By Andrew S. Boutros and Craig B. Simonsen

Seyfarth Synopsis: Federal whistleblower laws collide with the in-house attorney-client privilege. The trial round goes to the whistleblower.  The expected appellate round still has not been fought.

In a February 7, 2017 jury verdict, the plaintiff, Sanford S. Wadler, the former General Counsel of Bio-Rad Laboratories, Inc., was awarded $7.29 million for compensatory and punitive damages in a case alleging Sarbanes-Oxley and Dodd-Frank Acts whistleblower retaliation – Foreign Corrupt Practices Act (FCPA) claims, in the United States District Court for the Northern District of California.  It is exceedingly rare for a general counsel of a public company to be a whistleblower, much less file a lawsuit, take it to trial, and be awarded anti-retaliation whistleblower fees.

Whether unique in its own facts or a watershed case that will serve as a precursor for more to come, the case will surely be studied for both its impact and implications. And, given the high stakes, it is expected that the legal saga will continue on appeal.  If it does, until the Ninth Circuit Court of Appeals rules on whether federal whistleblower laws preempt state ethics and privilege rules, it is unclear whether Wadler’s victory will stand the test of time.

With that: Law360 notes that “the case’s turning point came in late December, when U.S. Magistrate Judge Joseph C. Spero ruled that the Sarbanes-Oxley Act’s whistleblower protections preempt attorney-client privilege, thus allowing Wadler to use otherwise privileged information as evidence in the case. ” (Emphasis in the original.)  The ruling bucked a Second Circuit decision from 2013 that found that the former General Counsel of Unilab, which was later acquired by Quest Diagnostics, could not bring a qui tam whistleblower suit against Quest under the False Claims Act because “the allegations relied on privileged information,” amounting to a finding that “privilege took precedent over whistleblower protections,” as noted by Law360. See United States ex rel. Fair Lab. Practices Assoc. v. Quest Diagnostics Inc., 734 F.3d 154 (2d Cir. 2013).

Wadler, who had worked at Bio-Rad for some 25 years, specifically alleged that “after learning of his employer Bio-Rad Laboratories, Inc.’s involvement in extensive bribery occurring in Russia, Thailand, and Vietnam, [he] investigated evidence of similar violations of the FCPA in China, where corruption is notoriously endemic.” According to Wadler’s Complaint, key Bio-Rad officers and directors wanted him to “turn a blind eye to this misconduct or sweep it under the rug, but he refused. Instead, and following his mandatory duties under federal securities laws as the Company’s chief legal officer, Wadler investigated this potential criminal activity and reported it up the ladder.” Wadler v. Bio-Rad Laboratories, Inc., et al., No. 15-cv-02356-JCS, Complaint, p. 1.

Wadler’s above-the-fold Complaint allegations went even further: “When Wadler began to believe that the conspiracy to violate the FCPA went all the way to the top of the corporate hierarchy, he reported his concerns to the Company’s audit committee. Then, just shortly before Bio-Rad was scheduled to present to the SEC and DOJ regarding the Company’s investigation into potential FCPA violations, the Company fired Wadler precisely because he refused to be complicit in its wrongdoing.” Complaint, p. 1.

Law360 observed that the unique role of the general counsel came up prominently during the nearly three-week trial, as Bio-Rad defended its termination of Wadler. “The company argued that his incompetence had led him to misconstrue normal business practices as FCPA violations. One board member testified that when Wadler had raised FCPA concerns with the board, his initial reaction that Wadler had made a courageous move gave way to a belief that Wadler’s suspicions actually stemmed from a misunderstanding of the FCPA. Others testified that Wadler wasn’t a team player.” Even Bio-Rad’s outside counsel testified as a defense witness against Wadler.  But that strand of argument was met by another, this one raised by Wadler, as noted by Law360:  That the role of the general counsel is “that of a generalist who is trained to spot issues and call in specialized experts when necessary” and that an attorney’s duty is to “bring attention to legal risks even when management doesn’t want to hear about them.”

Although a plaintiff’s victory at trial is a critical statement to legal observers and practitioners on both sides of the “v” in a whistleblower claim, the legal battle over Wadler’s allegations and treatment is far from over. With competing precedent out of the Second Circuit, Bio-Rad is surely expected to appeal the jury’s verdict and ask the Ninth Circuit to toss out the verdict and either dismiss the case entirely or return the case to the district court for a retrial.  How the Ninth Circuit will rule remains to be seen, but the legal saga is sure to continue until then and the state of the law on whistleblower preemption can hardly be viewed as settled.

Those with questions about any of these issues or topics are encouraged to reach out to the authors, your Seyfarth attorney, or any member of the Seyfarth Shaw’s White Collar, Internal Investigations, and False Claims Team, Securities Litigation Team, or Whistleblower Team.

By Andrew S. Boutros, William L. Prickett, Christopher Robertson, and Craig B. Simonsen

Seyfarth Synopsis: What, if any, steps the government will take to appeal the Tenth Circuit’s Bandimer’s decision remains to be seen. The government may elect to petition the entire Tenth Circuit to hear the case en banc.  Or the government might ask the Solicitor General to petition the Supreme Court to grant certiorari to take up the issue and resolve this newly-formed circuit split once and for all.

A divided Tenth Circuit Court of Appeals has held that the U.S. Securities and Exchange Commission’s (SEC) in-house administrative law judges (ALJs) are not constitutionally appointed as required by the Constitution’s Appointment Clause, thereby increasing the likelihood that the U.S. Supreme Court will take up the issue to resolve a circuit split between two federal appellate courts. The ruling by the Denver-based federal appeals court, marked a setback for the SEC amid increased challenges by defendants who question the fairness of the agency’s administrative court system. Bandimere v. United States Securities and Exchange Commission, No. 15-9586 (10th Cir. December 27, 2016).

The holding in Bandimere also marked a significant departure from the D.C. Circuit, which in August 2016 upheld the constitutionality of the SEC’s use of in-house administrative judges. See Raymond J. Lucia Companies, Inc., et al. v. Securities and Exchange Commission, 832 F.3d 277, 281 (D.C. Cir. 2016).

In Bandimere, the Tenth Circuit considered whether the five ALJs working for the SEC were employees or inferior officers. The court concluded that, based on Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), the SEC ALJ who presided over an administrative enforcement action against the petitioner David Bandimere was an inferior officer. Because the SEC ALJ was not constitutionally appointed, the Court held that the ALJ held his office in violation of the Appointments Clause. U.S. Const. art. II, § 2, cl. 2.

In his dissent, Circuit Judge Monroe McKay expressed his “fears of the probable consequences” that may “allow malefactors who have abused the financial system to escape responsibility.” Bandimere, p. 11. Judge McKay observed that the majority had “effectively rendered invalid thousands of administrative actions” through its potential impact on ALJs at agencies beyond the SEC.

In addition, the Wall Street Journal had previously studied the issue and demonstrated that over the last several years, the SEC has been sending more cases to its in-house ALJs, and in doing so, was “enjoying a higher success rate there than in federal courts.”  A U.S. Chamber of Commerce report expressed similar concerns, saying “the [SEC] preference for litigation of significant cases before administrative law judges has not been confined to insider trading violations.” Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices (July 2015), p. 14.

What, if any, steps the government will take to appeal the Tenth Circuit’s Bandimer’s decision remains to be seen.  The government may elect to petition the entire Tenth Circuit to hear the case en banc.  Or the government might ask the Solicitor General to petition the Supreme Court to grant certiorari to take up the issue and resolve the newly-formed circuit split once and for all.  In the meantime, many litigants who have received adverse rulings from the SEC’s ALJs are expected to dispute those rulings in federal court.  How the federal courts will handle such challenges remains an open question, but the uncertainly of the current state of affairs certainly presents an avenue worth exploring for many defendants who disagree with their SEC ALJ outcomes.

Those with questions about any of these issues or topics are encouraged to reach out to the authors, your Seyfarth attorney, or any member of the Seyfarth Shaw’s White Collar, Internal Investigations, and False Claims Team, Securities Litigation Team, or Whistleblower Team.

By Paul Whinder and Tessa Cranfield

Seyfarth Synopsis: The trend of increased regulation of the financial services industry continues apace in the UK with the recent introduction of mandatory rules on whistleblowing governance. .

New rules on whistleblowing have come into effect which impact certain Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) regulated financial services firms. The aim of these rules is to promote a change in workplace culture to encourage workers to raise concerns and challenge poor practices or behaviours.

These new rules came into effect on September 7, 2016. The changes are recapped below.

Which firms are obliged to implement these new rules?

The new rules apply to firms which are UK entities and which:

  • Take deposits and have assets of £250 million or more (including banks, building societies and credit unions);
  • Are PRA-designated investment firms; or
  • Are insurance and reinsurance firms within the scope of the Solvency II Directive, the Society of Lloyds and managing agents.

Although the rules are not mandatory for other FCA and PRA regulated firms, they have non-binding guidance status and may be taken into account in the event of a regulator investigation compliance or governance issues.

What are firms required to do?

Relevant firms must create and maintain an independent whistleblowing channel, i.e. a means through which disclosures can be made and are then effectively assessed and dealt with. The channel must permit anonymous and confidential disclosures and cannot be limited to matters which the firm believes would amount to ‘whistleblowing’. It must also be open to everyone, including the public. Complaints that would not amount to whistleblowing (for example employee grievances or customer complaints) can however be identified and then dealt with outside the firm’s whistleblowing regime. Whilst there is an obligation to promote the availability of the whistleblowing channel to the firm’s workforce, there is no equivalent obligation to promote its availability to the wider public.

Firms are also now obliged to make employees aware of the FCA and PRA’s services as an alternative to their own process. They can no longer instruct employees to raise matters internally before contacting the regulators, although they can still encourage them to do so.

However, importantly, these rules do not introduce a regulatory obligation on the firm’s staff to blow the whistle.

What are the obligations regarding staff training in respect of these new rules?

The workforce must receive bespoke training as follows:

  • UK based employees must receive training that includes the following:
    • A statement that the firm takes the making of reportable concerns seriously;
    • A reference to the ability to report reportable concerns to the firm and the methods for doing so;
    • Examples of events that might prompt the making of a reportable concern;
    • Examples of action that might be taken by the firm after receiving a reportable concern by a whistleblower, including measures to protect the whistleblower’s confidentiality; and
    • Information about sources of external support such as whistleblowing charities.
  • Managers of UK based employees must receive training that includes the following:
    • How to recognise when there has been a disclosure of a reportable concern by a whistleblower;
    • How to protect whistleblowers and ensure their confidentiality is preserved;
    • How to provide feedback to a whistleblower, where appropriate;
    • Steps to ensure fair treatment of any person accused of wrongdoing by a whistleblower; and
    • Sources of internal and external advice and support on the matters referred to above.

Note that this requirement applies, even if the managers are not based in the UK.

  • Employees with responsibility for operating the firm’s internal whistleblowing arrangements must receive training that includes how to:
    • Protect a whistleblower’s confidentiality;
    • Assess and grade the significance of information provided by whistleblowers; and
    • Assist the whistleblowers’ champion when required.

How do these rules fit in with the Senior Manager/Certificate Regime?

  • Whistleblowers’ Champion. As we previously reported, relevant firms also need to appoint a whistleblowers’ ‘champion’ (ordinarily a non-executive director, but otherwise a “senior manager” within the FCA or PRA regimes). The designated “Champion” is tasked with oversight of the whistleblowing policies and procedure and filing an annual report to the Board, to be made available to the FCA or PRA on request.
  • Settlement agreements. A statement must now be included in settlement agreements stating that the agreement does not prevent the individual from making a protected disclosure. This will likely already be familiar to clients operating in the US financial services sector. Further, the agreement must not contain any promise from the employee that they have not made a protected disclosure or know of any information which could lead to such a disclosure being made.
  • Tribunal claims. If the firm loses a “whistleblower” claim (i.e. an employment tribunal claim that a member of staff was subjected to a detriment or unfairly dismissed for “blowing the whistle”) then this must be reported to the FCA/PRA, as appropriate.

Comment

In practice, many firms will already have robust whistleblowing procedures in place, in particular where they are subject to Sarbanes Oxley. Firms should however review their current procedures to check they do comply with the specifics of these new rules – in particular, the fact the whistleblowing channel should be open to the public and the new staff training obligations that may include some non-UK managers. Adequate systems will need to be put in place to identify those UK and non UK employees who will need to be trained (and flag up where employees, such as US managers, move into roles where training is required) and to keep a record what has been delivered. Finally, as noted above, even if certain FCA/PRA regulated firms are not obliged to implement these new rules, they must still be treated as non-binding guidance meaning that they may in fact start to become the norm in the financial services sector.

For more information on this or any related topic please contact the authors, our Seyfarth Partner in London, Ming Henderson, your Seyfarth attorney, or any member of the Whistleblower Team, the International Employment Law Team, or the White Collar, Internal Investigations, and False Claims Team.

By Benjamin D. Briggs, Adam R. Young, and Craig B. Simonsen

Seyfarth Synopsis: The Tenth Circuit held that a trucking company unlawfully retaliated against a truck driver after he abandoned a trailer on a public highway, finding that his actions constituted a protected refusal to operate a vehicle in unsafe conditions.

The Tenth Circuit Court of Appeals denied a petition for review of a retaliation finding by the Administrative Review Board (ARB), finding that the employee had been retaliated against in violation of the Surface Transportation Assistance Act (STAA). TransAm Trucking, Inc. v. Department of Labor, No. 15-9504 (Tenth Circuit August 8, 2016),

The Court explained that the driver parked a tractor-trailer on the shoulder of an interstate highway. After sitting in sub-freezing temperatures, the brake lines on the trailer froze and rendered the trailer immobile. When a service vehicle failed to arrive and the driver’s heating unit stopped functioning, the driver detached the trailer and drove away in the tractor.

After his termination, the employee filed a whistleblower complaint with the Occupational Safety and Health Administration (OSHA), an agency within the Department of Labor (DOL) that administers STAA claims, asserting that the employer violated the whistleblower provisions of the STAA when it discharged him. After OSHA dismissed the driver’s complaint, the employee requested a hearing before a DOL administrative law judge (ALJ).

The employer argued that the driver’s actions were not protected under the STAA, which only creates a whistleblower claim for an employee who “refuses to operate a vehicle because … the employee has a reasonable apprehension of serious injury to the employee or the public because of the vehicle’s hazardous safety or security condition,” 49 U.S.C. § 31105(a)(1)(B)(ii). Because the trailer was inoperable and the driver drove off without it, the employer argued that the driver could not have refused to “operate” in unsafe conditions; but, rather, he abandoned company property.

The ALJ concluded that the driver had engaged in protected activity when he reported the frozen brake issue to the employer, and again when he refused to obey the instruction to drive the truck while pulling the trailer. The ALJ further concluded that the protected activity was a contributing factor in the employer’s decision to terminate his employment because his refusal to operate the truck while pulling the trailer was “inextricably intertwined” with the employer’s decision to terminate him for abandoning the trailer at the side of the highway. The employer appealed to the DOL Administrative Review Board (ARB) (which affirmed the ALJ’s decision) and then to the Tenth Circuit Court of Appeals.

In denying the employer’s appeal, the Tenth Circuit noted that the Administrative Procedure Act (APA) “standard of review is narrow and highly deferential to the agency.” Compass Envtl., Inc., v. Occupational Safety & Health Review Comm’n, 663 F.3d 1164, 1167 (10th Cir. 2011).  The Court concluded that the driver had refused to operate the vehicle when he left the trailer behind.  Consequently, the Court upheld the ARB decision and ordered the driver to be reinstated with backpay.

This case should remind employers that the DOL takes an expansive view of the whistleblower statutes enforced by OSHA, and the kind of actions that constitute protected activity under those statutes. In this case, the employer advanced a seemingly non-retaliatory reason for the termination — abandonment of company property — as the reason for the challenged decision.  However, the close connection between the trailer abandonment and the report that the brakes had frozen/refusal to pull the trailer was enough to tip the scales in the employee’s favor.  Employers should exercise extreme caution when making employment decisions under circumstances in which a legitimate reason for discipline bears a close relationship to conduct that may constitute protected activity under a whistleblower statute.

OSHA enforces the whistleblower provisions of twenty-two statutes protecting employees who report violations of various workplace, commercial motor vehicle, airline, nuclear, pipeline, environmental, railroad, public transportation, maritime, consumer product, motor vehicle safety, health care reform, corporate securities, food safety, and consumer financial reform regulations. For more information on this or any related topic please contact the authors, your Seyfarth attorney, or any member of the Whistleblower Team or the OSHA Compliance, Enforcement & Litigation Team.

 

 

 

By Ada W. Dolph, Adam R. Young, and Craig B. Simonsen

The Securities and Exchange Commission’s (SEC) Office of the Whistleblower (Office) recently released its 2015 Annual Report on the Dodd-Frank Whistleblower Program (Report) (November 16, 2015).

In Fiscal Year 2015 alone, the Commission paid more than $37 million to reward eight whistleblowers for their provision of original information that led to successful Commission enforcement actions with monetary sanctions totaling over $1 million; one whistleblower received over $30 million in a single award.  This flurry of awards followed the Commission’s active Fiscal Year 2014, in which the Commission authorized fourteen whistleblower awards and paid nine.  The Commission also registered a record year by issuing Final Orders or Preliminary Determinations on over 150 whistleblower award claims.

The Commission received 3,923 whistleblower tips, a 10% increase over Fiscal Year 2014 and nearly a 30% increase over the number of tips received in Fiscal Year 2012, the first year for which there is a full-year of data. The Commission received tips from all 50 states and 95 foreign countries. The most common complaint categories reported by whistleblowers included Corporate Disclosures and Financials (17.5%), Offering Fraud (15 6%), and Manipulation (12.3%).  In relative terms, the Commission reported the largest increases in Unregistered Offerings (150, up from 102) Trading and Pricing (213, up from 144) and Market Event (192, up from 139).  The Commission reports that it is currently tracking over 700 matters in which a whistleblower’s tip has caused an investigation to be opened or which have been forwarded to enforcement staff.

Notably, the Report also indicated that “to date, almost half of the award recipients were current or former employees of the company on which they reported information of wrongdoing.”  Approximately 80% of those individuals raised their concerns internally to their supervisors or compliance personnel, or understood that their supervisors or compliance personnel knew of the violations, before reporting information to the Commission.

The Report highlighted the Commission’s August 4, 2015 guidance clarifying the interaction of the anti-retaliation provisions and the award provisions of the Whistleblower Rules (17 C.F.R § 241) with respect to internal reporting under Dodd-Frank.  Though not universally accepted by the federal courts, the Commission has taken the position that whistleblowers who make only internal reports have engaged in protected activity under Dodd-Frank’s anti-retaliation provisions. (See our blog on this issue here).

The Report noted several ground-breaking 2015 decisions, including:

  • An April 28, 2015 award in which the Commission provided a maximum whistleblower award in its first anti-retaliation case (In the Matter of Paradigm Capital Management, Inc. and Candace King Weir, File No. 3-15930 (June 16, 2014));
  • An April 22, 2015 award of more than one million dollars to a compliance professional. This award was the first under the “substantial injury” exception, which permits awards for a compliance professional’s reports on conduct which the professional had a reasonable basis to believe would “cause substantial injury to the financial interest or property of the entity or investors” (Order Determining Award Claim, Exchange Act Rel. No. 74781, File No. 2015-2 (Apr. 22, 2015));
  • An March 2, 2015 award of over $500,000 to a company officer. This award was the first awarded under an exception permitting awards to an officer who reports information to the Commission more than 120 days after other responsible compliance personnel possessed the information and failed to address the issue adequately. (Order Determining Award Claim, Exchange Act Rel. No. 744404, File No. 2015-1 (Mar. 2, 2015)).

The Report also highlighted the Commission’s 2015 focus on employers’ use of confidentiality, severance, and other kinds of agreements to, in its view, interfere the ability of individuals to report potential wrongdoing to the SEC.  From the report, it is clear that assessing confidentiality agreements for compliance with Rule 21F-17(a) will continue to be a top priority for OWB into Fiscal Year 2016.

Employers should take note and revise their form severance agreements accordingly. For more information on the efforts of the Commission in these areas, also see our previous article,  “Aggressive Enforcement Efforts Will Continue After KBR, Per SEC Whistleblower Chief.”

Ada W. Dolph is a partner in Seyfarth’s Chicago office and Team Co-Lead of the National Whistleblower Team. Adam R. Young is an associate in the firm’s Chicago office and a member of the National Whistleblower team. Craig B. Simonsen is a senior litigation paralegal in the firm’s Chicago Office. If you would like further information on this topic, please contact a member of the Whistleblower Team, your Seyfarth attorney, Ada W. Dolph at adolph@seyfarth.com, Adam R. Young at ayoung@seyfarth.com or Craig B. Simonsen at csimonsen@seyfarth.com.

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By Ada W. Dolph and Robert T. Szyba

Earlier this week, employers in the Garden State saw another glimmer of hope for defending against frivolous claims brought under New Jersey’s whistleblower statute, the Conscientious Employee Protection Act (“CEPA”), N.J.S.A. 34:19-1 et seq.

As you may recall, much of our CEPA reporting lately has focused on recent court decisions affirming the expansive whistleblower protections under CEPA. (See one recent blog article here).  However, on Monday, in Fulton v. Sunhillo Corp., No. A-3950-13T2 (N.J. Super. Ct. App. Div., filed July 20, 2015), New Jersey’s Appellate Division upheld an award of $191,652 in attorneys’ fees against the plaintiff, holding that the award was justified given the “frivolous” and “harassing” nature of the plaintiff’s CEPA (and other) claims and litigation.

The plaintiff, Ronald Fulton, had been employed as Director of Business Development for Sunhillo Corporation since December 2007, a position that he explained later in deposition entailed developing new business for the company, which designs and manufactures data-communications products for the aviation industry.  Consistent with his role, his compensation was partly based on commissions for sales to new customers.  As he conceded during his deposition, however, he generated no new business in 2008 or 2009, and was laid off in September 2009.

Within a month of his termination, in October 2009, Fulton filed his first case (of two), representing himself pro se, against the employer in New Jersey Superior Court in Camden County, alleging that his employment was terminated because he was a whistleblower, and seeking $5 million in damages.  He accused the company and several executives of unlawful sales and business dealings with China and Thailand, and of an “unethical and illegal plan” to bribe foreign government officials.  In the complaint filed with the court, he detailed the objections he made while employed to the conduct he identified as unlawful, including the company’s response: hiring outside counsel, at Fulton’s suggestion, to conduct an investigation and audit. During the litigation, the plaintiff filed amended pleadings and discovery entailed “substantial and highly-contested motion practice,” which included motions regarding the plaintiff’s use and disclosure of the employer’s attorney-client communications and legal advice from the outside counsel who performed the investigation.

In the end, the trial court granted the company’s motion for summary judgment, finding that the plaintiff could not establish a CEPA violation because he could not connect the termination of his employment to his purported whistleblowing activity.  The court noted that the company had taken a variety of affirmative steps to address the plaintiff’s concerns, and that other employees who raised similar concerns (including an employee that the plaintiff conceded was the known driving force behind the alleged whistleblowing) remained employed.  The court also found that the plaintiff proffered no evidence that the company’s reason for the termination—the plaintiff’s failure to generate any new sales in 2008 and 2009—was a pretext for retaliating against him.  The timing of the two events, by itself, was not enough.

Over the course of two appeals (the first in 2013) and the trial court’s determination based on an evidentiary hearing, the Court found the plaintiff’s claims were frivolous, and that the plaintiff’s conduct during the litigation revealed “harassing, if not outright extortive[,] motivation” and awarded fees under the New Jersey Frivolous Litigation Statute, N.J.S.A. 2A:15-59.1, and Court Rule 1:4-8 (the state court rule addressing frivolous litigation).  The Court noted that this was the third time the plaintiff sued a former employer with a similar theory and was unable to explain several non-CEPA claims even though he persisted in pursuing them.  Further, the plaintiff admitted during his deposition that despite having no supporting facts, he nevertheless pursued a claim that the company breached a covenant of good faith and fair dealing, and initially misrepresented that his employment was not “at will,” forcing litigation over the issue.  The Court also found that his settlement demand of $5 million had no relation to any actual damages and indicated the plaintiff’s intention to harass the company.  Even when asked by the trial court to provide a factual basis for his allegations of judicial bias and misconduct—allegations which the plaintiff argued led to the dismissal of his case and the award of counsel fees—the plaintiff refused.

With the $191,652 award affirmed, the trial court is tasked with determining how much more the plaintiff will be ordered to pay for the two trips to the Appellate Division in this frivolous lawsuit.  While perhaps an unusual ruling, Fulton makes clear that litigants seeking to exploit CEPA’s expansive protections to harass and extort former employers can be ordered to reimburse the company for defending claims that are frivolous and brought in bad faith.

Ada W. Dolph is Co-Lead of Seyfarth’s National Whistleblower Team and a partner in the firm’s Chicago office.  Robert T. Szyba is an associate in the firm’s New York office and is a member of both the National Whistleblower Team and the New Jersey practice group. If you would like further information, please contact a member of the Whistleblower Team, your Seyfarth Shaw LLP attorney, Ada W. Dolph at adolph@seyfarth.com, or Robert T. Szyba at rszyba@seyfarth.com.

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By Ada W. Dolph and Craig B. Simonsen

Blog picWhistleblowers continue to reap extraordinary awards under Dodd-Frank’s “bounty” program in exchange for bringing the Securities and Exchange Commission (SEC) “original” information that leads to a successful enforcement action. Most recently, the SEC announced its third-highest award since Dodd-Frank was enacted — an award of “more than $3,000,000” — to one such whistleblower. (See the SEC Order announcing the award here).

Careful to adhere to its statutory mandate to keep the identity of whistleblowers confidential, the SEC revealed only that the award was being made to an undisclosed “company insider” whose information helped the Commission “crack a complex fraud” “which otherwise would have been very difficult for investigators to detect.”

In a press release, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, reminded would-be whistleblowers that if they provide the SEC with “unique and useful information” that contributes to a successful enforcement action, they too, may be eligible to “receive significant financial rewards.”

While $3 million is certainly nothing to sneeze at, the SEC previously issued a $30 million award in 2014, and a $14 million award in 2013.

At this rate, we can expect insiders to continue to provide information to the SEC. Publicly-traded companies and private companies that contract with those companies should continue to maintain robust (and SEC-compliant) compliance, reporting and investigative whistleblowing programs and policies to encourage employees to report alleged violations internally.

Ada W. Dolph is Team Co-Lead and Craig B. Simonsen is a member of the National Whistleblower Team. If you would like further information on this topic, please contact a member of the Whistleblower Team, your Seyfarth attorney, Ada W. Dolph at ADolph@Seyfarth.com, or Craig B. Simonsen at CSimonsen@Seyfarth.com.

To receive future Workplace Whistleblower Alerts, click here.

By Ada W. Dolph and Craig B. Simonsen

PostHailed as “another achievement” for the government’s Health Care Fraud Prevention and Enforcement Action Team (referred to as “HEAT”), the U.S. Department of Justice has announced that a Florida skilled nursing company and its former president and executive director will pay $17 million to resolve allegations that the company violated the False Claims Act by submitting claims to Medicare and Medicaid for patients that were referred to the company through illegal kickbacks.

The Department of Justice called this the largest settlement involving alleged violations of the Anti-Kickback Statute by a skilled nursing facilities company in the United States. Under the False Claims Act, the company’s former CFO, who initiated the lawsuit, will receive an eye-popping $4.25 million as his share of the recovery.

The CFO alleged that from 2006 through 2013, the company operated a kickback scheme in which they hired physicians as medical directors under contract. The lawsuit alleged that the medical director positions were actually “ghost positions,” which did not require the medical directors to perform any actual work; rather, they were on contract for their patient referrals to the company’s facilities. The CFO alleged that up to 70% of admissions to the skilled nursing facilities resulted from referrals by paid medical directors.

As part of the settlement, the company’s president agreed to resign from his position.  The company also entered into a five-year “corporate integrity agreement” with the Department of Health & Human Services Office of Inspector General, and agreed to change its policies on hiring and maintaining medical directors.

The Department of Justice asserted in its press release that with the help of HEAT, since January 2009 it has recovered more than $24 billion through False Claims Act cases, of which more than $15 billion was recovered in cases involving fraud against federal health care programs.

Ada W. Dolph is Team Co-Lead and Craig B. Simonsen is a member of the National Whistleblower Team. If you would like further information on this topic, please contact a member of the Whistleblower Team, your Seyfarth attorney, Ada W. Dolph at ADolph@Seyfarth.com, or Craig B. Simonsen at CSimonsen@Seyfarth.com.

To receive future Workplace Whistleblower Alerts, click here.

By Robert T. Szyba and Jade Wallace

In a pivotal decision with broad implications for aspiring New Jersey whistleblowers, yesterday the New Jersey Supreme Court affirmed the Appellate Division’s finding that no qualified privilege exists to protect an employee from criminal prosecution for taking confidential documents from her employer under the guise of gathering evidence for an employment lawsuit.

In State v. Saavedra, A-68-13 (June 23, 2015), a former public employee, Ivonne Saavedra, was criminally indicted on charges of second-degree official misconduct and third-degree theft of public documents after taking hundreds of highly confidential original and photocopied documents from her former employer, the North Bergen Board of Education.  These documents, which contained sensitive personal information, such as individual financial and medical information regarding individual minor students, were taken by Saavedra in support of her whistleblower retaliation and discrimination claims against the Board.  Saavedra alleged that she was a victim of gender, ethnic, and sex discrimination, as well as hostile work environment and retaliatory discharge.

Saavedra moved to dismiss the indictment, arguing that, in Quinlan v. Curtis-Wright Corp., 204 N.J. 239 (2010), the New Jersey Supreme Court “establishe[d] an absolute right for employees with employment discrimination lawsuits to take potentially incriminating documents from their employers.”  In Quinlan, the plaintiff’s employment was terminated after her employer discovered that the plaintiff copied about 1,800 pages of confidential information without authorization, and gave them to her attorney to use in the lawsuit.  The plaintiff added a claim of retaliation to her lawsuit and was awarded a multimillion dollar verdict.  The New Jersey Supreme Court upheld the jury verdict, finding that the plaintiff had engaged in protected activity that could not lawfully serve as a grounds for termination.

Analyzing Saavedra’s argument, the Appellate Division found that Quinlan did not apply in criminal cases, and instead of a bright-line prohibition against taking company documents, established a totality-of-the-circumstances test for use in civil litigation.

The New Jersey Supreme Court agreed. It confirmed that the “decision in Quinlan did not endorse self-help as an alternative to the legal process in employment discrimination litigation.  Nor did Quinlan bar prosecutions arising from an employee’s removal of documents from an employer’s files for use in a discrimination case, or otherwise address any issue of criminal law.”  On the contrary, the Court explained that the Quinlan decision stands for the proposition that an employer’s interest must be balanced against an employee’s right to be free from unlawful discrimination when assessing whether an employee’s conduct in taking documents from his or her employer constitutes a protected activity.  The Court pointed to the discovery procedures available to litigants that would have provided Saavedra access the same documents that she took, but would have allowed the trial court the opportunity to balance her interests with the Board’s interests, including any concerns about the privacy of minor students and their parents.

Despite the fact that the Court declined to provide an automatic shield from prosecution under Quinlan, the Court pointed out that in such circumstances, the employee will nevertheless be able to assert a claim of right defense or a justification.  Thus, the employee will still be able to assert that his or her taking of the employer’s documents was justified.  And there, the Court suggested, Quinlan’s guidance may assist the trial court in analyzing the particular facts and circumstances to determine whether the employee can assert this defense.

The New Jersey Supreme Court has thus clarified that although self-help tactics may be justifiable in certain circumstances, Quinlan did not establish or endorse an unfettered right of employees to surreptitiously take documents from the workplace for their own use in litigation or otherwise.  New Jersey employers, especially those who may be concerned with customer identity theft and data breaches, have won an important victory to assist in guarding against the unauthorized, and often covert, taking of confidential documents and information.

Robert T. Szyba and Jade Wallace are associates in the firm’s New York office.  If you would like further information, please contact a member of the Whistleblower Team, your Seyfarth Shaw LLP attorney, Robert T. Szyba at rszyba@seyfarth.com, or Jade Wallace at jwallace@seyfarth.com.

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By Christopher Robertson, Gena Usenheimer and Needhy Shah

Last week, the Second Circuit heard oral arguments in Berman v. Neo@Ogilvy, a case that places squarely before the Court the question of who is a “whistleblower” within the meaning of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).

As we have discussed in our previous posts, whistleblower status under Dodd-Frank remains a hotly contested issue, with courts around the country sharply divided.

The Debate

The crux of the debate arises from the interplay between the definition of “whistleblower” in Dodd-Frank and the conduct protected in the Act’s anti-retaliation provisions.  Specifically, the Act defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities law to the [Securities and Exchange] Commission, in a manner established, by rule or regulation, by the [SEC].” 15 U.S.C.§ 78u-6(a)(6).

Dodd-Frank goes on, however, to prohibit retaliation against “whistleblowers” who participate in the following conduct:

(i) who raise complaints relating to lawful acts done by a whistleblower in providing information to the SEC;

(ii) who participate or assist in any investigation of the SEC based upon such information; and

(iii) who make disclosures required or protected under the Sarbanes-Oxley Act and any other law, rule or regulation subject to the jurisdiction of the SEC.

See 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii).

One interpretation of the statute is that because subsection (iii) above does not expressly condition anti-retaliation protection on an employee having complained to the SEC, that such an external complaint is not required.  This interpretation is furthered by the clear reference to the Sarbanes Oxley Act of 2002 (“SOX”) in the statute which arguably suggests that internal reporting protected by SOX is sufficient to qualify for Dodd-Frank’s anti-retaliation protections.  Under this reading of the statute, the protections afforded to a “whistleblower” under subsection (iii) seemingly contradict the clear statutory definition of the term, leading a number of district courts to conclude that there is sufficient ambiguity in the statute to permit deference to the SEC’s interpretation on the issue.  Not surprisingly, the SEC has argued that that an employee need not report to the SEC in order to benefit from the anti-retaliation provisions of Dodd-Frank.  Rather, participation only in a protected activity covered under SOX is sufficient. See, e.g., 17 C.F.R. § 240.21F-2(b)(1) (SEC Rule).

Not all courts agree with the this reading of the law. Many courts find that the law is not ambiguous, the statutory definition of “whistleblower” is abundantly clear, and notwithstanding the language in subsection (iii) above, the anti-retaliation provisions plainly support the conclusion that to be a whistleblower, a person must first complain to the SEC.  This line of authority is consistent with Asadi v. G.E. Energy (USA), L.L.C., 720 F. 3d 620 (5th Cir. 2013), out of the U.S. Court of Appeals for the Fifth Circuit — which is the only circuit court to have conclusively addressed this issue. In Asadi, the Fifth Circuit expressly found that: “[u]nder Dodd–Frank’s plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.”  Id. at 625. For a more fulsome discussion on the split in authority in court’s throughout the country, see last week’s blog on this issue here.

The Arguments Presented in Berman

The Berman case came to the Second Circuit on appeal from a decision by Judge Woods in the Southern District of New York.  Judge Woods found that to benefit from Dodd-Frank’s anti-retaliation provisions, an employee must have reported his or her concerns to the SEC. This decision created a split of authority within the Southern District.

Last Wednesday, the Second Circuit held oral argument that lasted almost one full hour.  To begin, the panel unanimously agreed that term “whistleblower” is clearly defined in Dodd-Frank.  The remainder of argument, however, seemed to indicate that at least for the judges hearing the appeal, the definition of “whistleblower” was only the beginning of the analysis.  Specifically, the judges appeared to fall into three distinct camps with respect to the remainder of the statute’s interpretation.

First, Chief Judge Katzmann raised concerns about extending the protection in subsection (iii) to individuals who had not complained to the SEC, arguing that the definition of “whistleblower” could not be clearer.  Based on his questioning, he appears to believe that there is no ambiguity in the statute. Judge Katzmann also noted that it seemed compelling that absent a complaint to the SEC, a “whistleblower” still had potential remedies under SOX. In contrast, Judge Newman focused on the policy arguments that support the SEC’s position, in particular the fact that if a complaint to the SEC is required, then only in exceedingly limited circumstances would a person be protected under subsection (iii). Accordingly, Judge Newman’s questions focused on the apparent “tension” in the statute, which he implied would be sufficient for the Court to find the statute ambiguous.  If ambiguous, he suggested deference to the SEC’s rule would be appropriate.

Judge Calabresi’s questions provided less transparency with regard to his views.  His inquiries were more focused on statutory interpretation, questioning, in light of the clear definition of “whistleblower” in the statute, whether the arguably inconsistent language in the anti-retaliation provision allows the Court to conclude the statute is ambiguous. He requested authority from counsel on both sides directly addressing this issue, but counsel were not able to cite to any specific authority supporting either position.

From the questions posed by the panel during the argument and the colloquy between counsel and the panel, it appears that the panel has differing views regarding the language of the statute and whether an ambiguity or inconsistency exists, making it difficult to predict from the argument exactly how the Court will ultimately rule.  No matter the result in Berman, it will be significant for several reasons.  First, at least for employers within the Second Circuit, the Court’s decision will resolve the issue and provide clarity.  More importantly, the Court’s decision will either fall in line with the Fifth Circuit’s decision in Asadi, bringing a second federal appellate court in line with the conclusion that the statute is not ambiguous and a “whistleblower” only includes an employee who provides information to the SEC.  On the other hand, if the Second Circuit deviates from the Fifth Circuit, a split in the appellate courts will exist, creating the opportunity for the issue to be decided once and for all by the U.S. Supreme Court.

Regardless of the outcome, the Second Circuit’s decision is certain to influence the development of case law on this issue throughout the country.

Christopher F. Robertson is Team Co-Lead of the National Whistleblower Team.  Gena B. Usenheimer is a partner in Seyfarth’s New York office.  Needy Shah is a fellow in Seyfarth’s New York office.  If you would like further information on this topic, please contact a member of the Whistleblower Team, your Seyfarth attorney, Christopher F. Robertson at croberston@seyfarth.com, Gena B. Usenheimer at gusenheimer@seyfarth.com or Needy Shah at nshah@seyfarth.com.

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