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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By Meagan Newman

OSHA released an updated version of its Whistleblower Investigations Manual (CPL 02-03-005) on May 21, 2015–the first update since September 2011.

The manual now reflects procedures for investigating MAP-21 whistleblower claims (protecting workers who report defects in automobiles), as well as substantive changes to Chapter 6 which covers settlement agreements and remedies.

One of the most significant changes is the level of detail regarding punitive damages, including a recognition of an employer’s good faith defense to such damages.  Additional substantive guidance is also provided on the topic of damages for emotional distress.

With respect to settlement agreements, the manual instructs investigators for the first time to consider including a requirement in a settlement that the employer provide training for employees or managers about whistle-blowing rights.   The revised manual also makes clear, on the issue of front pay in lieu of reinstatement, that front pay may be appropriate when an employee would face “debilitating anxiety” or other risks to their mental health.  Previously, investigators were instructed to consider front pay when returning the employee to work would be too disruptive.

There are a number of other changes in the revised manual that will impact how OSHA investigates whistleblower claims and how the parties may resolve them.  Employers facing current or potential claims under any of the 22 whistleblower statutes investigated by OSHA should carefully evaluate the new manual and consult with their defense counsel.

By Ada W. Dolph

In a post-script to the SEC’s April 1 cease and desist order penalizing KBR, Inc. for a confidentiality statement that failed to carve out protected federal whistleblower complaints (our alert on it here), SEC Office of the Whistleblower Chief Sean McKessy today made additional comments that suggest public companies as well as private companies that contract with public companies should immediately review their agreements for compliance.

In a webinar sponsored by the American Bar Association titled “New Developments in Whistleblower Claims and the SEC,” McKessy commented on the recent KBR Order. Here are the key takeaways:

SEC Rule 21F-17 is “Very Broad

McKessy stated that he views the SEC Rule 21F-17 as “very broad,” and “intentionally so.” The Rule provides in relevant part:

(a)       No 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.

McKessy said that he reads the Rule as stating that “no person shall take any action” to impede an individual from communicating directly with the SEC.

Agreement Review a Continued High Priority for the SEC

McKessy stated that this initiative remains a “priority” for him and his office. “To the extent that we have come across this language [restricting whistleblowers] in a Code of Conduct” or other agreements, the SEC has taken the position that it “falls within our jurisdiction and we have the ability to enforce it.”

He noted that “KBR is a concrete case to demonstrate what I have been saying,” referencing public remarks he has made in the past regarding SEC scrutiny of employment agreements. He stated that the agency is continuing to take affirmative steps to identify agreements that violate the Rule, including soliciting individuals to provide agreements for the SEC to review. Additionally, he reported that the SEC is reviewing executive severance agreements filed with Forms 8-K for any potential violations of the Rule.

The KBR Language is Not a “Safe Harbor”

When asked whether the language required as part of the KBR Order constituted a “safe harbor,” McKessy stated that he would “not go that far,” and that each agreement will be viewed in context. He described the language in the KBR Order as “certainly instructive” but “not restrictive” and not insulating a company from further scrutiny by the SEC. He also stated that it is “really not appropriate for me to bless any language,” and suggested that the same language could be acceptable in one context but not in another depending on the company’s approach to encouraging employees to come forward to report alleged securities fraud.

KBR Could Be Applied to Private Companies

McKessy was also asked whether the SEC would apply the KBR Order to private companies under the U.S. Supreme Court’s 2014 ruling in Lawson v. FMR LLC, 134 S.Ct. 1158 (2014), which expanded Sarbanes-Oxley’s whistleblower protections to employees of private companies who contract with public companies.

McKessy stated that the SEC has not officially taken a position on this issue, but in his personal opinion he can “certainly can see a logical thread behind the logic of the Lawson decision” to be “expanded into this space [private companies],” and that “anyone who has read the Lawson decision can extrapolate from it the broader application.”

SEC Not Bound By Agreements Precluding Production of Company Documents

McKessy was asked regarding the SEC’s position regarding the disclosure of company documents by whistleblowers in their complaints to the agency. He said that it will “surprise no one that companies have a 100% record” of preferring that company documents not be provided to the SEC. But, “[a]t the end of the day” he stated that any kind of agreement restricting an employee from providing company documents to the SEC is not enforceable against the SEC and companies should not “bank on the fact” that the SEC would “feel bound” by that agreement in any way.

McKessy took a more measured approach with regard to privileged company documents, however. McKessy stated that the SEC is “not interested in getting privileged information” and that the SEC discourages whistleblowers and their counsel from providing privileged information as part of their complaints. He noted that while there are “certain exceptions to privilege,” he would “hate to leave the impression that [the agency] is looking to create to create an army of lawyers who can ignore their confidentiality requirements because of the possibility of being paid under our [Dodd-Frank bounty] program.”

Next Steps for Companies

McKessy concluded his remarks on this issue by stating that “[t]his is the time for the company to take a look at standard, standing severance and confidentiality agreements.”

In short, it is clear that we can expect further SEC enforcement actions in this area. Public companies and private companies that contract with public companies should consult with counsel to review their employment agreements to be sure they will not be the next to be caught in the SEC’s crosshairs.

Ada W. Dolph is Team Co-Lead 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 or Ada W. Dolph at adolph@seyfarth.com.

By Ada W. Dolph, Christopher F. Robertson and Robert Milligan

The Securities and Exchange Commission (SEC) announced today that it had made good on its prior promises to take a hard look at employment agreements and policies that could be viewed as attempting to keep securities fraud complaints in-house. In KBR, Inc., Exchange Act Release No. 74619 (April 1, 2015), the agency announced an enforcement action and settlement with KBR in which KBR agreed to amend its Confidentiality Statement to provide further disclosures to employees regarding their right to communicate directly with government agencies, notify KBR employees who had signed the Statement in the past, and pay a $130,000 civil penalty.

The SEC concluded that KBR’s Confidentiality Statement violated SEC Rule 21F-17, adopted by the SEC after the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010. SEC Rule 21F-17 provides that “[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.”  Continue Reading SEC Cracks Down on Agreement Requiring In-House Reporting of Fraud Complaint

By: Christopher F. Robertson

As we have reported previously, federal courts are currently split on the question of whether the anti-retaliation provisions of the federal Dodd-Frank Act (DFA) apply to employees who disclose their employer’s alleged securities violations to company officials but do not report the claimed violations to the Securities and Exchange Commission (SEC).  Just in May 2014, for example, district courts in New York and Nebraska held that a communication with the Commission is not required, but a Florida district court ruled otherwise.  On December 4, 2014, this split—not only among the federal courts nationally, but also within the Southern District of New York itself—was confirmed in Berman v. Neo@Ogilvy LLC, No. 1:14-cv-523-GHW-SN (S.D.N.Y. December 4, 2014).

Sarbanes-Oxley Act of 2002 (“SOX”) and DFA 

SOX prohibits retaliation against employees who communicate alleged wrongdoing to the SEC or to anyone “working for the employer who has the authority to investigate, discover, or terminate misconduct.”  The section in DFA entitled “Protection of Whistleblowers” permits a civil action for an adverse employment action injuring a “whistleblower” employee who (i) provided certain information to the SEC, or (ii) assisted the SEC in a proceeding relating to the information, or (iii) made disclosures of the information “that are required or protected under” SOX.

While there is no dispute regarding whether a report to the SEC is a prerequisite to a “whistleblower” claim under SOX, the same is not true with regard to DFA.  The confusion arises because the definition of “whistleblower” in the DFA is limited to an “individual who provides . . . information relating to a violation of the securities laws to the Commission.”  Thus, unless the employee passes the initial test of being a “whistleblower” as defined in the statute, those courts reading the statute as unambiguous have concluded that the employee does not fit within the gatekeeping definition and cannot bring a claim.  On the other hand, certain courts have concluded that the statute is not as clear, and, applying a Chevron analysis, have deemed it appropriate to defer to the SEC’s interpretation of the statute, contained in SEC Rule 21-F-2.  Rule 21-F-2 expresses the SEC’s view that DFA “whistleblower” claims are not precluded where the only reporting was internal to the employer, and the employee concedes that he or she never made any report to the SEC.  The SEC rule states that “the statutory anti-retaliation protections apply to . . . [among other people] individuals who report [prescribed wrongdoing] to persons and governmental authorities other than” the SEC.

The Berman Decision

In Berman, the plaintiff alleged that he reported to his employer a number of transactions that he reasonably believed to be violations of “policy, law, and GAAP,” “WPP policies,” and “Sarbanes-Oxley, Dodd-Frank and U.S. Securities Laws.”  Plaintiff claimed that defendants fired him after he made his concerns known to them.  The plaintiff, however, conceded that he did not report any of his concerns to the SEC before the defendants took the actions that plaintiff claims were retaliatory.  The Court concluded that the employee was not a “whistleblower” under the statute.

In reaching this conclusion, the Court noted that the DFA defines a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”  The Court concluded that the definition unambiguously provides that, in order to qualify as a whistleblower, an individual must report information to the Commission.  The Court reasoned that its reading makes sense in the context of the financial bounty provisions of the Act, noting that “it is hard to imagine how the Commission would pay a financial award to a whistleblower who never reported information to the Commission.”  The Court also noted that the same defined term is used in the anti-retaliation provisions of the Act.

The Court rejected the plaintiff’s argument that the statute is ambiguous, and refused to defer to the SEC regulations purporting to define the term, as some other courts had done previously.  See, e.g., Egan v. TradingScreen, Inc., No. 10 Civ. 8202, 2011 WL 1672066, at *5 (S.D.N.Y. May 4, 2011); Kramer v. Trans–Lux Corp., No. 3:11 Civ. 1424, 2012 WL 4444820, at *4 (D. Conn. Sept. 25, 2012).  Instead, the Court adopted the reasoning of the Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013).  In Asadi, the Fifth Circuit held that “the plain language of the Dodd-Frank whistleblower-protection provision creates a private cause of action only for individuals who provide information relating to a violation of the securities laws to the SEC.” Id. at 623.  In agreeing with the Asadi court’s statutory interpretation, the Berman Court noted that it is the exception, not the rule, for Congress to grant an individual a private right of action to sue for damages arising from retaliation without requiring that individual to make contact with a federal agency first, and noted that other contemporaneous whistleblower statutes included such requirements.  The Court further noted that it is well-established that courts should be extremely reluctant to extend a private right of action in such a manner in the absence of clear intent by Congress.  By adopting the Fifth Circuit’s interpretation of the Act in Asadi, the Court stated that it avoided this pitfall.

The Berman Court’s decision confirms that the split among the federal courts regarding Dodd-Frank’s scope shows no signs of slowing down, and appears that this issue is ultimately headed for the United States Supreme Court.

By: Ada W. Dolph and Craig B. Simonsen

A railroad’s decision to terminate an apprentice electrician whose OSHA injury report revealed he had not been truthful in his employment record about other prior workplace injuries was unlawful retaliation under the whistleblower provision of the Federal Railroad Safety Act, 49 U.S.C. § 20109 (FRSA), OSHA has ordered.  The railroad was ordered to pay $50,000 in compensatory damages, $150,000 in punitive damages, more than $22,000 in back wages and interest, and reasonable attorney’s fees.

After the employee was seriously injured at work, the injury was reported to OSHA and included information regarding prior unrelated workplace injuries.  The company investigated the injury, reviewed the information reported to OSHA, and concluded that the employee had been dishonest with the company about his prior workplace injury record.  As a result, the company terminated the employee’s employment.  The employee filed a whistleblower complaint under FRSA asserting that his employment had been terminated in retaliation for reporting workplace injuries.  OSHA agreed, leveling this significant damages award against the company.

This decision demonstrates how broadly OSHA will interpret employee whistleblower protections.  Employers should tread lightly when taking disciplinary action that is the fruit of any aspect of employee activity that is permitted under the whistleblower provisions of FRSA or any of the 21 other statutes that OSHA is charged with enforcing.

Ada Dolph is a Partner and Craig Simonsen is a Senior Litigation Paralegal, in Seyfarth Shaw LLP’s Chicago office.  If you would like further information on this topic, please contact a member of the Workplace Whistleblower Team, your Seyfarth attorney, Ada Dolph at adolph@seyfarth.com, or Craig Simonsen at csimonsen@seyfarth.com.

By Brent I. Clark, Ada W. Dolph, and Craig B. Simonsen

In remarks before its Whistleblower Protection Advisory Committee, OSHA Administrator Dr. David Michaels said that he will lessen the whistleblower’s burden of proof in investigations.

Dr. Michaels spoke at the September 3, 2014 Whistleblower Protection Advisory Committee meeting. In his introduction, he noted that from 2009 through June 30, 2014, OSHA has issued 3,726 merit determinations, “recovering over $119,000,000 in damages for whistleblower complainants, and reinstated 389 whistleblowers to their positions.” In fact, “in the first three quarters of this year, we’ve already issued 602 merit determinations and awarded approximately $21.5 million in damages to whistleblower complainants.” Dr. Michaels asserted that from 2009 through June 30, 2014, OSHA more than doubled the number of complaints OSHA found to have merit (from 450 in FY2009 to 934 in FY2013). A real question, of course, is whether this extraordinary increase in merit findings by OSHA was actually warranted by the facts of those cases.

Apparently, though, there were not enough complaints that were found to have merit by OSHA’s investigators, as the Administrator believes that the burden of proof in whistleblower investigations was just too high. “We are working on a new policy memo clarifying the Agency’s position regarding burden of proof in whistleblower investigations. The memo will change the burden of proof to be based on a ‘reasonable cause’ that a violation occurred, which is a lesser burden to prove than a ‘preponderance of the evidence.’ OSHA and the office of the Solicitor of Labor are working on this policy memo and it should be completed shortly.”

While the burden of proof in whistleblower cases is a legal standard prescribed in the 21 statutory provisions for whistleblower protections that OSHA administers, including OSHA 11(c), STAA, AIR21, and SOX, Dr. Michaels believes that OSHA should lower the burden needed before OSHA can find a case has merit. The natural consequence of such policy change will be even more cases being found to have merit by OSHA.

Of course, what Dr. Michaels and OSHA cannot change is the actual burden of proof that the courts are required to apply under each statute. If OSHA is constantly using a lower burden of proof to screen and evaluate cases, regardless of the statute, it seems they may be headed for trouble if and when they get to court.

Brent Clark and Ada Dolph are Partners, and Craig Simonsen is a Senior Litigation Paralegal, in Seyfarth Shaw LLP’s Chicago office.  If you would like further information, please contact a member of the Workplace Whistleblower Team, your Seyfarth attorney, Brent Clark at blcark@seyfarth.com, Ada Dolph at adolph@seyfarth.com, or Craig Simonsen at csimonsen@seyfarth.com.

By: Paul E. Freehling

In a stunning reversal, the Seventh Circuit recently vacated an over $12 million jury verdict against a nursing home and its president, and remanded it to the district court for judgment to be entered in favor of defendants.  U.S. ex rel. Absher v. Momence Meadows Nursing Center, Inc., Nos. 13-1886 and 13-1996 (7th Cir., Aug. 20, 2014).  Two nurses filed claims on behalf of themselves and the government (qui tam) under the False Claims Act, 31 U.S.C. § 3730 (“FCA”) and the Illinois False Claims Act, 740 ILCS 175(1) (2010).  They alleged that, over an eight-year period, a nursing home submitted thousands of false Medicare and Medicaid reimbursement claims and then retaliated against the nurses for reporting evidence of the supposed fraud.  A jury returned a verdict in favor of the nurses for $3 million in compensatory damages, which the trial court trebled, and $412,000 as damages for retaliation.  On September 3, 2014, the nurses filed a motion asking the Seventh Circuit to reconsider en banc the panel’s August 20 ruling.

The FCA precludes a qui tam action where all “critical elements of the fraudulent transactions themselves” are based on facts in the government’s possession at the time the suit was filed, unless the relators were the original source of the information.  Here, the appeals court found that certain of the FCA allegations “were based extensively upon incidents of non-compliant care documented in government [inspection] reports that gave rise to administrative penalty proceedings” prior to the litigation.  The nurses were not the “original source” of information concerning non-compliant care, and so that portion of their qui tam action was barred.   Moreover, courts have held that they are not ideal bodies for resolving disputed issues concerning the adequacy of medical care.  Chesbrough v. VPA, P.C., 655 F.3d 461, 468 (6th Cir. 2011); Hoyle v. American Nat. Red Cross, 518 F.3d 61, 67 (D.C. Cir. 2008); U.S. ex rel. Mikes v. Straus, 274 F.3d 687, 699-700 (2nd Cir. 2001).

The nurses’ qui tam lawsuit also accused the nursing home of providing “worthless services.” The Seventh Circuit said that the “‘worthless services’ theory of FCA liability” requires a deficiency so severe that “it is the equivalent of no performance at all.”  The burden of showing “worthlessness” is not satisfied by proving merely that services rendered were “worth less” than the amounts reimbursed.  Finding that the “worthlessness” standard had not been met, the Seventh Circuit declined to adopt worthless services as a separate theory of liability under the FCA.  The nurses alleged that certifications filed by the nursing home regarding plans to correct deficiencies were knowingly false and that patient data sheets were submitted which did not properly document symptoms, diagnosis or treatment.  Those claims were dismissed because no statistical or other evidence was presented showing even a rough approximation of the number of false certifications, and a jury is not permitted to compute damages based on speculation.  A significant part of the nurses’ motion for rehearing en banc takes aim at these grounds for the reversal of the judgment.

By this ruling, the Seventh Circuit reinforces the common-sense notion that to be protected, whistleblowers must report conduct actually prohibited by the FCA.  This ruling is consistent with the view of other circuits.  See, e.g., Hutchins v. Wilantz, Goldman & Spitzer, 253 F.3d 176, 187 (3rd Cir. 2001) (submission of fraudulent invoices to bankruptcy court not acts in furtherance of a FCA action because payment would have been obtained from bankruptcy estate, not federal government); U.S. ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996) (internal report urging compliance with laws, rules and regulations not a protected activity on which a FCA cause of action could be based).

Paul Freehling is a partner in Seyfarth’s Chicago office.  If you would like further information, please contact a member of the Workplace Whistleblower Team, your Seyfarth attorney, or Paul Freehling at pfreehling@seyfarth.com.

By Ada W. Dolph and Craig B. Simonsen

Since 2010, OSHA has made a concerted effort to coordinate enforcement of whistleblower complaints with affiliated agencies. (See our past blog about OSHA’s coordination with the FDA here).  OSHA continues in this effort, recently announcing that it has entered into a Memorandum of Understanding (MOU) with the Federal Motor Carrier Safety Administration (FMCSA) to coordinate enforcement of the Surface Transportation Assistance Act (STAA)’s whistleblower anti-retaliation and anti-coercion provisions, found at 49 U.S.C. §§ 31105, 31136(a)(5).

The STAA protects private-sector drivers of commercial motor vehicles (CMVs) and individuals who directly affect CMV safety or security from discharge, discipline, or discrimination for engaging in “protected activities,” which include:

  • Filing a complaint or beginning a proceeding related to a violation of a CMV safety or security regulation, standard, or order, or testifying in such a proceeding;
  • Refusing to operate a vehicle because the operation violates a regulation, standard, or order of the United States related to CMV safety, health, or security, or 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;
  • Accurately reporting hours on duty;
  • Cooperating with a safety or security investigation by the Secretary of Transportation, the Secretary of Homeland Security, or the National Transportation Safety Board; or
  • Furnishing information to the Secretary of Transportation, the Secretary of Homeland Security, the National Transportation Safety Board, or any federal, state, or local regulatory or law enforcement agency as to the facts relating to any accident or incident resulting in injury or death to an individual or damage to property occurring in connection with CMV transportation.

The STAA’s anti-coercion provisions preclude a motor carrier, shipper, receiver, or transportation intermediary from coercing a driver to operate a CMV in violation of CMV safety regulations, CMV driver regulations, or hazardous materials transportation regulations.

New coordination efforts include that upon receiving a whistleblower complaint, the FMCSA will inform the complainant that “a personal remedy for retaliation is available through OSHA, rather than FMCSA, and that the individual should personally contact OSHA,” within 180 days of the alleged retaliation.  In turn, OSHA will notify FMCSA of any complaint alleging STAA retaliation, including in instances where the complaint has been withdrawn because of a settlement.  OSHA will also provide complainants who raise FMCSA-specific safety allegations (such as willful disobedience of “the hours of service rules”) with the FMCSA hotline number and email address.  The agencies also agree to share information in their respective databases upon request and within just two (2) business days.

CMV employers should be on alert because increased coordination between OSHA and the FMCSA will likely result in an increase in whistleblower and coercion complaints.

For more information, please contact a member of the Whistleblower team or your Seyfarth attorney.