5 Critical Issues in Whistleblower and Retaliation Litigation

(1) Clauses in Severance, Separation, Settlement or Confidentiality Agreements Which Prohibit Reporting of Federal or State Law Violations to Law Enforcement.

The last several years have witnessed the enactment of several enhancements to laws that protect whistleblowers. Though it would be hard to argue that a lot of whistleblowers has not been dramatically improved, there remain many instances of lingering corporate restraint on potential reporters. The culprit, clauses written into severance, separation, settlement, or confidentiality agreements which prohibit or curtail the reporting of federal or state law violations to law enforcement, are not only insidious but, also inherently void and impermissible.When the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was enacted on July 21, 2010, it amended the existing Exchange Act by adding Section 21F, “Whistleblower Incentives and Protection.” The purpose of Section 21F was to encourage whistleblowers to report what they believed were securities law violations by providing financial incentives and various confidentiality guarantees to those whistleblowers. That section, we strongly believe, was crafted to intentionally be broad to make it clear that companies may not prevent reporting of possible corporate wrongdoing.

Congress signaled its view that the provision of financial incentives to promote whistleblowing to the Securities and Exchange Commission (“SEC”) was a crucial aspect of the program when it stated that “a critical component of the Whistleblower Program is the minimum payout that any individual could look towards in determining whether to take the enormous risk of blowing the whistle in calling attention to fraud.”[1]In response to Congress perspective, the SEC adopted Rule 21F-17, which provides that no person may take any action to impede an individual from communicating directly with the SEC staff about a possible securities law violation, including enforcing or threatening to enforce, a confidentiality agreement . . . with respect to such communications.[2]

If any potential whistleblower identifies a provision in a confidentiality, severance, separation, or settlement agreement that in any way prohibits or discourages cooperation with regulatory agencies, the potential whistleblower may have an additional claim and should report it to the SEC. In one example, the SEC ruled that a company violated Section 21F-17 when the company asked its employees to sign agreements in which they explicitly agreed not to act as whistleblowers or to participate in a whistleblower program was created under Dodd-Frank. While the contractual prohibition of reporting to regulators is, perhaps, the most obvious example of a company attempting to prevent or dissuade whistleblowing, companies do employ other practices with similar intentions.Corporate policies or procedures which impede reporting to the government, and are likewise impermissible under the law include(1) company requirements where employees must initially report potential violations to the company’s own compliance department, (2) requirements which indicate a company will only indemnify its employees if they are not whistleblowers, (3) confidentiality agreements in which employees agree that everything they learn about or discuss about the company is company property, and (4) annual certification which requires that employees indicate that they have not seen any violations.It should be noted that similar protections are afforded to whistleblowers in False Claims Act (“FCA”) cases under the Whistleblower Protection Act.

(2) How to Overcome Retaliation and Negative Publicity against Whistleblowers?

Many government enforcement agencies, including the SEC and the Department of Justice (“DOJ”), have taken a tough stance against companies that retaliate against whistleblowers. Perhaps, as a result, the Ethics Resource Center found that only 34% of employees declined to report a wrongdoing because they fear retaliation[3]and that only 21% of employees who reported company violations believed that they had later been retaliated against.[4]Examples of government agencies taking companies to task for engaging in adverse actions against whistleblowers abound. One interesting example is a case where the SEC held a hedge fund advisory company liable for engaging in prohibited retaliation against an employee who reported unlawful activity to the government.[5] Currently, the U.S. Supreme Court is considering whether the anti-retaliation provision for whistleblowers in the Dodd-Frank Act extends to those who have not reported alleged misconduct to the SEC and therefore fall outside the Act’s definition of a “whistleblower.”[6] In many cases, the government, through an entity such as the SEC, may separately penalize a company and as result pay a bounty to the whistleblower after the findings prove the company retaliated.

(3) WhatIf an Employee Produces a Recording or a Company Laptop with Confidential Information?

Potential whistleblower clients arrive at our offices with many different forms of evidence. Recordings may be strong evidence, unless they are made in a state that requires two-party consent. In a number of states, of which California is one, both parties must consent prior to being recorded. If this requirement is violated, the evidence may be void, and, at worse, the act of making the recording without proper consent could be a criminal violation. In addition, there may also be privilege concerns when potential claimants bring in company documents. These documents may include attorney-client communications or work products. Also, certain high level executives and board members may risk breaching their fiduciary duties or confidentiality agreements should they disclose such documents. In circumstances such as these, plaintiff’s attorneys will often make a copy of the documents, and then return the documents to the company. By doing this, they successfully preserve copies of the documents while leaving the determination as to their admissibility into evidence up to a judge.

With regard to company laptops or electronic devices, the company is entitled to its equipment and the intellectual property on the equipment. When these items are brought in by potential litigants, our firm strives to reach an agreement with the company about the imaging of the material so as to preserve these materials without unnecessarily escalating the dispute.

(4) What are Current Whistleblower Litigation Trends in 2017 and Where are we Headed?

The two most commonly cited laws in whistleblower litigation are FCASection 3730 and Section 806 of the Sarbanes-Oxley Act. To truly understand where whistleblower litigation is going, it is important to note who, among the key decision-makers under the Obama Administration remains in place under theTrump Administration. The new administration has not replaced most of former President Obama’sadministrative appointees and judiciary. For example, the Department of Labor‘s Administrative Review Board (“ARB”) develops the scope of Sarbanes-Oxley Act Section 806 protections.As the Trump Administration has been bogged down with other matters and has not made significant changes to the composition of the ARB, it is reasonable to expect that whistleblower litigation is going to benefit.

Under the George H.W. Bush Administration, whistleblowers enjoyed far fewer protections than they do now. Whistleblowers at that time could generally only rely on protections when they could allege definitive and specific violations of law. Now the standard is that (i) if the whistleblower reasonably believes that there was some danger or fraud to the public, corporation, or to the shareholders, the whistleblower would be protected, and (ii) merely alleging whistleblower jurisdiction under the Sarbanes-Oxley Act in and of itself confers subject matter jurisdiction (a required component of any lawsuit) under the Sarbanes-Oxley Act.[7]Given the vastly expanded protections whistleblowers enjoy today, looking into the future, it is reasonable to expect an increase in whistleblower litigation, especially under Sarbanes-Oxley Act Section 806, as well as a general jurisdictional and interpretative broadening as to what is considered protected activity.

(5) how common is the Scenario Where One Has a Pending Sarbanes-Oxley Act Claim or Dodd-Frank Act Filing with the SEC and also Files a Traditional Employment or Retaliation Civil Law Suit?

For certain senior-level employees who would like to continue working in their industry, it is unlikely that they would also file a traditional employment or retaliation case. Rather, they would only file an SEC or DOJ claim since those claims guarantee their anonymity. This makes sense as court cases are searchable and public and high level employees do not want to run the risk of being “blacklisted”. In fact, more than half of our clients choose to file anonymously. That being said, in certain circumstances, such as if the qui tam relators or whistleblowers are retaliated against and there’s significant money involved, it will increase the likelihood that even high profile executives will file a traditional employment or retaliation case. To get more help visit: employment lawyer.

In any case, if you want to get help just go to Stephan Danz

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[1]The Restoring American Financial Stability Act of 2010 report from the Committee on Banking, Housing, and Urban Affairs (April 30, 2010).

[2] Rule 21F-17 effective August 12, 2011.

[3]https://www.ethics.org/ecihome/research/nbes/nbes-reports/nbes-2013

[4] Ibid.

[5]https://www.sec.gov/news/press-release/2014-118

[6]http://www.scotusblog.com/case-files/cases/digital-realty-trust-inc-v-somers/

[7] Sylvester v. Parexel, ARB Case №07–123, ALJ Nos. 2007-SOX-39, 2007-SOX-042 (May 25, 2011)

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