Whistleblower Developments is a periodic report covering significant cases, decisions, proposals, and legislation related to whistleblower statutes and how they may impact your business. Recent developments include:
On July 25, 2017, the U.S. Securities and Exchange Commission (SEC) announced it was awarding nearly $2.5 million to a government employee who tipped off the SEC to a company’s wrongdoing.
Although the SEC does not customarily release the identities of, or details about, whistleblowers, it disclosed that the whistleblower worked for a “domestic government agency.” With his or her report to the SEC, the whistleblower also provided relevant supporting documentation. As a result of the report and documentation, the SEC began an investigation into the subject company. The SEC emphasized, in making its award, that the whistleblower provided the agency with “specific, timely, and credible information, helpful documents, significant ongoing assistance, and relevant testimony that accelerated the pace of the investigation.” As a result of its investigation, the SEC obtained a monetary recovery from the investigated company. The SEC has not divulged the name of the company investigated, the amount of its monetary recovery, or what percentage of the overall recovery the whistleblower received as his or her reward.
In announcing this whistleblower award, the SEC took the opportunity to remind the public that employees of law enforcement agencies are not eligible to receive whistleblower awards. Notably, this particular whistleblower works in a government agency with a law enforcement arm, but its law enforcement functions are housed in a separate division of the agency. The SEC then raised the question of whether the exclusion for employees of law enforcement agencies applies to agencies that have some law enforcement component or components to them. However, in the announcement, the SEC declined to address that question “for all cases given the myriad permutations of domestic governmental entities and agencies,” noting that the distinction between the sub-agency that employed the whistleblower and the broader agency of which it was a part justified the award.
On July 27, 2017, the SEC announced another whistleblower award of more than $1.7 million to a private sector employee who provided the SEC with information that helped stop a continuing fraud it identified as being “hard to detect.” As a result of the SEC’s investigation, millions of dollars were returned to the undisclosed private company’s investors, who, according to the SEC, would have been harmed as a result of the fraud.
This award is significant in that it was made to the whistleblower, despite the whistleblower having some culpability in the fraud and unreasonably delaying the reporting of the fraud. In its order, the SEC wrote that it balanced the whistleblower’s role in reporting the multi-year fraud with the whistleblower’s unreasonable delay and culpability. The delay, according to the SEC, was somewhat mitigated by the fact that the whistleblower had first reported the fraud to the SEC prior to the establishment of the whistleblower program and its protections. With respect to the culpability, the SEC described the whistleblower’s culpability as “limited.” As we have noted previously, the Financial CHOICE Act of 2017 would prohibit culpable whistleblowers from receiving any monetary award under the Dodd-Frank whistleblower program.
As of the publication of this award, the SEC announced that it has awarded approximately $158 million to 46 whistleblowers pursuant to its whistleblower award program.
As we reported in our last newsletter, the U.S. Supreme Court agreed to review and resolve the circuit split concerning whether the Dodd-Frank Act prohibits retaliation against internal whistleblowers who have not reported their concerns regarding securities law violations to the SEC before filing suit. By way of background, Digital Realty Trust moved to dismiss a former employee’s whistleblower retaliation claim because he had not taken his concerns to the SEC before he filed suit. The trial court denied Digital Realty Trust’s motion, and the Ninth Circuit affirmed the trial court’s decision.
In its opening appellate brief to the Supreme Court, Digital Realty Trust argued that the Ninth Circuit and the SEC have expanded the definition of “whistleblower” under the Dodd-Frank Act beyond Congress’s legislative intent, thereby minimizing the role of a parallel whistleblower regime provided in the Sarbanes-Oxley Act. Digital Realty Trust further emphasized that, if the Ninth Circuit’s opinion stands, it would render the whistleblower protections of the Sarbanes-Oxley Act nearly obsolete because the whistleblower filed a claim in federal court under the Dodd-Frank Act’s whistleblower provisions, even though he claimed he was fired in retaliation for internally reporting violations of the Sarbanes-Oxley Act. Digital Realty Trust claims whistleblowers under the Sarbanes-Oxley Act are thereby dis-incentivized from suing under its provisions because the Dodd-Frank Act allows for the recovery of double back pay, and has a longer statute of limitations.
While the SEC has promulgated a rule providing that the Dodd-Frank Act’s anti-retaliation provisions extend to internal whistleblowers, Digital Realty Trust argues that the SEC’s guidance is not entitled to deference. This is because the Dodd-Frank Act, according to Digital Realty Trust, unambiguously defines “whistleblower” as someone who reports their concerns directly to the SEC.
We will continue to provide updates as this appeal develops before the U.S. Supreme Court.
A full panel of the Eighth Circuit Court of Appeals affirmed the dismissal of a whistleblower’s retaliation suit, in John A. Watson v. Air Methods Corporation, No. 15-1900 (8th Cir. Aug. 31, 2017).The whistleblower, John Watson, worked as a flight paramedic for the company, which operates flights and provides in-flight medical care for patients being transported to hospitals. During his employment between July 2013 and May 2014, Watson claims he saw various violations of federal aviation safety regulations, such as a pilot making cellphone videos in flight, and another pilot trying to take off with frost and ice accumulated on the airplane. When Watson reported his concerns to company management, he alleges that their response was to suspend, and then to fire him. Watson then sued the company in Missouri state court for wrongful discharge in violation of public policy. The company removed the case to federal court based on diversity of citizenship, and later sought to have it dismissed on the ground that Watson’s state law claims were preempted by federal law.
The district court agreed with the company and dismissed Watson’s retaliation claims as preempted by the Airline Deregulation Act, a relevant federal law. The Airline Deregulation Act contains an express preemption provision providing that a state may not enforce a law or other provision “having the force and effect of law related to a price, route, or service of an air carrier that may provide air transportation under this subpart.” In reversing the lower court, the Eighth Circuit held that the Airline Deregulation Act did not preempt the Missouri wrongful discharge claims because the effect the Missouri claims would have on the company’s operations was too tenuous and remote to fall within the federal law’s preemption provision.
Earlier this year, a panel of the Ninth Circuit Court of Appeals affirmed a summary judgment in favor of an employer on a former employee’s Sarbanes-Oxley Act whistleblower retaliation claims, in Ramona Lum Rocheleau v. Microsemi Corporation, Inc., No. 15-56029 (9th Cir. Feb. 21, 2017).
The whistleblower, Ramona Lum Rocheleau, based her retaliation claim on her report that the company: (1) engaged in technical violations of the affirmative action requirements imposed by the Office of Federal Contract Compliance Programs (OFCCP); (2) misclassified Rocheleau and two other employees as independent contractors; and (3) asked Rocheleau to retroactively change hiring and recruiting data in violation of OFCCP regulations.
In its opinion, the Ninth Circuit noted that, in order to establish Sarbanes-Oxley retaliation claims, SEC regulations require that whistleblowers “possess a reasonable belief that the information [they] are providing relates to a possible securities law violation (or, where applicable, to a possible violation of the provisions set forth in [the Sarbanes-Oxley Act]) that has occurred, is ongoing, or is about to occur.” The Ninth Circuit also noted that, in addition to possessing a subjective belief that the conduct complained of violates a securities law, that belief must also be objectively reasonable under the circumstances. In order for a whistleblower to have an objectively reasonable belief that reported conduct violates a securities law, the whistleblower’s theory of the conduct must at least “approximate” the basic elements of a securities law violation.
The Ninth Circuit ultimately held that the conduct Rocheleau reported did not evidence an objectively reasonable belief that any violation of a securities law occurred. First, reporting violations of OFCCP regulations is not itself protected under the Sarbanes-Oxley Act (or the Dodd-Frank Act, for that matter). Moreover, under the circumstances, Rocheleau did not have an objectively reasonable basis to believe that those violations would result in serious losses to the company, and therefore, her report did not at least approximate the basic elements of a securities law violation. With respect to Rocheleau’s claim that she and other employees were misclassified as independent contractors, the Ninth Circuit held she could only reasonably believe a violation had occurred with respect to her own classification. Furthermore, a single misclassified worker is not material enough to satisfy the basic elements of a securities law violation. With respect to Rocheleau’s claim that she was asked to change hiring and recruiting data retroactively, she admitted during her deposition that she had neither done, nor been asked to do, any such thing.