful NPA or DPA resolution by the Department of Justice on a related action.

Stay tuned for our ongoing review of the monthly notices of Covered Actions.  See our previous posts on the June 2021 Covered Actions here and July 2021 Covered Actions here.

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