California Federal Court Stays SOX Claim Pending Arbitration of Related Claims

On December 21, 2018, the U.S. District Court for the Northern District of California stayed a plaintiff’s whistleblower retaliation claim under SOX (which was not subject to mandatory arbitration) while granting a motion compelling arbitration of the plaintiff’s remaining employment discrimination and retaliation claims. Anderson v., Inc., No. 18-cv-06712-PJH.


Plaintiff alleged that he was terminated after he raised concerns about his employer’s accounting practices. He subsequently filed suit in the Northern District of California asserting ten causes of action under the FMLA and California law for various forms of employment discrimination and retaliation, and an eleventh cause of action under SOX for whistleblower retaliation. While employed, the plaintiff had signed an arbitration agreement in which he agreed to “resolve by arbitration all claims or controversies, past, present, and future” that he may have against Defendant. However, as Dodd-Frank invalidated pre-dispute arbitration agreements regarding whistleblower claims under SOX, 18 U.S.C. §1514A(e)(2), the employer moved to compel arbitration only of the first ten causes of action, and to stay the SOX claim pending resolution of the arbitration.


The court granted the motion to compel arbitration and stayed the SOX claim pending resolution of the arbitration. In granting the motion to compel arbitration, the Court found that a valid and enforceable agreement to arbitrate existed between the parties and that the claims at issue fell squarely within the scope of the agreement. The Court also granted the employer’s motion to stay the non-arbitrable SOX claim, because that claim arose from the same conduct as Plaintiff’s arbitrable claims. The Court reasoned that allowing the arbitration to run its course would simplify issues of law or questions of fact relating to the SOX claim in future proceedings.


This is a win for the employer, as it was able both to enforce its arbitration clause and avoid litigating essentially the same set of facts in two places at once. Moreover, to the extent the employer establishes meritorious defenses to the other claims in arbitration, those defenses may have res judicata and/or collateral estoppel effects on the stayed SOX claim.

SEC Releases FY 2018 Whistleblower Program Annual Report

On November 15, 2018, the U.S. Securities and Exchange Commission (“SEC”) published its statutorily mandated fiscal year report to Congress covering the agency’s whistleblower program.

The report, which covers the period from October 1, 2017 through September 30, 2018, was prepared by the SEC’s Office of the Whistleblower (“OWB”) to summarize its whistleblower bounty program, report on the program’s recent growth, and highlight key amendments to the SEC’s Dodd-Frank regulations.

Whistleblower Bounty Program

Through the whistleblower bounty program, the SEC offers a financial reward to individuals who report original, relevant information that leads to a successful enforcement action.  The SEC’s report states that 69% of bounty recipients to date are current or former corporate insiders.  Of these insiders, roughly 83% initially raised their concerns to their employer through internal reporting mechanisms, or perceived that their relevant compliance personnel knew of the violation, before contacting the SEC.  Bounty recipients’ tips have contributed to enforcement actions related to alleged false or misleading statements in offering memoranda or marketing materials, false pricing information, accounting violations, internal controls violations, and FCPA violations, among other conduct.  For FY 2018, the SEC reports that the most common activities reported by whistleblowers related to offering fraud (20%), corporate disclosures and financials (19%), and market manipulation (12%).

The statistics provided in the SEC’s report suggest that the whistleblower program expanded in FY 2018.  During that period, the SEC awarded more money to whistleblowers than in all of the program’s prior years combined.  In FY 2018, more than $168 million were distributed across 13 individuals whose initial tips and subsequent cooperation aided in the execution of successful enforcement actions.  The SEC’s March 2018 award of $83 million included an almost $50 million joint award to two individuals, the SEC’s largest single award ever.

OWB received a total of 5,200 whistleblower tips in FY 2018, more than in any other previous year.  This represents an almost 20% increase from FY 2017 and close to a 76% increase since the SEC started tracking statistics for this whistleblower bounty initiative in 2012.

Proposed Rule Amendments

The SEC attributes some of the recent uptick in whistleblowing to the Supreme Court’s ruling in Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018).  In that decision, the court held that Dodd-Frank’s anti-retaliation protections only cover individuals who have reported information to the SEC (as opposed to making an internal complaint to their employer).  In response to Digital Realty, the SEC revised its previously expansive definition of the term “whistleblower” to comply with the Supreme Court’s decision.

The SEC has also proposed other amendments to its regulations aimed at barring whistleblowers who repeatedly make frivolous bounty claims and affording OWB additional discretion in making bounty determinations.  For example, one such proposed amendment would require an “enhanced review” of awards resulting from enforcement actions that yield penalties in excess of $100 million whereby the gross amount of the bounty award would be a factor considered by the SEC.  With the public comment period for these rule modifications having ended on September 18, 2018, the SEC is now reviewing the comments before the rules themselves are finalized.  The full text of these proposed amendments can be found here.

N.D. Illinois Refuses To Expand Reach of Commodity Exchange Act Whistleblower Provisions

On October 22, 2018, the U.S. District Court for the Northern District of Illinois granted a Rule 12(b)(6) motion to dismiss a first-impression whistleblower retaliation claim under the Commodity Exchange Act (“CEA”).  Johnson v. Oystacher, No. 15-cv-02263.


Plaintiff and Defendant went into business together in January 2011, with Plaintiff acting as Chief Risk Officer and Defendant handling the company’s volume futures trading.  They split ownership of the company by 10% and 90% respectively.  In December of 2012, Plaintiff testified in connection with the CFTC’s investigation of Defendant’s trading activities, stating he did not believe Defendant was engaged in improper trading.  Later, he took the opposite view, believing Defendant was engaged in “spoofing” (an unlawful trading practice).  In June 2013, Plaintiff allegedly demanded that Defendant either cease the trading activities at issue or stop trading completely.  Later the same month, Plaintiff was ousted from the company,  allegedly for “misrepresenting his capital contribution to [the company], using money from [the company] for personal use without authorization, and creating a phony [company] operating agreement.”  Plaintiff alleged that Defendant then threatened him and coerced him into relinquishing his 10% ownership interest by signing a settlement agreement, “the terms of which were meant to prevent him from disclosing to regulators information about [Defendant’s] illegal trading.”  Defendant then filed suit alleging he was retaliated against in violation of the CEA (among other claims, including RICO and state law claims) in connection with the foregoing confrontation and Defendant’s alleged attempt to prevent him from assisting the CFTC in its investigation into Defendant’s trading.


The court granted Defendant’s motion to dismiss without prejudice.  It rejected Plaintiff’s argument “that the whistleblower protections afforded by the SEC should be imputed to the [CEA]” because the CEA protects “individuals who are retaliated against for providing information to the CFTC or for assisting in a CFTC action based upon or related to such information.”  The court found that Plaintiff failed to state a claim for relief under the CEA’s anti-retaliation provision because he was not retaliated against for providing information to the CFTC or assisting the CFTC in an investigation stemming from that information.  The court rejected Plaintiff’s argument that a new regulation, which “extend[ed] the [CEA’s] anti-retaliation protections to whistleblowers who report internally prior to providing information to the CFTC,” applied retroactively to his claim.  The court reasoned that Plaintiff did not “allege that he provided information to the CFTC or otherwise assisted it in an investigation or administrative action.  Thus, regardless of the regulator’s retroactive effect, his claim still fails.”  The court gave Plaintiff leave to plead a claim under a different theory.


This first-impression decision shows courts’ reluctance to expand the CEA whistleblower provisions beyond their plain import.

Federal Court Allows SOX Whistleblower Claim To Proceed But Dismisses Dodd-Frank Claim

On October 2, 2018, the U.S. District Court for the Western District of Pennsylvania federal court denied a Rule 12(b)(6) motion to dismiss a SOX whistleblower retaliation claim, reasoning that Plaintiff sufficiently alleged that he engaged in protected activity and that his protected activity was a contributing factor in his termination.  But it dismissed the Dodd-Frank whistleblower claim because Plaintiff only provided information to the SEC after his employment was terminated.  Wutherich v. Rice Energy Inc., No. 18-cv-200.


Plaintiff worked for Defendant as Director of Completions.  He alleged his employment was terminated in order to conceal a report he made to the Chief Operating Officer and President that he believed the Vice President, who was an owner of a company that provided services to Defendant (Silver Creek), “was self-dealing due to his interest in Silver Creek and making bad business decisions as a result.  [And] . . . that the selection of Silver Creek constituted a securities violation.”  Plaintiff also reported to the same Vice President that Defendant’s 10-k filings with the SEC allegedly failed to list known “theft of trade secrets as one of its liability risks,” and that he believed the failure to disclose was a securities violation.  Plaintiff reported these alleged violations to the SEC after his employment was terminated.  Following the termination of his employment, Plaintiff filed suit alleging he was retaliated against for engaging in protected activity in violation of the SOX and Dodd-Frank whistleblower protection provisions.


Defendant moved to dismiss both whistleblower retaliation claims pursuant to Rule 12(b)(6).  With respect to the SOX claim, it argued that Plaintiff did not engage in protected activity and even if he did, he did not allege that the management officials involved in the decision to terminate his employment were aware of his protected activity.  In a conclusory fashion, the court found that at this early stage in litigation the Plaintiff had alleged sufficient facts to “support an inference that his communication to [the Vice President] and others in management reflected a reasonable belief that Defendant’s conduct constituted a securities violation and thus was protected activity under [SOX].”  Likewise, the court found that Plaintiff alleged “circumstances sufficient to raise an inference that Plaintiffs protected activity was a contributing factor in his termination.”  However, the court dismissed the Dodd-Frank claim, ruling that “[b]ecause Plaintiff did not provide information to the [SEC] before his termination, he did not qualify as a whistleblower at the time of the alleged retaliation and is therefore ineligible to seek relief.”


This is the second district court case in the Third Circuit applying Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018), to alleged Dodd-Frank whistleblowers that report violations to the SEC after their employment is terminated.

SEC Issues More than $54 Million to Two Whistleblowers

On September 6, 2018, the SEC Office of the Whistleblower awarded $39 million to one whistleblower and $15 million to another. The $39 million award is the second-largest award in the history of the program, behind a $50 million award made in March of this year.

The Chief of the SEC Office of the Whistleblower, Jane Norberg, said in a press release that “[w]histleblowers serve as invaluable sources of information, and can propel an investigation forward by helping us overcome obstacles and delays in investigation.” She added, “[t]hese substantial awards send a strong message about the SEC’s commitment to whistleblowers and the value they bring to the agency’s mission.”

According to the Order, the first whistleblower’s award was slightly reduced based on delay in reporting the misconduct. This reduction, however, was smaller than usual because the majority of the time period during which the whistleblower failed to report predated the SEC whistleblower program.

In addition, the second whistleblower provided information in connection with an earlier investigative interview, which the SEC found to be an involuntary submission.  However, because the whistleblower did not know the information at the time of the interview and promptly informed the SEC upon discovery, the SEC granted an award as a limited waiver of the voluntariness requirement.

Also, both whistleblowers’ respective related-action claims were denied. The first was denied because the original information did not lead to a successful agency action in another action.  The second was denied because an additional waiver related to a second agency’s action was not in the public interest. The SEC said allowing whistleblowers to recover funds both under its program and a separate program “for the same action would produce the irrational result of encouraging multiple ‘bites of the apple’ in adjudicating claims for the same action.”

An award for a third claimant was denied, as the information he or she provided did not lead to a successful covered action.

Since its first award in 2012, the SEC has awarded more than $320 million to 57 individuals.

CFTC Issues $30 Million Whistleblower Award

On July 12, 2018, the U.S. Commodity Futures Trading Commission (CFTC) issued its largest whistleblower award ever, approximately $30 million, as part of its Dodd-Frank whistleblower program.  This is the first award under the Trump Administration, and only the fifth award that the CFTC has issued since the inception of its whistleblower bounty program.  Notably, this award dwarfs the next highest award of $10 million, which was awarded in April 2016.

The CFTC Chairman, J. Christopher Giancarlo, said in a press release that he “hope[s] that an award of this magnitude will incentivize whistleblowers to come forward with valuable information and provide notice to market participants that individuals are reporting quality information about violations of the Commodity Exchange Act.”  (The CFTC’s press release can be accessed here.)  As is the case with the CFTC’s prior awards, the Agency did not provide details about the whistleblower or the information that led to the enforcement action.

This $30 million award ties the third-highest award under the U.S. Securities and Exchange Commission’s (SEC) whistleblower program, which made a $30 million award in September 2014.

Third Circuit Affirms Dismissal of SOX Whistleblower Suit

On June 27, 2018, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal on summary judgment of a SOX whistleblower retaliation claim, concluding that the Plaintiff’s purported belief that the Defendant had committed fraud was not objectively reasonable. Westawski v. Merck & Co., No. 16-4075, 2018 WL 3159093 (3d Cir. June 27, 2018).


Plaintiff Joni Westawski was a research analyst at Merck & Co.  She was assigned to oversee a diabetes-related study for grocery chain H-E-B and its health insurance benefits administrator, Blue Cross Blue Shield of Texas (“BCBS”).  After Merck hired an outside market research firm, DrTango, to conduct the research project, Westawski complained that DrTango was more expensive than other research firms and that Merck had only hired DrTango because one of its scientists had close relationships with executives of BCBS.   After Merck terminated Westawski’s employment in a restructuring, she filed a whistleblower retaliation suit under Section 806 of SOX.

The district court granted Merck summary judgment on Westawski’s SOX whistleblower claim, holding that she could not show that she engaged in protected activity because no reasonable person in her position could have believed that the concerns she raised amounted to a violation of one of the laws enumerated in Section 806 of SOX. (We posted about the district court’s decision here.)


The Third Circuit affirmed the district court’s grant of summary judgment to Merck, holding that “[e]ven assuming Merck selected DrTango and paid it a premium to conduct a study for H-E-B so Merck could improve its business relationship with Blue Cross [Blue Shield of] Texas, Westawski fails to explain how that is fraud.” Westawski, 2018 WL 3159093, at *2. Westawski’s “vague” assertions that the payments to DrTango were some form of “bribe,” “inducement,” or “quid pro quo” were not enough to demonstrate that her complaints “relate in an understandable way” to any of Section 806’s enumerated forms of fraud. Id. (citation omitted).


The Third Circuit’s decision is an important reminder that even applying the “reasonable belief” standard articulated by the Administrative Review Board in Sylvester v. Parexel, the plaintiff’s alleged protected activity must “relate in an understandable way” to one of the enumerated forms of fraud set forth in Section 806 of SOX.

California Federal Court Grants Motion to Compel Arbitration of Dodd-Frank Whistleblower Claim

On June 27, 2018, the U.S. District Court for the Central District of California granted Snap Inc.’s motion to compel arbitration of a Dodd-Frank whistleblower retaliation claim.  Pompliano v. Snap Inc., No. 17-cv-3664 (2018 WL 3198454).

Background.   Plaintiff signed an employment agreement (the “Agreement”) with Snap Inc. (the “Company”) without consulting an attorney.  Fired just “three tension-filled weeks” after starting, he sued under Dodd-Frank’s whistleblower provisions, claiming retaliation for allegedly opposing the use of faulty growth metrics prior to the Company’s IPO.

The Company contended the termination was performance-related and moved to compel arbitration per the Agreement’s terms.  In response, Plaintiff argued the Agreement and its arbitration provisions were unconscionable due to (i) the Company’s alleged demand that Plaintiff sign the Agreement the same day it was provided to him; (ii) Plaintiff’s non-legal background; and (iii) a “delegation provision” requiring that an arbitrator—not the court—decide the arbitrability of any disputes.  Finally, relying on an unpublished district court opinion from Connecticut, Plaintiff argued that his Dodd-Frank claims also arose under SOX, and thus SOX’s provision barring enforcement of pre-dispute arbitration agreements prevented arbitration of the dispute.

Rulings.  The court held the Agreement enforceable.  Plaintiff—who was heavily courted by the Company and had negotiated a higher salary than what was initially offered—was deemed savvy enough to evaluate its contents, despite some pressure to sign quickly.

Further, the delegation clause was not substantively unconscionable, because it applied to both sides equally.  Finally, the court sided with the vast majority of courts in holding that Dodd-Frank whistleblower claims do not per se arise simultaneously under SOX.  It noted that Dodd-Frank exists in an entirely different title of the U.S. Code from SOX and contains numerous distinct features.  Moreover, the Federal Arbitration Act favors arbitration, and the court declined to restrict its application in the absence of a clear Congressional mandate to do so.

Implications.  This result supports the enforceability of arbitration provisions generally—particularly against relatively sophisticated parties—and, in particular, delegation provisions.  The decision also follows decisions from other jurisdictions holding that SOX’s predispute arbitration ban is inapplicable to Dodd-Frank whistleblower claims.

SEC Votes in Favor of Proposal to Amend Whistleblower Rules to Comport with U.S. Supreme Court’s Holding in Digital Realty Trust

On June 28, 2018, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) voted in an open meeting on several final rules and rule proposals that will have a material impact on the Commission’s whistleblower program. Most notably, the SEC approved a rule proposal that would modify its Rule 21F, which defines who is a whistleblower and establishes anti-retaliation protection, to comport with the U.S. Supreme Court’s holding in Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018).

As detailed on our blog, in February, the U.S. Supreme Court unanimously held that the anti-retaliation provision of the Dodd-Frank Act only applies to individuals who have provided information regarding a violation of the securities laws to the SEC. In so holding, the Court ruled that the SEC’s Rule 21F-2, which enabled an individual to gain anti-retaliation protection from complaints not made directly to the SEC (such as internal company complaints), was in clear contravention of Congress’s instruction that a “whistleblower” is a person who provides “information relating to a violation of the securities laws to the Commission.”

The SEC’s proposed rule will comport with the Court’s holding by requiring, inter alia, that an individual seeking anti-retaliation protection report, in writing, information about possible securities laws violations to the SEC itself. The proposed rule would apply uniformly: to the SEC’s whistleblower award program, the heightened confidentiality program, as well as for employment anti-retaliation protection. Continue Reading

Alabama Federal Court Partially Grants Motion to Dismiss SOX Claim On Exhaustion Grounds

On May 29, 2018, the U.S. District Court for the Northern District of Alabama granted a motion to dismiss in part Plaintiff’s whistleblower retaliation claims under SOX on the grounds that the Plaintiff failed to exhaust his administrative remedies against the Defendant CEO.  Wingo v. S. Co., 17-cv-01328.

Background.  Plaintiff, a Project Manager, informed his supervisor that a project was on track for a delayed Commercial Operation Date (“COD”).   Plaintiff alleged that after he informed his supervisor of his findings, management pressured employees to take dangerous shortcuts and continued to tout that an on-time COD was possible, because governmental and private incentives were contingent on a timely execution of the project.  Plaintiff allegedly reiterated his concerns to management and ultimately expressed his concerns to the CEO.  Plaintiff alleged that management began to retaliate against him and he was subsequently terminated.  Plaintiff then submitted a report to the SEC and filed a SOX whistleblower retaliation complaint with OSHA.  He then filed suit in federal district court, naming his employer and the CEO as defendants. 

Rulings.  The CEO moved to dismiss the SOX claim against him individually, arguing that Plaintiff’s OSHA filings poorly communicated his charges and failed to properly reference him, despite naming him as a defendant.  The court agreed, concluding that OSHA was not on notice that it should investigate the CEO’s alleged conduct.  Thus, the court granted the CEO’s motion to dismiss.   

Implications.  This decision is a favorable result for individual defendants in SOX cases, who are sometimes improperly named as parties and where claims against them in OSHA complaints are lacking.