Whistleblowing & Compliance Law Blog

Whistleblower Risks - It May Be Time to Reexamine Assumptions about their Management and Insurability

EPSTEIN BECKER & GREEN, P.C. — Fri, 23 Sep 2011 09:32:33 -0800

By Allen B. Roberts and Stuart M. Gerson

Those concerned with managing or insuring risk are affected increasingly by the evolution of whistleblowing, especially as new laws and interpretations since 2009 have changed the stakes by redefining whistleblower protections and bounty award entitlements.

Virtually any risk management program written prior to the 2008 elections may need to be recalibrated to take account of new definitions introduced by whistleblower features of legislation nominally concerning healthcare and financial services, but in reality reaching much more broadly beyond the bounds of the industries ostensibly targeted. The subject matter of protected activity, the appropriate manner for an informant or tipster to communicate, the remedies for employment-related reprisals, and the opportunity to share in sanctions imposed by the government are part of laws enacted in the past two years that introduce entirely new rights and obligations or importantly amend existing ones.

Wholly apart from legislative initiatives, interpretations issued on the watch of a newly constituted Department of Labor Administrative Review Board could have the effect of reinventing Sarbanes-Oxley protected activity – if decisions issued particularly during 2011 are enforced and followed. In recent administrative decisions, the predicate that Sarbanes-Oxley’s whistleblower protections are reserved for exceptional matters of material shareholder or securities fraud no longer holds, and the underlying focus of Sarbanes-Oxley as a post-Enron statute intended to protect the presumed “innocent investor” is disregarded. Equating reports of mail, wire and bank fraud with shareholder and securities fraud, the current Administrative Review Board has downplayed the legislative concern for activities that materially impact shareholders or securities markets and related protection of individuals who assist with valuable information. The consequence for now is that more companies are exposed to claims by individuals asserting that even garden variety reports in the course of performing their duties or otherwise should be within the ambit of Sarbanes-Oxley protection against unfavorable personnel actions.

For more information, see “Whistleblowers: A Risk Management View,” (pdf) an article by Allen B. Roberts and Stuart M. Gerson featured in the August 22, 2011 issue of Insurance Advocate. © 2011 CINN Worldwide, Inc. All rights reserved. Originally published by CINN Worldwide, Inc. in the Vol. 122, No. 14 edition of Insurance Advocate.

SOX Recap

Epstein Becker & Green, P.C. — Tue, 12 Jul 2011 05:43:11 -0800

Allen B. Roberts and Stuart Gerson are co-authors of the recent Law360 article Examining The Purpose Of Sarbanes-Oxley. This summary of recent Administrative Review Board actions explains the shift in the standards whistleblowers must meet, and how employers should prepare for this new era of litigation.

SEC Final Rule on Dodd-Frank Whistleblower Bounty Awards and Protections Discussed in Bloomberg Article

Epstein Becker & Green, P.C. — Fri, 17 Jun 2011 09:27:22 -0800

In previous articles and postings, we have cautioned that legislative policy of the Dodd-Frank Wall Street Reform and Consumer Protection Act threatens to circumvent corporate compliance programs and drive whistleblowers having vital information outside the organization in the hope of receiving rich bounty awards. In a recent article published by Bloomberg Law Reports®, Allen Roberts discusses some of the challenges businesses subject to SEC jurisdiction need to address in the face of the SEC’s Final Rule – mindful that the plaintiffs’ bar has geared up to capitalize on new opportunities.

For more information, see Allen B. Roberts, Dodd-Frank Bounty Awards and Protections Change Whistleblower Stakes -- Will Opporunity for Personal Gain Frustrate Corporate Compliance?, Bloomberg Law Reports - Securities Law (2011) (pdf)

U.S. Supreme Court Reins-In The Scope of Whistleblower Lawsuits Filed Under the False Claims Act

Epstein Becker & Green, P.C. — Tue, 17 May 2011 07:32:02 -0800

By: Stuart M. Gerson

On May 16, 2011, the U.S. Supreme Court decided the case of Schindler Elevator Corp. v. United States ex rel. Kirk (pdf), holding that the public disclosure bar of the False Claims Act (FCA) is triggered by a federal agency’s written response to a Freedom of Information Act (FOIA) request. This important, and much awaited, decision makes it clear that an agency’s FOIA response constitutes a “report” for purposes of the FCA’s public disclosure bar, which forecloses private parties from bringing qui tam whistleblower suits to recover falsely or fraudulently obtained federal payments where those suits are "based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media." 31 U. S. C. §3730(e)(4)(A).

The Respondent in the underlying case, a Vietnam War Veteran, brought a qui tam lawsuit under the FCA, alleging that his former employer submitted hundreds of false claims for payment under federal contracts that were subject to certain reporting requirements under the Vietnam Era Veterans’ Readjustment Assistance Act (VEVRAA). Specifically, the Respondent alleged that his former employer failed to adequately report the number of veterans it employed to the U.S. Department of Labor (DOL). In support of his allegations, the Respondent relied upon three written responses to FOIA requests, which his wife received from the DOL, which supplied the reports filed by the company, or lack thereof.

The U.S. Court of Appeals for the Second Circuit, reversing an order of dismissal from the U.S. District Court for the Southern District of New York, held that the DOL’s response was neither a “report” nor an “investigation,” as contemplated by the FCA’s public disclosure bar. The Supreme Court reversed per Justice Thomas, writing for himself, Chief Justice Roberts and Justices Scalia, Kennedy and Alito. Justice Ginsburg, joined by Justices Breyer and Sotomayor, dissented. Justice Kagan took no part in this case.

Sarbanes-Oxley "Protected Activity" Wins a Broad Interpretation - But Is the Decision Faithful to Congressional Intent?

Epstein Becker & Green, P.C. — Mon, 11 Apr 2011 10:51:58 -0800

By: Allen B. Roberts, Stuart M. Gerson and Daniel J. Schuch

In a case packed with allegations of the kind rarely found beyond the script of a soap opera, the U.S. Department of Labor ("DOL") Administrative Review Board ("ARB") determined that protected activity under the Sarbanes-Oxley Act of 2002 ("SOX") does not require a showing of fraud against shareholders. Rather, per the ARB, it is sufficient that an employee reasonably believes conventional mail or wire fraud has occurred. The holding in Brown v. Lockheed Martin Corp. (pdf) evidences the ARB's adherence to a literal, and clinical, construction of SOX – and serves as a clear indication of the ARB's willingness to reach beyond the underlying objectives envisioned by Congress in the wake of the infamous collapse of Enron and WorldCom. If upheld and followed, Brown effectively expands SOX whistleblower protections well beyond the intended beneficiary of the law – the "innocent investor."

Background – SOX

Legislative history shows that SOX was enacted in response to "a culture, supported by law, that discourage[s] employees from reporting fraudulent behavior not only to the proper authorities ... but even internally. [Congress noted that such a] corporate code of silence not only hampers investigations, but also creates a climate where ongoing wrongdoing can occur with virtual impunity." As a result, SOX was enacted to "encourage and protect employees who report fraudulent activity that can damage innocent investors in publicly traded companies."

As such, Section 806 of SOX was crafted to protect employee-whistleblowers who:

… provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of [18 U.S.C. §] 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the [Securities and Exchange Commission], or any provision of Federal law relating to fraud against shareholders. [Emphasis added].

The ARB and U.S. District Courts, determining what constitutes "protected activity" under SOX, have issued conflicting opinions with respect to the import of the phrase "relating to fraud against shareholders." Some decisions have interpreted this phrase narrowly, so as to explicitly include only allegations of fraud against shareholders, while others have read the term more broadly, so as to include activities involving mail or wire fraud, regardless of whether such fraud actually involves a shareholder.

In the Brown decision, the ARB came down firmly favoring the broad approach, holding that shareholder fraud is not required to establish the existence of protected activity under theories of mail or wire fraud.

Facts of the Brown Case

Andrea L. Brown ("Brown") was employed as Director of Communications at the Lockheed Martin ("Lockheed") facility in Colorado Springs, Colorado. In May 2006, she learned that Lockheed's Vice President of Communications (the "VP") "developed sexual relationships with ten … soldiers, purchased a laptop computer for one soldier, had sent inappropriate emails and a box of sex toys to soldiers in Iraq, and had traveled to welcome home ceremonies on the pretext of business while [the VP] actually took soldiers away in limousines to expensive hotels for intimate relations." (See the ALJ's Jan. 15, 2010 Recommended Decision and Order (pdf)). Brown believed the VP developed such "paramours" through Lockheed's Pen Pal Program, which was created to facilitate communications between Lockheed employees and U.S. soldiers serving overseas. Brown also believed the costs associated with the VP's conduct, including the laptop, hotel rooms, limousines, travel expenses, and sex toys – not quantified in the decision – were charged to the federal government under an existing contract for the Pen Pal Program. Brown reported her concerns to Lockheed's Vice President of Human Resources, and the Pen Pal Program was discontinued within days.

After the Pen Pal Program was discontinued, the VP asked Brown if she knew who filed the complaint. Brown confirmed that she told the Vice President of Human Resources "a few things," but she did not know who reported her. Thereafter, Brown's working conditions at Lockheed reportedly deteriorated dramatically: her position was eliminated and her job duties were assigned to someone apparently favored by the VP; she lost her office, and was instructed to work from home or use a visitor's office; and, she was told not to attend Lockheed's annual communications conference, despite being named as a recipient of the Lockheed's Comet Award. Finally, on a day she was instructed by her replacement to report to Lockheed's facility, the visitor's office was occupied, and she was instructed to work from a cubicle, despite being in a leadership position. Ultimately, Brown gave notice of her constructive discharge by way of "forced termination" in February 2008.

Brown's SOX Complaint

Following her separation from Lockheed, Brown filed a SOX complaint with OSHA. After administrative investigation and dismissal of her complaint, Brown filed objections and obtained a hearing before an Administrative Law Judge ("ALJ"), who determined that Brown had engaged in protected activity under the mail and wire fraud theories of SOX:

Complainant testified that she grew concerned that [the VP] made purchases with company funds that would ultimately be billed to the government. … Complainant had reason to believe that such actions were taken in furtherance of a ‘scheme or artifice to defraud' because … she had been aware of [the VP's] alleged and undisputed systemic use of the Pen Pal Program to recruit new paramours.

The ALJ also found Brown to have been constructively discharged because of her protected activity, and ordered reinstatement and backpay and awarded medical expenses, $75,000 in compensatory damages, attorneys' fees, and costs.

Lockheed filed a timely appeal of the decision to the ARB. Addressing whether Brown engaged in protected activity, the ARB determined that SOX "does not require that mail fraud or wire fraud pertain to fraud against the shareholders," and affirmed the ALJ's decision.

The Consequence of Brown

The ARB's holding in Brown is likely to serve as a bellwether for the administrative interpretation of SOX, with employee-whistleblowers reaping the benefits of the expanded definition of "protected activity." In a typical case, a SOX complainant has the right to remove his or her case from administrative proceedings before the DOL and file an original action in federal court if the DOL has not issued a final decision within 180 days after filing the complaint. However, Brown may eliminate any perceived incentive for SOX complainants to remove cases rooted in mail, wire, or bank fraud, and that lack the elements of shareholder fraud, for fear that a court might construe SOX-protected activity more narrowly than the ARB – and within the congressional intent of shareholder protection.

Because respondent companies must accept the forum selected by the complainant, the only avenue for judicial consideration of an ARB decision applying Brown will be review by a U.S. Court of Appeals. However, in reviewing the ARB's application of Brown, a Court of Appeals might constrain its review under principles of judicial deference. The Supreme Court of the United States has clearly articulated the level of deference that must be given to decisions issued by administrative agencies, such as the ARB:

If … the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute. … Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. … If this choice represents a reasonable accommodation of conflicting policies that were committed to the agency's care by the statute, [courts] should not disturb it unless it appears from the statute or its legislative history that the accommodation is not one that Congress would have sanctioned.

Chevron USA v. Natural Resources Defense Council, 467 U.S. 837, 842-44 (1984). The Supreme Court further instructed that "[i]t is fair to assume generally that Congress contemplates administrative action with the effect of law when it provides for a relatively formal administrative procedure." See U.S. v. Mead Corp., 533 U.S. 218, 230 (2001). Such procedure has been established by Congress under SOX.

As the text of Section 806 and the cases interpreting it illustrate, ambiguity appears to exist with respect to the phrase "relating to fraud against shareholders" and its application to the statutory protections that precede it. As such, it is not unreasonable to believe that a Court of Appeals, if posed with the issue, would defer to the ARB's application of Brown, unless it can be established that such interpretation is against the manifest intent of Congress in enacting SOX. This issue is likely to become the subject of recurrent litigation as the various Courts of Appeal, and ultimately the Supreme Court of the United States, ascertain the intent of Congress. And, finally, we note that the Supreme Court has tended to be very hospitable to plaintiffs claiming retaliation.

What Should Employers Do in Light of Brown?

Publicly traded companies subject to SOX jurisdiction are encouraged to:

Understand the Employee Protections Under SOX

Now, more than ever, employers need to become intimately familiar with the employee protection provisions contained in Section 806 of SOX. The DOL has requested a $6 million increase in its budget, as well as an increase of 45 dedicated investigators, for the Office of the Whistleblower Protection Program ("OWPP"), which enforces Section 806.

The proposed increase in the OWPP's budget and staffing, in spite of the current economic conditions facing the federal government, serves as a clear indication of the DOL's commitment to the OWPP and laws such as SOX. As a result, a significant increase in enforcement activity under SOX and other laws establishing whistleblower protections is likely to occur going forward.

Establish and Monitor a Whistleblowing Policy

It is important that employers subject to SOX jurisdiction implement an internal whistleblowing policy that provides a clear procedure for employees to report alleged corporate misconduct. Such a policy must clearly state that employees who file a complaint under the policy are protected from retaliation.

Train Managers and Supervisors

It is vital that managers and supervisors are trained regarding the broad reach of anti-retaliation laws, including SOX. Managers and supervisors should be made aware of their responsibilities when an internal complaint of corporate misconduct is raised, including how to identify such a complaint.

Follow Established Policies for Investigating and Documenting Complaints

Employers confronted with internal complaints asserting allegations of mail, wire, or bank fraud should initiate measures consistent with their distinct corporate compliance and human resources policies to minimize potential exposure to whistleblower claims under SOX. Of course, the interplay of individual employment issues with larger compliance issues needs to be coordinated, with appropriate delegation and management of information throughout the multiple stages of investigation and decision-making.

Further, and notwithstanding the holding in Brown, in connection with any investigation based on an employee's complaint about corporate malfeasance, both the complaint and the details of the investigation should be carefully documented so that if a SOX whistleblower complaint ensues, the company has a better chance of being able to demonstrate that the complaining employee raised allegations of certain frauds but never sounded a concern about shareholder fraud.

* * *

Undoubtedly, Brown draws some baselines and opens the debate on how broadly "protected activity" will be construed under SOX relative to the interests of the presumed "innocent investor." However, the ARB's holding in Brown should not necessarily be read by whistleblowers or their employers as the final word. Employers need not forsake the congressional purpose underlying SOX whistleblower protections. Whistleblower allegations that are rooted in mail, wire, and bank fraud – but are lacking in a reasonable belief of shareholder fraud – may yet be held deficient. Ultimately, the merit of a complaint that the employee-whistleblower suffered a reprisal for engaging in protected activity may turn on the validity of the complaining employee's reasonable belief that such allegations implicate shareholder fraud.

Food Safety and Whistleblowing - New Federal Law May Deliver a Full Basket of Claims

Epstein Becker & Green, P.C. — Thu, 13 Jan 2011 14:08:58 -0800

By Allen B. Roberts and John Houston Pope

With virtually no fanfare, a major sector of the American workforce – those who handle food – won whistleblower protections under the FDA Food Safety Modernization Act (“FSMA”), Pub. L. No. 111-353. The Food and Drug Administration (“FDA”) describes FSMA, signed into law on January 4, 2011, as improving food safety by preventing hazards “from farm to table” and making “everyone in the global food chain responsible for safety.”

While much attention and controversy surrounded the whistleblower bounty awards of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) enacted in July 2010, the potentially more significant whistleblower provision of FSMA passed in the final days of the 2010 legislative session in routine and undramatic fashion. Indeed, the most significant whistleblower portions of the bill did not emerge until a version of the bill was reported out of a Senate committee in mid-November. (No written report explained the major changes written into the law.) Because of the sheer size of the workforce that touches food and the comprehensive definition of “protected activity,” however, the relatively unheralded law extends coverage and companion employer obligations in potentially unprecedented measure. The claims that result could dwarf those arising under whistleblower laws receiving far more media and business attention.

Food Industry Coverage – It Ain’t Just Beans

The FSMA whistleblower provision reaches quite broadly. It includes “entities” engaged in such diverse activities as the:

manufacture,
processing,
packing,
transportation,
distribution,
reception,
holding, or
importation

of food. The legislative history does not disclose more detail on industries or employers covered by this set of activities.

In terms relatively standard to whistleblower protections, covered employers are prohibited from taking unfavorable personnel actions by way of discharge or other adverse employment actions against an employee with respect to compensation, terms, conditions, or privileges of employment because of an employee’s protected activity. However, protected activity includes both internal and external disclosures and activities in its expansive definition. Expressing no priority or preference for the particular types of protected activity it defines, FSMA protects individuals equally if they:

provide, or cause to be provided, to the employer, the federal government, or the attorney general of a state information relating to any violation of, or any act or omission the employee reasonably believes to be a violation of, any provision of the Federal Food, Drug and Cosmetic Act (“FDCA”) or any order, rule, regulation, standard, or ban under the FDCA;
testify, or are about to testify, in a proceeding concerning such violation;
assist or participate, or are about to assist or participate, in such a proceeding; or
object to, or refuse to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believes to be in violation of any provision of the FDCA, or any order, rule, regulation, standard, or ban under the FDCA.

Assuring that its base of protection will be further broadened, FSMA provides that protected activity includes not only actions expressly initiated by the employee, but also activities in the ordinary course of the employee’s duties or the duties of any person acting pursuant to a request of the employee.

OSHA/DOL Procedures Adopted – FSMA Puts Meat on Familiar Bones

FSMA becomes the 20th statute adopting the familiar procedure of investigation by the Occupational Safety and Health Administration (“OSHA”) and litigation through U.S. Department of Labor (“DOL”) processes, with access to federal courts by the complaining employee if a final administrative determination does not issue after a specified period. FSMA’s procedures borrow substantially from Title X of Dodd-Frank, the Consumer Financial Protection Act (and resemble those of the Sarbanes-Oxley Act). Some features characteristic of this scheme are:

A standard of proof favorable to complainants, allowing a prima facie case with a showing that protected activity was a “contributing factor” in the unfavorable personnel action alleged in the complaint.
A rigorous standard for defending claims that requires employers to demonstrate by “clear and convincing” evidence that the same unfavorable personnel action would have been taken in the absence of the alleged protected activity.
Controversial – and judicially uncertain – orders for preliminary reinstatement if it is determined at the conclusion of the administrative investigation or after an administrative trial that there is reasonable cause to believe a violation has occurred.
A requirement that a proceeding may be terminated by settlement between a complainant and an employer before issuance of a final administrative order only if supervised by OSHA/DOL.
Remedial relief, including affirmative action to abate the violation; reinstatement to the former position; back pay and restoration of the terms, conditions, and privileges associated with employment; compensatory damages to the complainant; costs and expenses (including attorneys’ fees and expert witness fees) reasonably incurred by the complainant for, or in connection with, the bringing of the complaint.
An option for the complainant – but not the employer – to discontinue administrative proceedings and bring an action de novo in federal court if a final administrative decision has not issued within 210 days after the filing of the complaint, or within 90 days after a written investigative determination is received. This process allows a complainant dissatisfied with the administrative record or results to start anew with a right to trial by jury and application of the same favorable evidentiary burdens of proof applicable in administrative proceedings.

The following FSMA items distinguish the new federal law from other recent legislation adopting the OSHA/DOL scheme:

Whistleblower protection under FSMA is denied to an employee who has engaged in wrongdoing by deliberately causing a violation that underlies the protected activity, unless he or she acted at the direction of the employer or its agent.
FSMA does not bar a waiver of rights and remedies by agreement, policy, form, or condition of employment, nor does it declare that pre-dispute agreements requiring arbitration of whistleblower retaliation claims will be invalid or unenforceable. In this respect, FSMA departs from such recent legislation as the Dodd-Frank amendments to Sarbanes-Oxley and Dodd-Frank’s Consumer Financial Protection Act.
FSMA adopts Dodd-Frank’s Consumer Financial Protection Act’s statute of limitations, requiring the filing of an administrative complaint with OSHA/DOL within 180 days after the date on which a violation is alleged to have occurred.

Implications – Plenty for Employers to Digest

Considering the practicalities of how many businesses and individuals – inside and outside the food industry – have some role in getting food to those who consume it, probably no legislation has swept as broadly as FSMA to confer whistleblower protections. “Whistleblower rights don’t get any stronger than this,” according to one advocate for the legislation.

Quite apart from creating protection for testifying or participating in proceedings, by enacting FSMA, Congress expanded exponentially the universe of protected individuals by including anyone holding a reasonable belief that a FSMA violation has occurred anywhere in the movement of food, from farm to table, and acting to make an appropriate internal or external disclosure about it, or objecting, refusing to participate in a related activity, policy, or practice – or refusing to perform an assigned task based on that belief. What otherwise could constitute an insubordinate refusal to perform a work assignment may be cloaked by FSMA as protected activity if related to a reasonable, albeit wrong, belief that it was motivated by a FSMA food-safety concern. Moreover, because the protected activity need only be one of possibly several factors contributing to an employer’s unfavorable personnel action, employees can be expected to erect even casual, otherwise unremarkable and forgotten or unrecorded, workplace remarks or work-related actions, advancing food safety as elements of their newly conferred whistleblower job-protection rights.

The extent to which whistleblower advocates may argue for an exceedingly broad reach – perhaps even to retail establishments like grocery stores or restaurants – cannot be known or foreclosed. Employers that believe they might fit within the coverage should proceed conservatively until the DOL and the courts sort out the precise contours of the statute.

As a cautionary note, we observe that FSMA refers to the FDCA as the basis of whistleblower protection. While the substance of FSMA focuses on businesses handling food, the whistleblower provision’s incorporation of, and reference to, the larger statute that comprehends drugs and cosmetics suggests that the scope of FSMA whistleblower coverage may extend beyond food products for FSMA-covered employers. If protected activity were construed to be coextensive with FDA-regulated drugs and cosmetics items, it is possible that individuals could bootstrap to expanded, non-food-related coverage by raising issues concerning drugs and cosmetics and assert entitlement to protection even more broadly than is apparent from the statute’s “food safety” label. Rulemaking may clarify whether employers subject to expected FSMA whistleblower protections for disclosures and activities or refusals concerning food will have expanded exposure because they also handle products or have activity with non-food items within the FDA’s jurisdiction.

A further challenge exists in FSMA’s assignment of responsibility for compliance downstream, potentially to the lowest level of supervision acting on behalf of employers. Employers accustomed to formal channels established by compliance or audit hotlines will need to rethink their procedures to ensure compliance with FSMA, as any representative may be endowed with authority sufficient to become the recipient of a bona fide employee complaint or a work refusal capable of transformation into statutorily conferred whistleblower protection.

How businesses will receive, record, and process the myriad communications and observations that employees could utilize to show protected activity looms as an enormous challenge. Supervisors and managers, even at the first line of authority, will need to understand their critical role in compliance programs and in properly communicating matters of potential concern through appropriate channels. The new consequences of adverse employment actions that could be linked by an employee to FSMA-protected activity known to supervisors and managers makes it imperative that affected businesses update their compliance and human resources policies and procedures. Training about whistleblowing complaints will need to occur at all levels of management.

What Employers Should Do Now

Probably more than any whistleblower legislation preceding it, FSMA delivers protections and correlative responsibilities affecting a broad range of businesses and their entire workforces. With the enactment of FSMA, it becomes clear that exotic schemes and staggering economics do not provide the only impetus for strong whistleblower protections. FSMA sets whistleblowing more firmly as a fixture across food industry lines, empowering employees to report or act on real or perceived violations of the law. We suggest that employers in the chain of food manufacture, processing, packing, transportation, distribution, reception, holding, or importation take the following actions to protect themselves against potential claims and to best defend themselves against those that may arise:

Become familiar with the several respects in which FSMA may affect business operations and employee relations.
Build FSMA compliance into employee orientation and training programs.
Establish and monitor adherence to procedures for:
- the reporting of incidents by whistleblowers,
- the hotline or other receipt of information, and
- the investigation and determination of compliance and human resources matters.
Assure that supervisors know their responsibilities as employer representatives to report and respond in a manner consistent with established guidelines.
Manage the communication of confidential information.

FSMA opens wide a new door to whistleblower activity and protection, necessitating employer attention to related compliance obligations and human resources considerations.

SEC's Proposed Dodd-Frank Anti-Retaliation Rules: What Is An Employer To Do?

Epstein Becker & Green, P.C. — Mon, 20 Dec 2010 11:39:59 -0800

By David W. Garland and Allen B. Roberts

Major provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) will gain substance and vitality only with amplifying interpretive rules. On December 17 the period closed for submitting comments on rules proposed by the Securities and Exchange Commission (SEC) to implement whistleblower provisions added in a new Section 21F to the Securities Exchange Act of 1934 (Exchange Act). With the comment period having closed, and final rules expected to be implemented in the Spring of 2011, this is a good time to take account of the proposed rules regarding the statute’s anti-retaliation provisions and their potential impact on employers.

Dodd-Frank authorizes bounty awards to eligible whistleblowers who voluntarily provide original information to the SEC about a violation of the federal securities laws leading to a successful enforcement action and resulting in a monetary sanction exceeding $1,000,000. It is not surprising that much of the analysis and media attention generated by Dodd-Frank concerns the bases on which the SEC will make determinations about paying potentially enormous bounty awards that can range from 10% to 30% of the amount of monetary sanctions.

Section 21F also protects whistleblowers against retaliation by their employers, with the scope of protection circumscribed by the statutory definition of a whistleblower. Rather than providing protection equally for internal disclosures to the employer and external disclosures to authorized agencies and authorities, as is seen commonly in whistleblower statutes, Section 21F protects only certain external disclosures. It defines a whistleblower narrowly as any individual, acting alone or jointly, who provides information relating to a violation of the securities laws to the SEC in the manner prescribed by the SEC.

For a whistleblower satisfying the statutory definition, Dodd-Frank’s Exchange Act amendment provides customary protections against direct or indirect employment reprisals of discharge, demotion, suspension, threat, harassment or any discrimination against a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower in providing information to the SEC in accordance with Section 21F. The amendment also prohibits retaliation against a whistleblower for “initiating, testifying in, or assisting in any investigation or judicial or administrative action of the [SEC] based upon or related to such information.” Further, an employer may not retaliate against a whistleblower for “making disclosures that are required” under the Sarbanes-Oxley Act “and any other law, rule, or regulation subject to the jurisdiction” of the SEC. The whistleblower may commence an action in federal court against his or her employer for violation of the anti-retaliation provisions and seek reinstatement, two times the amount of back pay owed as a consequence of the retaliation, and litigation costs, including attorneys’ fees.

Departing from literal statutory text, the SEC’s proposed rules would not limit the definition of the term “whistleblower” to only those individuals who provide the SEC with information about actual securities violations. Instead, the protection would be available to those providing information about a “potential” violation.

The proposed rules are more rigorous in standards set for bounty award qualification than employment protection. To be eligible for a bounty award, a whistleblower would be required to submit original information to the SEC in accordance with prescribed procedures and conditions. But protections against employment reprisals would be available to individuals whether or not they qualified for a bounty award, and a determination that awhistleblower is ineligible to receive an award “for any reason” would not deprive the individual of theExchange Act’s anti-retaliation protections.

Although proposed rules concerning retaliation are far less extensive than those for bounty awards, the SEC invited comment and suggestions for promulgating rules interpretingand implementing the anti-retaliation provisions. The SEC is aware of the business community’s unease with sweeping protections that would not take account of compliance realities and practicalities of certain employment relationships. Comment was invited specifically on whether the Exchange Act anti-retaliation protections should be applied broadly to any person who provides informationto the SEC concerning a potential violation of the securities laws,or whether the various procedural or substantiveprerequisites limiting consideration for a bounty award should apply. Similarly, the SEC requested comment on ensuring that appropriate employment actions (not based on reporting potential securities law violations) are not impaired by whistleblower protections and barring whistleblower protection for frivolous or bad faith claims – a feature of other statutes, but not Dodd-Frank’s Exchange Act amendment.

Most of the comments submitted in response to the proposed rules focused on the bounty award provisions. Very few addressed the questions posed by the SEC about the anti-retaliation provisions. Comments addressing bounty awards frequently focused on the features that detract from – and may even undermine – effective internal corporate compliance programs. The United States Chamber of Commerce and a small number of employers, however, have raised issues with the anti-retaliation provisions. As the Chamber pointed out, as a result of the lack of guidance regarding whistleblower protections, employers may not be able to effectively address employee violations of law or corporate policy without risking claims of retaliation under Dodd-Frank. For example, responsive to one of the SEC’s invitations to comment, the Chamber observed that nothing in the proposed rules affirmatively states that an employer may take appropriate disciplinary action against an employee for non-retaliatory reasons. One clear example would be attempting to win protection against an adverse employment action on the ground that one’s own wrongdoing or complicity in wrongful acts had been disclosed to the SEC. Additionally, the Chamber pointed out that employers should be able to discipline employees for conduct in violation of corporate codes of conduct or for failing to report internally potential wrongdoing – even if the employee has reported alleged wrongdoing to the SEC. An employee’s complaint to the SEC would not be a shield against appropriate disciplinary action.

Bound by statutory language and aware of policy considerations and tensions between statutory provisions and compliance program requirements and incentives, the SEC now undertakes assessment of the comments it has received. The opportunity for the SEC is to frame a final rule that best incentivizes employers and their employees to join an effective common cause of corporate compliance consistent with sound programs that are appropriately structured, implemented and maintained.

Will any belief be sufficient to cloak a whistleblower in statutory protections? Will wrongdoing or complicity in it bar whistleblower protection? Whatever the contours of the SEC’s final rules, employers must be prepared with policies and procedures to carefully navigate the investigatory and disciplinary process, concerned that a misstep might expose them to potential liability under Dodd-Frank’s anti-retaliation provisions.

* * *

Whistleblower provisions of Dodd-Frank are explored fully in the white paper, The Sounds of New Whistleblower Awards and Protections under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as appeared in Bloomberg Law Reports - Securities Law.

Obama, Tea Party, Health Care, Jobs: A Midterm Review of the Impact on Labor and Employment Law - January 26, 2011 in Washington, DC

EPSTEIN BECKER & GREEN, P.C. — Wed, 15 Dec 2010 11:47:20 -0800

Whistleblower considerations are likely to be especially prominent in the new year and as a new Congressional term begins, leading to the 2012 election campaign.

Please join me and other attorneys from my firm, EpsteinBeckerGreen, as we present a full-day program covering labor and employment law topics that have increasingly impacted employers over the past two years. In addition, we will offer an outlook of what we should expect in the coming two years. Our keynote speaker is Darrel Thompson, Senior Advisor to Senate Majority Harry Reid, who will offer comments concerning the agenda of the 112th Congress. We are particularly pleased that Norah O'Donnell, MSNBC Chief Washington Correspondent, is attending the event as our guest luncheon speaker.

For more details and registration information, please visit the EpsteinBeckerGreen website.

I hope to meet you and other readers of this blog.

Sarbanes-Oxley Whistleblower Complaint Dismissed for Failure to Enumerate Basis of Statutory Protection

Jill Barbarino — Mon, 01 Nov 2010 09:53:45 -0800

An in-house patent attorney who protested that his employer knowingly assigned a $50 million value to acquire patents alleged to be worthless could not link his discharge to whistleblower activity protected by the Sarbanes-Oxley Act. Affirming dismissal in Vodopia v. Koninklijke Philips Electronics, N.V., et al., the Second Circuit Court of Appeals observed that: (1) the complaint clearly centered on the plaintiff’s concern that the patents were invalid, not on the value the company assigned to them; and (2) the complaint did not allege that the $50 million value assigned to those patents was ever reported to the public or to shareholders.

Sarbanes-Oxley Section 806 makes it unlawful for an employer to take an unfavorable personnel action by discharging, or in any other manner discriminating against, an employee in the terms or conditions of employment because of any lawful act done by the employee to provide information or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of certain enumerated federal laws.

In order to state a claim pursuant to Section 806, a plaintiff must allege the following four elements: (1) that he engaged in protected activity; (2) the employer knew of the protected activity; (3) he suffered an unfavorable personnel action; and (4) circumstances exist to suggest that the protected activity was a contributing factor in the unfavorable action.

In Vodopia, the plaintiff, John Vodopia, a former in-house patent attorney for Philips Electronics of North America, alleged that his employment was terminated after various attempts to report that several patents acquired by defendants from an outside company had been obtained through fraud on the United States Patent Office and thus were likely to be declared invalid. Affirming dismissal by summary order, the Second Circuit faulted Vodopia’s complaint on the first element of a Section 806 claim, failure to “directly and specifically” show that he engaged in protected activity relating to statutorily enumerated mail fraud, wire fraud, bank fraud, securities fraud, any rule or regulation of the Securities and Exchange Commission, or any provision of federal law relating to fraud against shareholders.

Following decisions in the First, Fourth, Fifth and Ninth Circuits, the Second Circuit held that the Section 806 listing of protected activities is exhaustive and “the employee’s communications must definitively and specifically relate to [one] of the listed categories of fraud or securities violations” to qualify as protected activity. Based on a reading of the complaint in the light most favorable to Vodopia, the court found that the “complaint fails to allege that Vodopia reasonably believed that he was reporting potential securities fraud as opposed to patent-related malfeasance”; the complaint merely alleged that Vodopia communicated information relating to alleged fraud on the Patent Office and the potential invalidity of certain patents as a result.

With its summary order in Vodopia, the Second Circuit applies Ashcroft v. Iqbal, noted in our May 27, 2010 posting, to a Sarbanes-Oxley whistleblower claim. The continued and expanded application of Iqbal illustrates the vitality of the principle that complaints will be subject to dismissal, as a threshold matter, for failure to plead sufficient facts to state a claim.

Bloomberg Article Examines Whistleblower Awards and Protections under the Dodd-Frank Wall Street Reform and Consumer Protection Act

Victoria Sloan — Tue, 17 Aug 2010 01:48:33 -0800

In the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Congress has crafted an array of bounty awards and whistleblower protections broadly affecting securities, commodities and futures, and consumer financial products firms and those associated with them. Although there was an opportunity to create incentives promoting internal reporting in aid of corporate compliance programs and to rationalize whistleblowing with standardized definitions, procedures and remedies, Congress went in different directions. The result is a set of whistleblower inducements that may frustrate attainment of corporate compliance objectives by driving whistleblowers outside the organization and an enigmatic patchwork of whistleblower protections laden with internal variations that must be mastered.

Into the mix of entirely new extensions of coverage by way of bounty awards and whistleblower protections, Dodd-Frank adds provisions mandating whistleblowing for nationally recognized statistical rating organizations. It also adds significant changes enabling whistleblowers to fare better under the Sarbanes-Oxley Act and the False Claims Act.

Allen B. Roberts explores the provisions and variations existing within Dodd-Frank that present compliance challenges, and a trigger for affected firms to revisit compliance policies, practices and procedures, in The Sounds of New Whistleblower Awards and Protections under the Dodd-Frank Wall Street Reform and Consumer Protection Act (pdf), originally published by Bloomberg Finance L.P. (reprinted with permission).

SOX Whistleblower Must Actually Believe Employer's Conduct Was Illegal, Says Eleventh Circuit

Epstein Becker & Green, P.C. — Fri, 23 Jul 2010 08:33:48 -0800

[Ed. Note: We thank our colleague Richard D. Tuschman for this post, which was originally published on EBG’s Florida Employment & Immigration Law Blog]

An employee claiming Whistleblower protection under the Sarbanes-Oxley Act must have actually believed that his company’s conduct was illegal in order to state a claim under the Act, according to a recent decision by the Eleventh Circuit Court of Appeals, Gale v. U.S. Department of Labor, Case No. 08-14232 11th Cir. June 25, 2010) (pdf).

The case arose when Michael Gale was terminated from his employment at World Financial Group (“WFG”). Gale filed a Whistleblower complaint with the Occupational Safety and Health Administration, which enforces the SOX Whistleblower provisions. Gale alleged that he was terminated because he opposed decisions made by company officers relating to waste and misuse of corporate funds, and because he raised concerns regarding the alleged violation of SEC rules and regulations.

Under SOX, a publicly traded company and its officers are prohibited from discharging an employee for providing information to a supervisory authority about conduct that the employee “reasonably believes” constitutes a violation of federal laws against mail fraud, wire fraud, bank fraud, securities fraud, any SEC rule or regulation, or any provision of federal law relating to fraud against shareholders. 18 U.S.C. § 1514A(a)(1).

OSHA dismissed Gale’s complaint on the grounds that WFG was not a covered employer. Gale appealed the decision to an administrative law judge of the Department of Labor, who allowed pre-hearing depositions. During his deposition, Gale testified that he was “uncomfortable” with some of the practices he observed and “expressed reservations” about them, but that he did not actually believe the company was engaging in illegal or fraudulent activities. The ALJ recommended that WFG’s motion for summary decision be granted on the grounds that Gale could not prove that he reasonably believed WFG’s practices were illegal or fraudulent The Administrative Review Board agreed with the ALJ and granted WFG’s motion. Gale appealed the ARB’s decision to the Eleventh Circuit.

The question presented in Gale was what “reasonably believes” means. In answering this question, the Eleventh Circuit joined several other federal circuit courts in holding that the term encompasses both a subjective and an objective component. That is, the employee must actually believe that the employer’s conduct was illegal, and his belief must be objectively reasonable under a “reasonable person” standard. The court noted that it has employed the same standard in the context of other retaliation statutes such as Title VII.

Because Gale did not actually believe his employer’s conduct was illegal, the Eleventh Circuit affirmed the ALJ’s summary decision in favor of WFG. The court did not have to reach the question of whether a reasonable person would have believed WFG’s practices were illegal or fraudulent.

For employers in the Eleventh Circuit, Gale is a reminder of the importance of both components of a retaliation case. Whether a belief is “objectively reasonable” is often a difficult question, and one that may not be amenable to a summary judgment motion. But where an employer is fortunate enough to obtain an admission from a plaintiff that she did not actually believe her employer’s conduct was illegal - or in the case of a Title VII sexual harassment case, that she did not actually perceive the harassment as sufficiently severe or pervasive to alter the terms and conditions of her employment - defending a retaliation case becomes a piece of cake.

Bloomberg Law Video of Allen Roberts Interview on Whistleblower Rights and Protections in Wall Street Financial Reform Bill

Epstein Becker & Green, P.C. — Wed, 14 Jul 2010 05:23:54 -0800

We continue to follow developments on Wall Street financial reform legislation and the whistleblower rights and protections that will come with its enactment. Now recast as the Dodd-Frank Wall Street Reform and Consumer Protection Act, the bill will be considered with its Conference Report (pdf).

A preview of the legislation is addressed in the interview of Allen Roberts by Bloomberg legal analyst Spencer Mazyck, now available in video, below:

Get the Flash Player to view this video file.

© 2010 Bloomberg Finance L.P. All rights reserved. The views expressed herein are those of the speaker and not of Bloomberg Finance L.P. These discussions are for informational purposes only. They do not take into account the qualifications, exceptions and other considerations that may be relevant to particular situations. These discussions should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Any tax information contained herein is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content contained herein and do not make any representation or warranty as to its completeness or accuracy.

Whistleblowing Takes New Turn with Mandated Reporting Imposed by PPACA's Elder Justice Act

EPSTEIN BECKER & GREEN, P.C. — Wed, 07 Jul 2010 09:20:25 -0800

By: Allen B. Roberts, Victoria M. Sloan

The typical set of protections or awards featured in a familiar array of whistleblower statutes has a new entrant with the imposition of mandated reporting in the Elder Justice Act section of the recently enacted Patient Protection and Affordable Care Act (“PPACA”). In a notable departure from other laws, the Elder Justice Act provides that every individual employed by or associated with a long-term care facility as an owner, operator, agent or contractor has an independent obligation to report a “reasonable suspicion” of a crime affecting residents or recipients of care. Reports must be made directly to both the Secretary of Health and Human Services (“HHS”) and one or more law enforcement entities in as little as two hours following the formation of the reasonable suspicion.

Although limited to reports of crimes against residents and recipients of services of long-term care facilities, the mandate of the Elder Justice Act sets a new standard of conduct – and backs it up with stiff penalties affecting long-term care facilities and those associated with them.

Notice and Reporting Obligations and Timeframes

Each owner, operator, employee, manager, agent or contractor of a long-term care facility that receives at least $10,000 in federal funds annually under PPACA is considered a “covered individual” subject to the reporting obligations. Every year, each long-term care facility must notify all covered individuals of the obligation to report a crime against a resident or recipient of care. Additionally, a notice of employee rights against retaliation (in a form to be prescribed by the Secretary of HHS) must be posted conspicuously in the facility.

Once a covered individual forms a reasonable suspicion that a crime against a resident or recipient of care has occurred, the reporting clock begins to run. Within the time provided in the Elder Justice Act, the individual must report the suspicion to the Secretary of HHS and one or more other law enforcement entities for the political subdivision in which the facility is located. The reporting time limits are stringent:

If the events that cause the suspicion result in serious bodily injury, the individual must report the suspicion immediately, but not later than two hours after forming the suspicion.
For events that do not result in serious bodily injury, the suspicion must be reported within 24 hours after forming the suspicion.

Penalties

Failure to comply could subject the covered individual to a civil monetary penalty of up to $200,000. If the failure to report exacerbates harm to the victim, or results in harm to another individual, the maximum penalty is increased to $300,000. But a severe monetary penalty is not the only possible consequence. An individual who does not fulfill reporting obligations may be classified as an “excluded individual” who becomes ineligible to participate in any federally funded plan or program that provides health benefits, through insurance or otherwise. And a long-term care facility must scrupulously monitor the status of its employees; it may become ineligible to receive federal funds under PPACA if it employs an individual during the period the individual is considered such an “excluded individual” – even if the facility has no connection to the crime, its victim or any failure to report it.

* * *

Further Analysis Available

Our recent article published in the CCH Health Care Compliance Letter, June 29, 2010, Mandatory Reporting of Elder Abuse in PPACA Creates Additional Risk and Compliance Burdens for Long-Term Care Providers (pdf), offers a comprehensive analysis of the Elder Justice Act and action steps that long-term care facilities should consider as compliance measures.

Bloomberg Law Interviews Allen B. Roberts

EPSTEIN BECKER & GREEN, P.C. — Sat, 26 Jun 2010 06:04:40 -0800

A new wave of whistleblower monetary awards and protections will come to the financial services industry once the Restoring American Financial Stability Act of 2010 (RAFSA) is enacted. With final resolution of differences between House and Senate versions accomplished, both houses of Congress now will consider the conference committee bill.

Bloomberg legal analyst Spencer Mazyck has been following whistleblowing changes we are likely to see with the anticipated enactment of RAFSA. Spencer explored with me some contours and ramifications of the pending legislation during 20-minute Bloomberg podcast.

Click here to listen to the audio podcast

ARB Clarifies Burden Whistleblowers Bear for Equitable Extension of SOX Statute of Limitations

EPSTEIN BECKER & GREEN, P.C. — Mon, 07 Jun 2010 06:20:18 -0800

On the heels of its 2-1 decision in Hyman v. KD Resources, allowing equitable estoppel to extend the Sarbanes-Oxley (SOX) statute of limitations (noted in our blog posting of April 20, 2010), the Department of Labor Administrative Review Board (ARB) has issued a unanimous decision clarifying the burden for whistleblowers to survive dismissal of complaints that are not filed within the explicit 90-day statute of limitations. Daryanani v. Royal & Sun Alliance, ARB No. 08-106, ALJ No. 2007-SOX-79 (ARB May 27, 2010).

Adhering to the principle that equitable estoppel may apply when certain employer conduct interferes with a whistleblower-employee’s exercise of rights, the ARB nevertheless refused to extend the SOX statute of limitations on the basis of alleged inaction by an employer. Holding equitable estoppel would not be available in the circumstances, the ARB observed that the employer had no affirmative obligation to:

inform the employee of potential causes of action,
inform the employee of time limitations applicable under statutes creating a cause of action, or
counter-sign a severance release agreement within the statute of limitations deadline.

The ARB also clarified that:

responsibility for discovering a cause of action and filing a timely complaint remains an obligation of the complainant, and
a complainant’s delayed awareness of a possibly retaliatory motive for an adverse employment action is not a ground for equitable estoppel.

Administrative Appeals Judge Wayne C. Beyer, who dissented in Hyman v. KD Resources, wrote a concurring opinion to emphasize two supplemental points. First, he would find a pre-complaint settlement agreement and release of “all claims” binding, even though the release did not expressly refer to SOX claims. Second, consistent with his Hyman v. KD Resources dissent, he would not allow settlement discussions to toll the limitations period.

While Hyman v. KD Resources may have created a broader opening of the equitable estoppel door, Daryanani v. Royal & Sun Alliance helps to define the space within by placing the burden squarely on the complainant – even while ARB members continue to show different tolerances for applying principles of equitable modification.

Federal Court Finds SOX Whistleblower Provisions Cover Employees of Private Firms Acting Under Contract to Public Mutual Funds

EPSTEIN BECKER & GREEN, P.C. — Fri, 21 May 2010 14:26:42 -0800

By Allen B. Roberts, Douglas Weiner

The U.S. District Court for the District of Massachusetts held in Lawson v. FMR LLC (pdf) that SOX coverage can apply not only to employees of publicly traded companies, but to employees of private management services firms as well.

The typical business model in the financial services industry is that public mutual fund companies generally have no employees of their own, but are managed by private investment advisors. The public company’s investment assets are thus managed by employees of a private employer.

Plaintiffs, employees of a private investment advisor to a public mutual fund, alleged they had engaged in activity protected by SOX, for which they suffered retaliation. The employer moved to dismiss the lawsuit, arguing plaintiffs were not covered by the Section 806 whistleblower protections because they were not employees of a publicly traded company. The defendants noted the very title of the whistleblower section of SOX is “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.” The plaintiffs countered that Congress intended to extend coverage to private employees in cases such as the plaintiffs.

The Lawson court, the first federal court to decide the issue, agreed with the putative whistleblowers and held that SOX covers employees of private firms providing contract services to the public company.

The court found that the private employers in question made fundamental decisions as to how the publicly held mutual funds are invested. The court held that, “For the goals of SOX to be met, contractors and subcontractors, when performing tasks essential to insuring that no fraud is committed against shareholders, must not be permitted to retaliate against whistleblowers.”

The court looked to the legislative history of SOX, citing Congress’s attempt to address “failures to report instances of fraud against shareholders, failures not only on the part of public company employees, but also ‘employees’ of those institutions working with the public company.” Finding broad coverage was consistent with Congressional intent, the Court stated that, “[i]f Section 806 only protected employees of public companies, then any reporting of fraud involving a mutual fund’s shareholders would go unprotected, for the very simple reason that no ‘employee’ exists for this particular type of public company.”

What may employers expect next? There are indications that Secretary of Labor Hilda Solis and other newly appointed officials and members of the DOL’s Administrative Review Board will be examining positions and precedents in prior interpretations of SOX protections that had been criticized by advocates as not sufficiently inclusive of intended whistleblower rights. The Lawson decision, coming from outside the DOL, suggests more aggressive litigation by whistleblowers urging an expansive reading of SOX protections – and some measure of receptivity to theories that previously had not won mainstream acceptance.

Beyond the Administrative Process -- Courts Show Receptivity to Arbitration of Certain Whistleblower Claims

EPSTEIN BECKER & GREEN, P.C. — Wed, 12 May 2010 09:00:05 -0800

Like several other statutes, the Sarbanes-Oxley Act (“SOX”) requires whistleblowers to initiate their complaints by an administrative filing with the Department of Labor’s Occupational Safety and Health Administration. But when a preferred outcome in that designated arena appears unlikely, a whistleblower may be allowed to abandon the administrative process before a final order issues and seek a new opportunity in court. Faced with the prospect of another round of de novo litigation, employers may turn increasingly to pre-dispute arbitration agreements as an alternative to litigating in court.

As exemplified by Stone v. Instrumentation Laboratory Co.(4th Cir. 2009) (pdf), filing an administrative complaint and participating in the administrative process, as required by SOX, do not foreclose access to a federal court before the issuance of a final administrative order. The court explained that the preclusion doctrine, intended to avoid duplicative litigation, does not bar de novo consideration by a federal district court if a lawsuit is filed at least 180 days after the administrative filing and before the Department of Labor has issued a final decision, even where administrative proceedings have progressed to Administrative Review Board consideration of an administrative law judge’s dismissal of a complaint.

Once a whistleblower gains access to a federal court, there is no assurance the case will remain there to be adjudicated, if an arbitration agreement is in place. In Hill v. Ricoh Americas Corp., (10th Cir. Apr. 19, 2010) (pdf), the court heldthat a SOX whistleblower’s lawsuit should be stayed and arbitration compelled because a pre-dispute agreement to arbitrate contained in an employment agreement is enforceable. An earlier Second Circuit Court of Appeals decision, Guyden v. Aetna Inc., (2d Cir. 2008) (pdf), similarly held that SOX whistleblower claims are arbitrable.

Decisions in the Tenth and Second Circuits show judicial receptiveness to referring such matters to arbitration if appropriate pre-dispute agreements are in place, and judicial authorization of appropriately structured agreements to arbitrate SOX claims may gain even greater currency as whistleblowers seek to avoid an unfavorable administrative determination by finding another forum.

Nevertheless, while judicial construction permits arbitration within the confines of SOX and certain other whistleblower laws, Congress recently has turned less friendly to alternative dispute resolution, as reflected in the American Recovery and Reinvestment Act of 2009 ("ARRA") (pdf), where arbitration of stimulus package whistleblower protections is expressly disfavored. Under the ARRA, procedural, as well as substantive, rights and remedies may not be waived by any agreement, policy, form or condition of employment, and pre-dispute arbitration agreements will not be valid or enforceable, unless contained within a collective bargaining agreement. See Stimulus Package Brings Sweeping Whistleblower Protections Affecting Employers Receiving Covered Funds.

Going forward, the favorable regard courts are tending to show for arbitration – available under statutes that do not specifically preclude that alternative to court litigation – may give both impetus and poignancy to precise legislation, like the ARRA, barring arbitration.

New Healthcare Legislation Brings FLSA Whistleblower Protections

EPSTEIN BECKER & GREEN, P.C. — Tue, 27 Apr 2010 10:07:29 -0800

By Allen B. Roberts, Douglas Weiner

While most attention in the legislative and political process leading to enactment of the Patient Protection and Affordable Care Act (“PPACA”) focused on the significant impact on the delivery of health care, employers need to be aware, also, of amendments to the Fair Labor Standards Act ("FLSA"). The FLSA amendments impose certain employer responsibilities in providing health care benefits, confer whistleblower protections and authorize the U.S. Department of Labor ("DOL") to undertake increased enforcement related to health care.

While other features of the FLSA amendments are addressed in our client alert, "Health Care Reform Legislation Amends the Fair Labor Standards Act to Give the U.S. Department of Labor Increased Enforcement Authority over Health Care," here is a summary of whistleblower protections:

A new Section 18C, “Protections For Employees”, is added to the Fair Labor Standards Act, prohibiting employers from taking adverse action against any employee because the employee:
- received a premium tax credit or subsidy for a health plan;
- provided information to the employer or the federal or state government concerning a violation, act or omission the employee reasonably believes to be a violation relating to Title I of the PPACA. (Title I of the PPACA, among other things, provides rules for the establishment and operation of the Exchange and imposes certain mandates on employers, including the provision of certain standards of benefits for health coverage, the automatic enrollment requirements described above and the elimination of certain restrictions in health coverage, such as pre-existing condition exclusions and lifetime and annual dollar limitations in coverage);
- testified or is about to testify in a proceeding concerning such violation;
- assisted or participated, or is about to assist or participate, in such a proceeding; or
- objected to, or refused to perform any activity or assigned task the employee reasonably believes to be such a violation.
The new employee protections under the PPACA are significant in that they provide employees with the authority to challenge actions of employers in implementing the requirements of Title I of the PPACA.
Enforcement of these protections incorporates the procedures, notifications, burdens of proof, remedies and statute of limitations set forth in the Consumer Product Safety Improvement Act of 2008 (“CPSIA”), 15 U.S.C. 2087(b) [addressed in EpsteinBeckerGreen Client Alert, New Law Builds Employee Whistleblower Protections into Consumer Products]. The Department of Labor is likely to assign complaints under this section to the whistleblower investigations unit within OSHA, as are 17 other statutes, including CPSIA. Finally, these protections do not diminish any other rights under federal or state law or under a collective bargaining agreement and are not waivable.
This provision is effective immediately.

In an earlier article published in Financier Worldwide's Litigation & Dispute Resolution 2010 Ebook (pdf), we observed that businesses and other organizations should anticipate change occasioned by increased enforcement initiatives by administrative agencies. In ways different from legislative and executive initiatives empowering governmental authorities, features of the PPACA may have the effect of enlisting employees to police compliance. Affected organizations should review policies and procedures to take account of these new legal and enforcement considerations.

Newly Constituted Administrative Review Board Allows Equitable Considerations to Extend 90-Day Statute of Limitations for Whistleblower Claims

EPSTEIN BECKER & GREEN, P.C. — Tue, 20 Apr 2010 14:40:41 -0800

By: Allen B. Roberts, Victoria M. Sloan

Employers who thought they were free of exposure if no complaint was filed within the statute of limitations applicable in Sarbanes-Oxley ("SOX") and other whistleblower claims administered by the Secretary of Labor need to recalibrate their risk based on a recent decision allowing equitable estoppel.

In Hyman v. KD Resources, an employee missed the 90-day SOX statute of limitations by filing his complaint 160 days after he was discharged. Two newly appointed members of the Administrative Review Board (“ARB”) allowed the complaint to survive and remanded it to the Administrative Law Judge who had dismissed it as untimely.

Equitable Estoppel Principles

According to the ARB, equitable estoppel becomes available to extend a statutory time limitation when a whistleblower can show that the failure of a timely filing is attributable to reasonable reliance on an employer’s misleading or confusing representations or conduct.

Among the bases for equitable estoppel in whistleblower cases are:

the employer has actively misled the whistleblower respecting the cause of action;
the whistleblower has in some extraordinary way been prevented from asserting his rights;
the whistleblower has raised the precise statutory claim in issue but has mistakenly done so in the wrong forum; and
the employer’s own acts or omissions have lulled the whistleblower into forgoing prompt attempts to vindicate his rights.

The principles to extract from KD Resources:

It may be immaterial whether the employer engaged in intentional misconduct if the employer’s conduct, innocent or not, reasonably induced the whistleblower not to file within the statutory limitations period.
The whistleblower may have to prove prejudice caused by the allegedly misleading conduct.
Settlement discussions are not sufficient to toll the running of the limitations period, absent a showing that the employer misled or otherwise prevented the whistleblower from filing a complaint.
The whistleblower carries the burden to prove the bases for equitable extension of the statute of limitations.
Equitable estoppel may not be available to complainants who are represented by counsel.

The Significance of the Decision

The KD Resources decision comes within months of the January 11, 2010 announcement by Secretary of Labor Hilda Solis of new appointments to the Administrative Review Board. The 2-member majority opinion emphasized the “fact intensive” nature of the considerations applicable when a whistleblower seeks to revive a dismissed complaint on grounds of equitable estoppel or equitable tolling (where ignorance excuses timely filing because essential information bearing on a claim could not be discovered by the whistleblower’s exercise of reasonable diligence). For its part, the dissent emphasized that settlement discussions may have offered “hope” to the complainant but fell well short of the “promise” necessary to support an equitable estoppel argument. The dissent also noted the whistleblower’s improper appellate reliance on documents that were not disclosed in the record before the Administrative Law Judge and the unavailability of equitable estoppel to complainants who are represented by counsel.

Apart from its immediate impact – possibly opening the door to more litigation of claims that do not satisfy a rigid application of the statute of limitations – the ARB’s KD Resources decision may signal ARB reluctance to dispose of cases by summary processes and a trend to more evidentiary hearings. Looking forward, there may be a message, also, that the newly constituted ARB will be hospitable to other bases for remanding summary dispositions. If this happens, employers and complainants alike will increasingly encounter the rigors and expense of developing a full evidentiary record in whistleblower proceedings.

County and State Reports Trigger the Federal False Claims Act Public Disclosure Bar

Epstein Becker & Green, P.C. — Fri, 16 Apr 2010 11:20:47 -0800

By Stuart M. Gerson

Suits in the name of the United States under the Federal False Claims Act (“FCA”) brought by private individuals known as qui tam relators are among the most common forms of whistleblower actions in the federal system. The Supreme Court rendered its much-anticipated decision in Graham County Soil and Water Conservation District, et al. v. United States ex rel. Wilson (pdf), imposing a significant limitation on the ability of these relators to satisfy an important jurisdictional bar.

The FCA authorizes both the Attorney General and private qui tam relators to bring actions against persons who make or facilitate fraudulent claims for payment from the United States. However, in the absence of the government, a relator will be barred from proceeding on his own if the action is based upon the public disclosure of allegations or transactions in, inter alia, "a congressional, administrative, or Government Accounting Office ("GAO") report, hearing, audit, or investigation." 31 U. S. C. §3730(e)(4)(A). The Graham County case involved federal contracts and funding for the repair of flood damage. The relator, Wilson, a local government employee, alerted both federal and county and state officials to irregularities in performance. Both the county and the state issued reports making findings about these potential irregularities and Wilson thereupon filed a qui tam action against the county conservation districts administering the contracts. The District Court dismissed for lack of jurisdiction because it held that the allegations publicly disclosed in the county and state reports constituted "administrative" reports under the FCA's public disclosure bar. The Fourth Circuit reversed, holding that only federal administrative reports may trigger the public disclosure bar.

Writing for a six-Justice majority, Justice Stevens ruled that the reference to “administrative” reports in section 3730(e)(4)(A), encompasses disclosures made to state and local sources as well as federal sources. This resolves a split in the Circuits and makes it clear that the jurisdictional bar of the FCA – intended to weed out parasitic lawsuits, that is suits that track what the authorities already know about – is not limited to matters that had been disclosed to the Federal government but includes public disclosures made to local, county and state authorities. This is significant to those who administer public contracts or grants at the state level, for example as a county department or local authority, or as a contractor to such authorities. It is also of particular relevance to health care providers whose activities may receive federal financing, for example under the Medicaid program and who are subject to parallel state regulation and investigations.