Uma análise dos recentes desenvolvimentos em matéria de denúncias

• Fourth Circuit Applies Two-Year Statute of Limitations to SOX Whistleblower Claim and Confirms Availability of Emotional Distress Damages
• SDNY Holds That SOX Protects Employee From Retaliation for Activity Engaged in After Being Terminated
• SEC Focuses on Restrictions Placed Upon Potential Whistleblowers
• SEC Makes First Whistleblower Award to a Former Corporate Officer
• Second Circuit Affirms SEC’s Denial of Whistleblower Award Based on Information Reported Prior to Dodd-Frank’s Enactment

Fourth Circuit Applies Two-Year Statute of Limitations to SOX Whistleblower Claim and Confirms Availability of Emotional Distress Damages

In Jones v. SouthPeak Interactive Corp., 777 F.3d 658 (4th Cir. 2015), the plaintiff, the former chief financial officer of a video game publishing company, believed that the company’s chief executive officer had used personal funds to pay for an order that the company placed with a supplier. Because the company had not recorded this transaction as a debt on its balance sheet or quarterly financial report, the plaintiff reported her concern to the chairman of the company’s audit committee. The company’s board later voted to terminate the plaintiff, who then filed a whistleblower complaint with the Occupational Safety and Health Administration (OSHA) against the company that also identified the company and three individuals as having violated the retaliation provisions of Sarbanes-Oxley Act of 2002 (SOX). When OSHA did not issue a final order within 180 days, the plaintiff withdrew her complaint. Nearly two years later, the plaintiff filed a SOX retaliation suit in federal court against the company and two individuals.

The case went to trial, and the jury found the company and two individuals liable. The jury found the company liable for $593,000 in back pay, and each individual defendant liable for $178,500 in compensatory damages. After post-trial motions, the court reduced the damages for which the company was responsible to $470,000 in back pay and $123,000 in compensatory damages. The court reduced the damage awards against the individual defendants to $50,000 each.

On appeal, the company argued that the suit was barred by the statute of limitations because it had been filed nearly three years after her termination. The company argued that the two-year statute of limitations found in 28 U.S.C. § 1658(b) applies, rather than the four-year limitations period in 28 U.S.C. § 1658(a). The Fourth Circuit rejected this argument, noting that the four-year limitations period applied to “a claim of fraud,” while the plaintiff’s claim involved retaliatory discharge that does not require any showing of actionable fraud. Thus, the four-year “catchall” provision for actions under federal statues applied. 777 F.3d at 668.

The appellants also challenged the district court’s award of emotional distress damages, arguing that such damages are not available under SOX. The Fourth Circuit noted that § 1514A(c)(1) provides that a prevailing employee is entitled to “all relief necessary to make the employee whole.” Id. at 670. In addition, the next subsection, § 1514A(c)(2), states that compensatory damages “shall include” several types of damages, although specifically enumerating emotional distress damages. Id. at 670-71. The court noted that the phrase “shall include” is not the equivalent of “limited to.” Id. The Fourth Circuit followed other circuit courts that had reached the same conclusion and focused on a SOX plaintiff’s entitlement to be made “whole.” Id. The court further noted that SOX protects whistleblowers from threats and harassment, which often will cause noneconomic harm. Id. at 672. Finally, the court found no abuse of discretion in the court’s award of emotional distress damages. Id. at 673.

SDNY Holds That SOX Protects Employee From Retaliation for Activity Engaged in After Being Terminated

A recent decision by the United States District Court for the Southern District of New York (SDNY) in Kshetrapal v. Dish Network, LLC, 14-cv-3527 (PAC), 2015 U.S. Dist. LEXIS 24573 (SDNY Feb. 27, 2015), extends SOX whistleblower protection to employees who engage in protected activity after being terminated. Tarun Kshetrapal was employed as the associate director of South Asian marketing for DISH Network L.L.C. He questioned the legitimacy of a marketing agency’s invoices to DISH and claimed that other DISH executives allowed the fraudulent invoicing because they were receiving bribes from the marketing agency. While Mr. Kshetrapal’s concerns were validated, he claimed that he was subsequently forced to resign. The marketing agency sued DISH, and Mr. Kshetrapal was deposed in that action. He testified about the fraudulent invoices, the bribes, and that his concerns had been overruled. After leaving DISH, Mr. Kshetrapal found a new job at Saavn, LLC, a Bollywood music streaming service. DISH placed ads with Saavn but a DISH executive later instructed that no further business should be done with Saavn. In June 2010, Mr. Kshetrapal received an offer of a new position with Nimbus Communications Limited, only to have it rescinded a few days later when DISH conveyed that it did not want him in the position. Mr. Kshetrapal claimed that DISH also provided a negative reference to Nimbus in violation of DISH’s neutral reference policy. DISH later informed Saavn that it would not work with them because they employed Mr. Kshetrapal.

Mr. Kshetrapal brought suit under SOX, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), and also asserted common law claims of tortious interference with contract and business relations, as well as for defamation. Key to Mr. Kshetrapal’s SOX claim was whether his deposition testimony, given post-termination from DISH, was protected under SOX. Under SOX, an employer may not “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act.” 18 U.S.C. §1514A. The SDNY found that it was unclear whether the term “employee” was intended to apply only to current employees or also encompassed former employees — in particular noting that Section 1514A provided for the remedy of reinstatement, and a current employee could not be reinstated. Id. at *8. The court then looked to other sources, including the United States Department of Labor’s regulations, Administrative Review Board decisions, as well as the policy underlying SOX to resolve the ambiguity, and found that all of these sources supported holding that former employees were covered by SOX. Id. at *8-9. Consequently, the defendants’ motion to dismiss Mr. Kshetrapal’s SOX claim was denied.

Mr. Kshetrapal’s Dodd-Frank claim was dismissed as DISH’s alleged interference with his employment opportunity at Nimbus occurred in June 2010, prior to the effective date of Dodd-Frank. The court held that not only could Mr. Kshetrapal not obtain compensatory damages for events occurring prior to Dodd-Frank’s enactment, but he also could not seek injunctive relief based on the assertion that the harassment continued after Dodd-Frank became effective, as the U.S. Congress did not provide for injunctive or declaratory relief. Id. at 13-14.

SEC Focuses on Restrictions Placed Upon Potential Whistleblowers

As previously discussed, the SEC has interpreted its authority under Dodd-Frank to enable it to enforce Dodd-Frank’s anti-retaliation provisions (see July 2, 2014, newsletter, “SEC Brings First Anti-Retaliation Case Under Dodd-Frank Act Whistleblower Provisions”). According to the Wall Street Journal, the SEC is now focusing on provisions in various standard corporate documents that could be interpreted as preventing whistleblowers from reporting wrongdoing. Under SEC Rule 21F-17(a) “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.” According to the Wall Street Journal, the SEC has contacted several corporations seeking “every nondisclosure agreement, confidentiality agreement, severance agreement and settlement agreement entered into with employees since Dodd-Frank went into effect, as well as documents related to corporate training on confidentiality.” (Rachel Louise Ensign, “SEC Probes Companies’ Treatment of Whistleblowers,” Wall Street Journal, Feb. 25, 2015.) In addition, the SEC has also purportedly requested “all documents that refer or relate to whistleblowing,” as well as a list of all terminated employees. Id.

In light of the SEC’s wide-ranging request, companies should review severance agreements, nondisclosure agreements/confidentiality agreements, termination agreements, and settlement agreements to ensure that they do not contain language that could be interpreted as preventing whistleblowers from reporting suspected wrongdoing. Problematic language could range from an explicit prohibition on an employee speaking to regulators unless the company is first informed of the content of what is going to be disclosed, to generic confidentiality language that prohibits the disclosure of certain information unless compelled by legal process. Companies should also review training materials and investigation protocols to ensure that cautionary language regarding confidentiality cannot be interpreted as conflicting with SEC Rule 21F-17(a).

SEC Makes First Whistleblower Award to a Former Corporate Officer

On March 2, 2015, the SEC announced an award between $475,000 and $575,000 to a former officer who reported original, high-quality information about a securities fraud that resulted in an SEC enforcement action with sanctions exceeding $1 million. (In the Matter of the Claim of Award, Release No. 74404, March 2, 2015). This marks the first time that a former officer has received an award. In making the award, the SEC noted that it first determined that the claimant had provided original information, and then it considered whether the information was derived from the claimant’s independent knowledge or independent analysis. Rule 21F-4(b)(iii)(A) provides that unless an exception applies, “[t]he Commission will not consider information to be derived from [a whistleblower’s] independent knowledge or independent analysis” if the whistleblower “obtained the information because” the whistleblower was “[a]n officer, director, trustee, or partner of an entity and another person informed you of allegations of misconduct, or you learned the information in connection with the entity’s processes for identifying, reporting, and addressing possible violations of law[,]” 17 C.F.R. §240.21F-4(b)(iii)(A). Here, the claimant’s information was not disqualified because the claimant reported the information to other responsible persons at the entity, or such persons knew about it, at least 120 days before the claimant reported the information to the Commission.

Andrew Ceresney, the Director of SEC’s Division of Enforcement, in commenting on the award, stated that “Corporate officers have front-row seats overseeing the activities of their companies, and this particular officer should be commended for stepping up to report a securities law violation when it became apparent that the company’s internal compliance system was not functioning well enough to address it.” This most recent award should serve as a reminder to companies that whistleblowers can be found at any level, and a company’s failure to address internally reported potential fraud within 120 days can result in the report being made to the SEC.

Second Circuit Affirms SEC’s Denial of Whistleblower Award Based on Information Reported Prior to Dodd-Frank’s Enactment

In Stryker v. Securities and Exchange Commission, No. 13-4404-ag, 2015 U.S. App. LEXIS 3765 (Mar. 11, 2015), the Second Circuit affirmed the SEC’s determination that information submitted before the enactment of Dodd-Frank did not qualify for an award under Section 21F(b)(1) of the Securities Exchange Act of 1934. Between 2004 and July 2009, Larry Stryker reported information to the SEC regarding alleged wrongdoing by Advanced Technologies Group, Ltd (ATG) and another individual. Id. at *2. The SEC opened an investigation in March 2009 and, subsequently, filed an enforcement action charging ATG and the individual with violating Section 5 of the Securities Act of 1933. Id. The matter was settled in November 2010, and ATG and the individual were jointly liable for $19 million. Id.

On January 11, 2011, Mr. Stryker submitted an application for a whistleblower award under Section 21F of Dodd-Frank. Id. at *3. The SEC preliminarily recommended that the application be denied because the information that Mr. Stryker provided was “not ‘original information’ within the meaning of Section 21F(a)(1) … and Rule 21F-4(b)(1)(iv) … because it was not provided to the Commission for the first time after July 21, 2010.” Id. Mr. Stryker agreed that he had not provided information before July 2010, but contended that the definition of “original information” was “contrary to the statute insofar as it requires that information to be submitted to the Commission for the first time after Dodd-Frank’s effective date.” Id.

The Second Circuit ultimately deferred to the SEC’s interpretation. The Second Circuit began its analysis with the definition of original information, which is information that:

(A) Is derived from the independent knowledge or analysis of a whistleblower

(B) Is not known to the Commission from any other source, unless the whistleblower is the original source of the information

(C) Is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information

Id. at *5 (quoting 15 U.S.C. §78u-6(a)(3)).

The Second Circuit noted that Congress then provided that to qualify for an award, original information would need to be provided in the form and manner required by the SEC’s rules and regulations. Id. Because such rules and regulations would necessarily be promulgated after the passage of Dodd-Frank, it was possible that information would be volunteered before the rules were promulgated. Id. at *6. Congress, therefore, created a safe harbor for “[i]nformation provided to the Commission in writing … prior to the effective date of the regulations, if the information is provided by the whistleblower after July 21, 2010.” Id. The SEC subsequently enacted Rule 21F-9(d) to give effect to the safe harbor: “If you submitted original information in writing to the Commission after July 21, 2010 (the date of enactment of … Dodd-Frank), but before the effective date of the these rules, your submission will be deemed to satisfy the requirements set forth in paragraphs (a) and (b) of this section.” Id. The SEC also enacted Rule 21F-4(b)(1)(iv), which provided that whistleblower awards may only be made for information “[p]rovided to the Commission for the first time after July 21, 2010.” Id. at *7.

The Second Circuit found that under Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984), even if it was ambiguous as to whether Dodd-Frank intended to bar a whistleblower award based on information reported prior to July 21, 2010, the SEC’s interpretation that information submitted prior to July 21, 2010 would not qualify for an award was entitled to deference. Id. at *8-9. As the SEC’s interpretation was fully consistent with the safe harbor provision, the SEC’s decision to deny Mr. Stryker an award was upheld. Id. at *9.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Pamela L. Johnston
Partner
Los Angeles, California
213.972.4632
[email protected]

Bryan B. House
Sócio
Milwaukee, Wisconsin
414.297.5554
[email protected]

Courtney Worcester
Sócia
Boston, Massachusetts
617.502.3218
[email protected]