Whistleblowing & Compliance Law Blog

Second Circuit Holds That Participation in Purely Internal Investigation Does Not Trigger Title VII "Participation Clause" Protections, Maintaining Uniform Approach Among Courts of Appeals

Michael J. Slocum — Fri, 11 May 2012 06:09:10 -0800

On May 9, 2012, the Second Circuit held that Title VII’s “participation clause,” prohibiting an employer from retaliating against any employee who participates in an investigation “under” Title VII, requires participation in a formal investigation involving the Equal Employment Opportunity Commission (“EEOC”) – participating in purely internal investigations, conducted pursuant to the employer’s own policies and procedures, is not sufficient to trigger the statutory protections. Townsend v. Benjamin Enterprises, Inc., No. 09-0197.

The Second Circuit thereby reaffirmed the approach taken by its sister courts in the Fifth, Sixth, Seventh, Ninth and Eleventh Circuits, leaving intact a significant legal defense against retaliation claims under Title VII.

Plaintiff Claimed that She Had Been Terminated in Retaliation for Participating in an Internal Investigation into Alleged Sexual Harassment of Another Employee

Martha Townsend was hired as an office manager and receptionist by Benjamin Enterprises, Inc. (“BEI”) in June 2002. She claimed that from the summer of 2003 through March 2005, Hugh Benjamin, BEI’s sole corporate Vice President and a corporate shareholder, had sexually harassed her. In March 2005, Townsend reported the sexual harassment to BEI’s Human Resources Director, Karlean Grey-Allen.

Grey-Allen began an investigation, interviewed Townsend and Benjamin, and discussed the allegations with both a private management consultant and the New York State Division of Human Rights. Claiming that her conversation with the private management consultant had been a breach of confidentiality, BEI’s President, Michelle Benjamin – who was also Hugh Benjamin’s wife – fired Grey-Allen and took over responsibility for the investigation. Critically, at the time Grey-Allen conducted her investigation and when she was terminated, no formal charge had been filed with the EEOC on Townsend’s underlying sexual harassment claims.

Second Circuit Follows Lead of Sister Courts in Adopting a Limited Approach, Leaves Open Question of Participation in Post-Charge Independent Investigations

Grey-Allen claimed that BEI had terminated her in violation of Section 704(a) of Title VII, 42 U.S.C. § 2000e-3(a), the so-called “participation clause,” which makes it unlawful for an employer to retaliate against an employee “because he has made a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under this subchapter.” The Second Circuit noted at the outset that “whether the participation clause covers internal investigations not associated with a formal EEOC charge is a question of first impression in this Court.”

The court looked first to the language of Title VII itself, in particular the participation clause’s requirement that the investigation in which the employee participates be one “under this subchapter.” Reasoning that “much of this subchapter is devoted to describing the enforcement powers of the EEOC and the procedures by which the EEOC carries out its investigations and hearings,” the court agreed with the Eleventh Circuit’s decision in EEOC v. Total System Services Inc., 221 F.3d 1171 (11th Cir. 2000), that an investigation “under this subchapter” thus refers solely to an investigation occurring in conjunction with the filing of a formal EEOC charge and does not include purely internal investigations conducted by an employer pursuant to its own policies and procedures.

Grey-Allen argued that “because internal investigations are integral to the deterrent aims and effective operation of Title VII,” her participation in BEI’s internal investigation should have afforded her the protections of the participation clause. In an amicus brief, the EEOC had likewise argued in favor of a more expansive interpretation of the participation clause. Observing that every Court of Appeals to have considered the issue had rejected such an interpretation, the Second Circuit likewise “decline[d] to adopt such a strained interpretation of the language of the statute.”

The Second Circuit in Townsend was quick to note that it “express[ed] no opinion on whether participation in an internal investigation that is begun after a formal charge is filed with the EEOC falls within the scope of the participation clause.” Although it made clear that, because no EEOC charge had been filed at the time Grey-Allen participated in the internal investigation, the question was not before it, the Second Circuit acknowledged that “some courts have answered this question in the affirmative.”

It remains to be seen, then, whether the Second Circuit would extend the protections of the participation clause to an employee who participates in an internal investigation commenced in response to an EEOC charge. There is an argument to be made that, because such an investigation is nonetheless conducted pursuant to the employer’s policies rather than the EEOC’s own enforcement and investigative procedures, it should not be considered “under” Title VII any more than an internal investigation begun before a charge has been filed.

For the time being, however, Townsend reaffirms the principle, adopted by every Court of Appeals to have considered the issue, that Title VII’s participation clause does not extend its protections to employees who participate in purely internal investigations. This principle thus remains a strong potential defense which should be considered by employers facing claims of retaliation under Title VII.

ARB Holds That After-Acquired Evidence Justifying Termination May Limit Back Pay Damages in Whistleblower Cases Under AIR21 Statute, Asks ALJ to Clarify Employer's Burden of Proof

Michael J. Slocum — Thu, 03 May 2012 11:09:21 -0800

The Administrative Review Board (“ARB”) on April 27, 2012 held that where an employer charged with retaliation under the AIR21 Statute can point to evidence of misconduct by a whistleblower which would have justified termination, but which was acquired after the termination had already occurred, that evidence may be used to limit the period for which back pay damages are recoverable. Clemmons v. Ameristar Airways, Inc., ARB Case No. 08-067. The ARB remanded the matter to the Office of Administrative Law Judges (“OALJ”) to clarify whether the employer must prove that it would have terminated the employee based upon the misconduct by a preponderance of the evidence, or by the heightened “clear and convincing evidence” standard.

Although Complainant Had Proved Retaliation, Respondent Argued That Evidence of Improper Email Communications Would Have Resulted in Legitimate Termination

Complainant Thomas Clemmons had been Director of Operations for Ameristar Airways, and claimed that he had been terminated in retaliation for reporting air safety issues to the Federal Aviation Administration. He filed a claim under the whistleblower protection provisions of the Wendell H. Ford Aviation Investment and Reform Act for the 21^st Century (“AIR21 Statute”), 49 U.S.C. § 42121. Following a hearing, the Administrative Law Judge (“ALJ”) found that Clemmons had been terminated in violation of the AIR21 Statute, and awarded back pay.

During the hearing, Ameristar had submitted evidence of an email Clemmons had sent to other Ameristar employees on January 13, 2003 – one week prior to his discharge on January 20, 2003. Although Clemmons admitted that the email was “vulgar, rude, and improper for a manager to do,” the ALJ found that it could not provide a legitimate and non-retaliatory reason for his discharge as his managers were unaware of the email until March 28, 2003, more than two months after Clemmons had already been terminated.

On appeal, the Fifth Circuit questioned whether the award of back pay should run from the January 2003 termination through the July 2004 hearing, as the ALJ and ARB had held, or should have been cut off in March 2003, as Ameristar arguably would have legitimately discharged Clemmons at that time because of the email. Ameristar Airways, Inc. v. ARB, 650 F.3d 562 (5^th Cir. 2011). Citing the Supreme Court’s holding in McKennon v. Nashville Banner Publ’g Co., 513 U.S. 352 (1995), that “where there is after-acquired evidence of wrongdoing that would have led to termination on legitimate grounds had the employer known about it,” an award of back pay should be limited to the period “from the date of the unlawful discharge to the date the new information was discovered,” the court remanded for determination of whether the back pay award should be adjusted in light of the email.

ARB Extends McKennon to AIR21 Statute, Asks ALJ to Consider Employer’s Burden of Proof

At the outset, the ARB held McKennon applicable to limit back pay awards in whistleblower cases under the AIR21 Statute. Reasoning that the purpose of the AIR21 Statute is “to eliminate employer discrimination and retaliation against employees who report violations of air safety regulations” – a goal similar to that espoused by the Age Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act of 1964, and the Equal Pay Act of 1963 considered by the Court in McKennon – the ARB concluded that McKennon’s holding was equally applicable to claims under the AIR21 Statute.

This left a remaining question, however, concerning an employer’s burden of proof as to after-acquired evidence of misconduct justifying termination: “must Ameristar prove by a preponderance of the evidence or clear and convincing evidence that it would have fired Clemmons on this alleged misconduct alone?” Although the ARB remanded the question to the ALJ for initial determination, it nonetheless hinted strongly that the stricter “clear and convincing” burden seemed more appropriate in its view:

In enacting AIR 21, Congress clearly imposed a heavy burden on an employer in the liability phase of a mixed motive case by requiring the employer to prove by clear and convincing evidence that it would have discharged the employee in the absence of the protected activity. It seems strange that the burden of proof would change in this case where the after-acquired evidence involved an incident occurring before the termination but merely discovered afterwards; that would result in a windfall to the employer solely because it learned of such information later.

Although it will be up to the ALJ to determine the applicable standard in the first instance, indications are that clear and convincing evidence will ultimately be required by the ARB. The distinction is significant, as the ARB has described the clear and convincing evidence standard as “more rigorous than the preponderance-of-the-evidence standard.” In the ARB’s view, “clear and convincing evidence denotes a conclusive demonstration; it indicates ‘that the thing to be proved is highly probable or reasonably certain.’” Clark v. Airborne, Inc., ARB Case No. 08-133 (Sept. 30, 2010). By suggesting its likely insistence on this heightened standard of proof, then, the ARB has stayed true to its recent complainant-friendly inclinations. Even in cases such as Clemmons, where the severity of the employee’s misconduct is admitted, the ARB would require the employer to prove to a reasonable certainty that it would have terminated the employee based upon that misconduct, a heavy burden on the employer that can be expected to prove a boon to the employee.

As catalogued in our earlier articles, it is still too early to know if the ARB’s expansive interpretation of various whistleblower protection statutes will pass muster as employers seek court review of some of these principles, and there appear to be ample grounds to question the current ARB’s fidelity to both statutory text and Congressional intent. But for the time being at least, it can be fully anticipated that this expansive approach to whistleblower protections will find its place in the ARB’s future whistleblower jurisprudence.

ARB Adopts Expansive View of Protections Afforded Whistleblowers Under the Consumer Product Safety Improvement Act, Continuing Recent Trends in Whistleblower Cases

Michael J. Slocum — Thu, 19 Apr 2012 12:06:31 -0800

The Administrative Review Board (“ARB”) on March 28, 2012 held that the whistleblower protection provisions of the Consumer Product Safety Improvement Act of 2008 (“CPSIA” or “Act”) are not limited to those who raise concerns only as to a “consumer product” as defined in the Act, but extends to any matter falling within the jurisdiction of the Consumer Product Safety Commission. Saporito v. Publix Super Markets, Inc., ARB Case No. 10-073. The ARB has thereby significantly expanded the number of manufacturers, distributors and retailers whose employees enjoy the whistleblower protections of the CPSIA.

Complainant Had Alleged Improper Handling of Food Products Specifically Excluded from CPSIA Coverage, Resulting in Dismissal of His Complaints Before OSHA and the ALJ

Complainant Thomas Saporito had been a Maintenance Technician in the dairy production area of a facility operated by Respondent. Claiming that he had been subjected to a hostile work environment and eventually terminated in retaliation for having complained to supervisors about potential contamination of milk products, Saporito sued under the CPSIA’s whistleblower protection provision, 15 U.S.C. § 2087.

The Occupational Safety & Health Administration (“OSHA”) declined to investigate Saporito’s claim, noting that food products are expressly excluded from the definition of a “consumer product” under the CPSIA and therefore outside the scope of the CPSIA. The Administrative Law Judge (“ALJ”) agreed with OSHA, holding that Saporito’s claims involved matters regulated by the Food & Drug Administration and were therefore not covered under CPSIA.

ARB Rejects View that CPSIA Covers Only “Consumer Products”

The ARB held that OSHA and the ALJ were wrong to suggest that the CPSIA is limited to concerns about consumer products alone. The ARB began with the premise that among the Act’s “expressed ‘purposes’ is to ‘protect the public against unreasonable risks of injury associated with consumer products.’” In furtherance of those purposes, Congress had established the Consumer Product Safety Commission (“Commission”). That food products are specifically excluded from the CPSIA’s definition of “consumer products” did not bar Saporito’s claims, reasoned the ARB, because the Act’s whistleblower provisions extend not only to reported violations of the CPSIA itself, but also to reported violations of “any other Act enforced by the Commission.” Observing that the Commission is also charged with enforcement of such statutes as the Federal Hazardous Substances Act and the Poison Prevention Packaging Act, the ARB concluded that “[c]learly, the Commission’s power extends beyond regulation of ‘consumer products.’” The ARB therefore held that Saporito’s CPSIA claims could proceed.

Saporito Decision Continues ARB’s Expansion of Whistleblower Protections, and Offers Alternate Avenue to Whistleblowers under the 2011 Food Safety Modernization Act

Saporito stands as another in a growing line of recent ARB decisions expanding the protections afforded whistleblowers under the twenty-one statutes administered by OSHA’s Whistleblower Protection Program. In particular, and as discussed in some of our recent postings, the ARB has greatly expanded the scope of protections available under the Sarbanes-Oxley Act of 2002 through its decisions in Brown v. Lockheed Martin Corp. (February 2011), Sylvester v. Parexel International, LLC (May 2011), and Zinn v. American Commercial Lines Inc. (March 2012). The Saporito decision continues this trend – and indeed, the ARB hinted at the possibility that it might soon extend its groundbreaking Sylvester holding beyond the Sarbanes-Oxley context.

Equally noteworthy, the Saporito decision provides would-be whistleblowers in the food industry with supplemental protections to those afforded them under the FDA Food Safety Modernization Act (“FSMA”), Pub. Law 111-353, signed by President Obama in January 2011. Section 402 of the FSMA created a cause of action for food industry workers who suffer retaliation for reporting violations of the FSMA’s food safety standards. 21 U.S.C. § 399d. The FSMA was not in effect when Saporito brought his claims under the CPSIA in September 2008. But by holding that the CPSIA extends to reported violations of food safety standards, the ARB has now created multiple layers of protection for food industry whistleblowers and further demonstrated its tendency to espouse a broad and expansive view of whistleblower protections generally.

It remains to be seen if the ARB’s extremely expansive interpretation of various whistleblower protection statutes will pass muster as employers seek court review of principles announced in these recent decisions, and there appear to be ample grounds to question the current ARB’s fidelity to both statutory text and Congressional intent. But for the time being at least, it can be fully anticipated that this expansive approach to whistleblower protections will find its place in the ARB’s future whistleblower jurisprudence.

Expansion of Protected Activity Under Sarbanes-Oxley Continues

Allen B. Roberts — Tue, 10 Apr 2012 13:32:03 -0800

By: Allen B. Roberts and Frank C. Morris, Jr.

Continuing its trend from 2011, the Department of Labor (DOL) Administrative Review Board (ARB) seems intent on extending whistleblower protection under the Sarbanes-Oxley Act of 2002 (SOX) beyond allegations of securities fraud – even where that means reversal of its own administrative law judges who believe they are applying the law as Congress intended and consistent with ARB precedent. For now, whistleblowers and their attorneys can expect a more hospitable reception in this administrative forum for innovative claims alleging that adverse employment actions have occurred in reprisal for activity claimed to be covered by SOX Section 806.

The ARB’s March 28, 2012 decision in Zinn v. American Commercial Lines Inc. (pdf) builds from the groundbreaking May 2011 holding in Sylvester v. Paraxel, Int’l LLC that “a reasonable belief about a violation of any rule or regulation of the Securities and Exchange Commission could encompass a situation in which the violation, if committed, is completely devoid of any type of fraud,” and a whistleblower need not prove fraud to win a retaliation claim. Zinn, at 8. Further, even if the whistleblower’s belief is mistaken, and no actual violation of the law has occurred, whistleblower protections are available and will be enforced. Id. at 10.

SOX Section 806 protects 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 section 1341[mail fraud], 1343[fraud by wire, radio or television], 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….

18 U.S.C. 1514(a)(1).

In Zinn, an in-house attorney hired in November 2007 invoked SOX Section 806 protections for reports made in April and May 2008. In one, she notified a division vice president and her legal department supervisor of her belief that a vendor improperly had used unlicensed personnel on its tugboats, a circumstance she claimed needed disclosure to avoid an SEC Form 10-K misrepresentation. In the other, she expressed concern to her legal department supervisor that the appointment of a new General Counsel required an SEC Form 8-K announcement. In her administrative complaint filed with the Occupational Safety and Health Administration (OSHA), Zinn claimed that she was subjected to changed work responsibilities, drug testing, increased monitoring of her performance, and ultimately the new General Counsel’s termination of her employment in July 2008 for poor job performance and insubordination. After OSHA investigated and administratively dismissed her complaint, Zinn exercised her right to a hearing before an Administrative Law Judge (ALJ).

The ALJ issued a decision dismissing the complaint, finding that Zinn did not show she engaged in protected activity and that her employer showed it would have taken the same adverse employment action regardless of any protected activity. From the ALJ’s perspective: (1) evidence of shareholder and securities fraud, essential to Zinn’s claim, was absent; (2) notwithstanding Zinn’s subjective belief of employer wrongdoing, she failed to establish that her beliefs were objectively reasonable; and (3) Zinn did not demonstrate that her employer actually violated the law. The ARB reversed and remanded, addressing and ascribing error on each of three critical issues: (1) based on the plain language of Section 806, reports of shareholder or securities fraud are not essential predicates for whistleblower protection; (2) reports of other types of frauds or violations suffice to support a claim; and (3) even without describing an actual violation of law, an employee’s communication of a reasonable but mistaken belief that her employer’s conduct constitutes a violation of any of the six enumerated categories under Section 806 may be protected.

In addition, the ARB reversed on the grounds that an incorrect standard was used to evaluate Zinn’s claim. Faulting the ALJ for applying the burden shifting standard utilized in the Title VII context, the ARB noted that SOX replaced the familiar McDonnell Douglas standard with a lesser burden of proof for complainants. According to the ARB, once protected activity is shown by a preponderance of evidence, analysis of SOX claims has the following elements:

Where protected activity involves providing information to an employer, the “reasonable belief” standard is measured by both subjective reasonableness (the employee “actually believed the conduct complained of constituted a violation of pertinent law”) and objective reasonableness (“evaluated based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee”). Zinn, at 6-7.

Direct or indirect proof that protected activity was a contributing factor to the adverse employment action can substantiate a claim. Id. at 11-12.
A contributing factor is any factor, including temporal proximity, that, “alone or in connection with other factors, tends to affect in any way the outcome of the decision.” Id.

Complainants are not necessarily required to prove the employer’s reasons for the adverse employment action are pretextual, and ALJs must weigh all evidence, including pretext evidence, to determine whether the complainant has overcome any legitimate business reason articulated by the employer. Id. at 13.

Zinn further shapes the ARB’s landscape of whistleblower protections under SOX and should inform every employer faced with reports of potential violations of the law that: (1) allegations of any of the enumerated frauds or violations, not just securities and shareholder frauds, are protected under Section 806; and (2) a complainant can prevail even if there was no actual violation of the law.

It remains to be seen if the ARB’s extremely expansive interpretation of SOX and proof standards under SOX will pass muster as employers seek court review of principles announced in any of these recent decisions. There appear to be ample grounds to question the current ARB’s fidelity to both the language of SOX and expression of Congressional intent as demonstrated both by prior ARB decisions and decisions of ALJs.

OSHA's Whistleblower Protection Program Will Now Report Directly to Assistant Secretary of Labor, Signaling Increased Priority for Whistleblower Enforcement

Michael J. Slocum — Wed, 07 Mar 2012 06:20:53 -0800

The Occupational Safety and Health Administration (“OSHA”) announced on March 1, 2012 that its Office of the Whistleblower Protection Program (“WPP”) will now report directly to the Department of Labor’s Office of the Assistant Secretary, rather than to its Directorate of Enforcement Programs. The restructuring signals an elevated priority placed on enforcement of the whistleblower protection laws falling under OSHA’s jurisdiction, and suggests that the Agency intends to devote increased efforts and resources to this area in the future.

WPP Had Not Been Sufficiently Meeting Its Mission to Protect and Incentivize Whistleblowers

OSHA’s WPP is responsible for enforcing the various whistleblower protection provisions of twenty-one separate federal statutes. These include such laws as the Occupational Safety and Health Act, Sarbanes-Oxley, and the Affordable Care Act, and they offer protections to employees who bring to light violations of a wide variety of laws, including airline safety, environmental remediation, food safety, public transportation and railroad, maritime and securities laws. While some differences exist between the details of the particular statutes, in general they prohibit an employer from terminating or otherwise discriminating or retaliating against an employee who reports or provides information regarding a suspected violation of the law, either to internal audit personnel or to the government. The statutes vest OSHA with jurisdiction to investigate complaints of retaliation against whistleblowers, and to award appropriate relief which frequently includes reinstatement, attorneys’ fees and costs, compensatory damages, and in some cases even punitive damages.

A pair of Government Accountability Office audits in 2009 and 2010 had identified substantial problems with the WPP. In particular, an August 2010 GAO Report No. 10-722, titled “Whistleblower Protection: Sustained Management Attention Needed to Address Long-Standing Program Weaknesses,” found that “OSHA has done little to ensure that investigators have the necessary training and equipment to do their jobs, and that it lacks sufficient internal controls to ensure that the whistleblower program operates as intended.”

OSHA Revamp WPP to Increase Protection and Incentives for Whistleblowing Activity

Spurred in part by these findings, OSHA conducted an internal review of its program, part of an overall plan to fortify the WPP and its operations. In September 2011 OSHA issued an updated Whistleblower Investigations Manual, and as of the Fiscal Year 2012 budget OSHA has established a separate budgetary line item for its WPP. Announcement of the restructuring and new reporting lines marks yet another key milestone in OSHA’s revamping of the WPP. Assistant Secretary of Labor Dr. David Michaels, who heads OSHA and will now directly oversee the WPP, said that “OSHA’s internal improvement initiatives, including this realignment, demonstrate the agency’s steadfast commitment to strengthening a program that is critically important to the protection of workers’ rights.”

The restructuring strongly indicates OSHA’s intention to bring more resources to bear in its enforcement of the whistleblower protection statutes it oversees. Employers can expect to see a growing emphasis on the WPP as a tool in the government’s law enforcement efforts, and a continued vibrancy in this area of employment litigation

Epstein Becker & Green, P.C. — Fri, 17 Feb 2012 08:49:56 -0800

By: Stuart M. Gerson

Lawson v. Fidelity Management & Research LLC, et al., No. 10-2240 (1st Cir. Feb. 3, 2012) (pdf), discussed in our February 16 posting, comes as a welcome development to privately-held companies that are providers of health care goods and services because it should, if followed generally, preclude whistleblowers from bringing the kinds of audit-related and financial accounting claims that are within the compass of the Sarbanes-Oxley Act (SOX). Many of these companies are, however, the recipients of payments that directly or indirectly involve funds generated through federally-financed health care programs like Medicare and Medicaid. Thus, before breathing a sigh of ultimate relief, such companies should recognize that, especially in view of the amendments to the Federal False Claims Act (FCA) made in the Patient Protection and Affordable Care Act, a clever whistleblower and his or her attorney can transmogrify a claim based on alleged accounting manipulations or misstatements into one that sounds of a so-called “reverse false claim,” i.e., knowingly withholding from the government funds that were improperly reimbursed to the provider. The FCA not only provides for the recovery of treble-damages and attorneys’ fees, but also has an anti-retaliation provision (that was the basis for the anti-retaliation protections included in Dodd-Frank). The Department of Health & Human Services, whose Inspector General is a principal arbiter of compliance and eligibility for participation in federal health care programs, has opined that, under the FCA, overpayments must be remitted to the government within 60 days of detection. And the agency recently has published a proposed rule on the subject. Companies potentially subject to the rule, whether public or not-for-profit, should review the proposed rule and discuss it with counsel or their trade association and, in any event, should be attentive to managing a thorough-going internal compliance program.

First Circuit Limits SOX Whistleblower Protection to Employees of Public Companies

Epstein Becker & Green, P.C. — Thu, 16 Feb 2012 13:03:01 -0800

By: Christina Fletcher

Confronting an issue of first impression, the U.S. Court of Appeals for the First Circuit recently held that the “whistleblower” protections of the Sarbanes-Oxley Act of 2002 (“SOX”) cover only employees of public companies, and do not extend to the employees of a public company’s contractors or subcontractors which are themselves private companies. Lawson v. Fidelity Management & Research LLC, et al., No. 10-2240 (1st Cir. Feb. 3, 2012) (pdf). This holding provides private-company employers with a potentially strong defense to claims of retaliation against employees. However, it should be anticipated that Congress may revisit the scope of the protections and ultimately expand them in response to Lawson.

Section 806 of SOX prohibits discrimination against employees who engage in protected whistleblowing activities and work for publicly traded companies subject to the requirements of the Securities Exchange Act of 1934. 18 U.S.C. § 1514A(a). In Lawson, Fidelity Investments, a public company covered by Section 806 of SOX, contracted with a private investment advisory firm to provide investment advisory services. Plaintiff Zang alleged that he had been terminated in retaliation for raising concerns about inaccuracies in a draft revised registration statement for certain Fidelity funds. Plaintiff Lawson alleged retaliation for raising concerns relating to cost accounting methodologies. She resigned her employment in September 2007, claiming constructive discharge. Defendants’ motions to dismiss the complaints argued that the plaintiffs were not covered employees under Section 806 of SOX. The district court agreed with the plaintiffs, holding that subcontractors to a public company subject to SOX were protected by SOX’s whistleblower provision.

The First Circuit reversed, basing its decision on the language of SOX, principles of statutory interpretation, and SOX’s legislative history. The Court noted that plaintiffs’ suggested reading of the Act created anomalies and provided very broad coverage not intended by Congress. The Court explained that the clause “officer, employee, contractor, subcontractor, or agent of such company” in the whistleblower protection provision goes to who is prohibited from retaliating or discriminating, not to who is a covered employee. Thus, covered employees are limited to employees of public companies

The Court also found Section 806’s title, “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud,” significant. The Court noted that “[f]rom that alone, it would be odd to read § [806] as covering employees of private companies. It is unlikely Congress intended the term ‘Civil action to protect against retaliation in fraud cases’ in the heading of § [806] to be broader than the terms of the ‘Protection’ discussed in the title of section 806.” Lawson, No. 10-2240, at 18. Moreover, the Court noted that Congress repeated the limitation “Whistleblower protection for employees of publicly traded companies” from the caption in the first line of the text of subpart (a) of § [806], further evidencing legislative intent to limit protections to only employees of public companies. “The title and the caption each contain the phrase, ‘employees of publicly traded companies,’ which supports the reading that the use of the term ‘employees’ underneath refers to ‘employees of publicly traded companies.’” Id. at 19.

The Court further noted that where Congress wished to enact broader whistleblower protection elsewhere, it explicitly did so and, in other portions of SOX, where Congress intended separate provisions of the Act to apply to employees of private entities, it said so explicitly. By contrast, the limited language within the text of Section 806 and the title and caption show that Congress did not intend coverage to reach beyond employees of public companies.

The Court also explained that the legislative history supports its interpretation of the Act. The statements in the Congressional committee reports only mention employees of publicly traded companies; employees of private companies are not mentioned.

In concluding that the whistleblower provision in Section 806 of SOX only covers employees of public companies, and does not protect employees of private companies that are contractors or subcontractors to covered public companies, the First Circuit noted that “if we are wrong and Congress intended the term ‘employee’ in § [806] to have a broader meaning than the one we have arrived at, it can amend the statute.” Lawson, No. 10-2240, at 49. History suggests that Congress may well take the First Circuit up on its invitation.

Congress recently expanded the scope of Section 806 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. Law 111-203 (“Dodd-Frank”). Specifically, Dodd-Frank extended Section 806 to apply not only to publicly traded companies, but also to “any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company[.]” The Dodd-Frank amendments indicate a Congressional appreciation that legislation is required to broaden application of the protections of Section 806, beyond those initially framed by an earlier enactment.

While an amendment superseding Lawson is of course not a certainty, it should not come as a surprise should Congress gain support to expand the scope of Section 806 to cover the employees of private companies that act as contractors or subcontractors to public corporations.

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

Allen B. Roberts — 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

Allen B. Roberts — 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

Epstein Becker & Green, P.C. — 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:

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© 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

Allen B. Roberts — 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.

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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.