On June 25, 2018, President Trump signed into law the Whistleblower Protection Coordination Act (the “Act”), permanently reinstating the Whistleblower Ombudsman Program, which was created in 2012 to encourage employees of federal government administrative agencies to report wrongdoing but expired on November 27, 2017 due to a five-year sunset clause.

The Act, which Congress passed with bipartisan support, reauthorizes a “Whistleblower Protection Coordinator” at each administrative agency’s Office of Inspector General (“OIG”) to educate agency employees about their rights to blow the whistle on suspected wrongdoing and the remedies available to them should their employers retaliate against them for doing so. Additionally, the Coordinator is tasked with ensuring that the OIG handles such whistleblower complaints promptly and thoroughly and coordinates with the U.S. Office of Special Counsel, Congress, and other agencies to address the allegations appropriately.

While the Act is specific to federal government employees and has no impact on the anti-whistleblower retaliation protections of the Sarbanes-Oxley and Dodd-Frank Wall Street Reform and Consumer Protection Acts, it is notable that the Trump administration passed the Act rather than letting the Whistleblower Ombudsman Program remain expired. This executive action suggests that the Trump administration does not currently appear to be intent upon rolling back legislative efforts to encourage employees to report suspected legal violations and to protect those that do from retaliation by their employers.

This post was written with assistance from Cynthia Joo, a 2018 Summer Associate at Epstein Becker Green.

Featured on Employment Law This Week: Supreme Court: Dodd-Frank Protections Are Limited

Dodd-Frank whistleblower protections are limited – The Supreme Court has ruled that whistleblower protections under the Dodd-Frank Act apply only to those who report violations to the SEC. The Act protects whistleblowers from termination, demotion, and harassment. People who report to the SEC, other regulatory or law enforcement agencies, or to company management are still protected under the 2002 Sarbanes-Oxley Act. Dodd-Frank’s anti-retaliation provision permits whistleblowers to recover double back pay damages – Sarbanes Oxley does not.

Watch the segment below and read our recent post.

Last August, we reported on two significant cease-and-desist orders issued by the SEC that, for the first time, found certain language in the confidentiality and release provisions of separation agreements to violate the SEC’s Rule 21F-17(a), which precludes anyone from impeding any individual (i.e., a whistleblower) from communicating directly with the agency.[1] Since then, the SEC has continued its aggressive oversight of separation and confidentiality agreements, with substantial repercussions for some employers. These orders, a select number of which we summarize here, have companies engaging in a serious review and rethinking of their confidentiality restrictions and other relevant provisions in their agreements and handbooks, and considering whether and what remedial steps to take proactively to cure any issues with the language in these key documents.

In Anheuser-Busch InBev SA/NV (Sept. 28, 2016), the company entered into a separation agreement in late 2012 with a specific employee after his termination and subsequent mediation of various alleged employment law claims. The separation agreement contained provisions (i) prohibiting the employee from disclosing confidential or proprietary company information, with no carve-out for reporting to government agencies; (ii) prohibiting the employee from disclosing the substance of the separation agreement; and (iii) imposing a $250,000 liquidated damages provision in the event that the employee breached the confidentiality provisions. After signing the agreement, the employee, who had been voluntarily communicating with SEC in connection with an ongoing investigation, ceased doing so.

The cease-and-desist order—which is a negotiated resolution of the matter once the SEC determines that a company has violated its rules or regulations—did not require the company to make any additional changes to its separation agreements because, in September 2015, the company had amended separation agreements to state:

I understand and acknowledge that notwithstanding any other provision of this Agreement, I am not prohibited or in any way restricted from reporting possible violations of law to a governmental agency of entity, and I am not required to inform the Company if I make such reports.

The order required the company to contact only certain former employees identified by the SEC to inform them that they were not prohibited from providing information to the SEC, rather than all employees who had signed separation agreements since the rule was implemented in August 2011, as has been required in other cases. In addition, unlike other cases, it appears that there was no separate monetary penalty against the company for violating Rule 21F-17(a).

In NeuStar, Inc. (Dec. 19, 2016), the company’s severance agreements included a non-disparagement clause with the following language:

Except as specifically authorized in writing by NeuStar or as may be required by law or legal process, I agree not to engage in any communication that disparages, denigrates, maligns or impugns NeuStar . . . including but not limited to communication with . . . regulators (including but not limited to the Securities and Exchange Commission . . .) [emphasis added].

Any breach of this clause by the employee resulted in the required forfeiture of all but $100 of the severance paid under the agreement. The SEC found that “at least one” former employee was impeded by this clause from communicating with the agency—although the SEC does not hesitate to find violations of Rule 21F-17(a) even where there is no evidence that anyone has actually been impeded.

To settle the matter, the company agreed to pay a civil penalty of $180,000 and to contact 246 former employees to inform them that the severance agreements they signed between August 12, 2011, and May 21, 2015, did not prevent them from communicating concerns about potential violations of law or regulation to the SEC. No remedial revisions to the company’s template severance agreement were required because the company had voluntarily, after commencement of the investigation, removed the reference to “regulators” from the non-disparagement clause and included a more common provision that stated, “In addition, nothing herein prohibits me from communicating, without notice to or approval by NeuStar, with any federal government agency about a potential violation of a federal law or regulation.”

Most recently, in HomeStreet, Inc. (Jan. 19, 2017), certain severance agreements used by the company had contained common waiver language used, in form and substance, by many employers:

This release shall not prohibit Employee from filing a charge with the Equal Employment Opportunity Commission or discussing any matter relevant to Employee’s employment with any government agency with jurisdiction over the Company but shall be considered a waiver of any damages or monetary recovery therefrom [emphasis added].

The SEC previously found that employees might interpret such waivers as applying to the agency’s whistleblower monetary incentive award program and, therefore, would unlawfully impede employees from coming forward to the SEC or reporting potential violations of the securities laws. The SEC reached the same conclusion in this case.

Prior to the investigation, however, the company had voluntarily revised its standard severance agreement to substitute the following:

Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with any federal, state or local government agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be commenced by any Government Agency including providing documents or other information without notice to the Company. This Agreement does not limit the Employee’s right to receive an award for information provided to any Government Agencies [emphasis added].

Thus, the cease-and-desist order did not require further revisions to the severance agreement because the foregoing language largely tracks revised language that the SEC had required in one of the previous orders issued last summer. Notwithstanding its proactive revisions to its agreements, the company still had to agree to a $500,000 civil penalty and to contact certain former employees who had signed the agreement to provide a link to the order and inform them that severance agreements did not prevent them from reporting information to the SEC or seeking and obtaining a whistleblower award from the SEC.

The NeuStar and HomeStreet orders serve to highlight that, even when a company has revised its agreements voluntarily to comply with Rule 21F-17(a), the SEC may still impose monetary penalties and potentially burdensome and undesirable obligations to contact former employees who have signed problematic separation agreements to inform them that, notwithstanding the money they were paid in conjunction with their separation agreements, they remain free to report any company wrongdoing—real or perceived—to the SEC.

What Employers Should Do Now

Companies wishing to avoid SEC scrutiny should do the following:

  • Review current separation and severance agreement templates to determine whether they are in compliance with Rule 21F-17, which would include a review of provisions such as, among others,
    • future monetary waivers,
    • non-disclosure of confidential information, and
    • non-disparagement clauses.
  • If necessary, work with legal counsel to determine appropriate revisions or “carve-outs” to bring those agreement templates into compliance.
  • Discuss with legal counsel whether to take affirmative steps to remedy past uses of confidentiality or waiver provisions that would be unlawful under the SEC orders.
  • Review other types of confidentiality and waiver agreements with employees, in whatever form they are used, to ensure that those agreements do not similarly violate Rule 21F-17.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

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[1] See the Epstein Becker Green Act Now Advisory titled “SEC Finds Certain Separation Agreement Provisions Unlawful Under Dodd-Frank Whistleblower Rule” (Aug. 18, 2016).

On the campaign trail, President Trump vowed to “dismantle” Dodd-Frank. Dodd-Frank was enacted in the wake of the 2008 financial crisis to curtail risky investment activities and stop financial fraud through increased oversight and regulation of the banking and securities industries. Among other things, it amended the Sarbanes-Oxley Act, Securities Exchange Act, and Commodity Exchange Act to include monetary incentives for individuals to blow the whistle on suspected financial fraud and stronger protections for whistleblowers against retaliation by their employers. President Trump has criticized Dodd-Frank, arguing that it is overbroad and inhibits economic growth. Now that he is in office, President Trump has the statute squarely in his crosshairs, and he is poised to impact its whistleblower protections on the legislative, administrative, and judicial fronts.

From a legislative standpoint, President Trump has wasted no time in seeking to roll back Dodd-Frank’s statutory framework. Only two weeks after his inauguration, he issued an EO titled “Core Principles for Regulating the United States Financial System,” which directs the Treasury Secretary to consult with the heads of financial agencies, including the Commodity Futures Trading Commission and the Securities and Exchange Commission (“SEC”), to find ways to conform U.S. financial regulations, including Dodd-Frank, to the Trump administration’s “Core Principles.” These “Core Principles” (detailed in the second article of this Take 5) are broad-sweeping and include, among other things, requiring “more rigorous regulatory impact analysis” for new laws and “mak[ing] regulation efficient, effective, and appropriately tailored.” While the precise scope of these principles is undefined (perhaps intentionally so), they appear to demonstrate a clear first step toward deregulation in the financial sector and may be a shot across the bow signaling the President’s intent to scale back—or at least halt any expansion of—Dodd-Frank, including its whistleblower protections.

Additionally, President Trump is well positioned to substantially affect the SEC’s administrative enforcement of Dodd-Frank’s whistleblower laws. Dodd-Frank created the SEC Office of the Whistleblower (“OWB”) to enforce its comprehensive whistleblower program. As reported in the 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program, since the OWB was established, the SEC has (i) awarded more than $100 million in bounty awards to whistleblowers who provided information leading to successful enforcement actions, (ii) independently sued employers for retaliating against employees for reporting alleged securities violations, and (iii) made it a top priority to find and prosecute employers that use confidentiality, severance, and other agreements that impede their employees from communicating with the SEC.

The SEC’s enforcement agenda could change significantly, however, under the Trump administration. Specifically, in 2017, President Trump will have the opportunity to appoint four out of the five SEC Commissioners (three seats are now vacant, and another will become vacant in June). He has nominated Jay Clayton—a corporate attorney who has spent his career representing financial services firms in business transactions and regulatory disputes—to fill one of those vacancies and serve as SEC Chair. New SEC leadership may result in the potential replacement of the sitting OWB Chief and alter the OWB’s current enforcement strategies. Thus, through his administrative appointments, President Trump may attempt to temper the SEC’s aggressiveness and focus when it comes to enforcement of Dodd-Frank’s whistleblower protections to more closely reflect his vision for less onerous regulation of the financial sector.

The President is also uniquely situated to influence the application of Dodd-Frank in the courtroom. Indeed, President Trump has inherited more than 100 federal court vacancies that he must fill, including one on the U.S. Supreme Court, giving him the opportunity to shape how Dodd-Frank’s whistleblower laws will be interpreted and applied by federal judges across the country. One of the most critical issues that hangs in the balance is whether an employee who reports an alleged securities violation only to his or her employer, and not to the SEC, is protected by Dodd-Frank’s anti-whistleblower retaliation provision. At present, there is a circuit court split on this issue. In 2013, the U.S. Court of Appeals for the Fifth Circuit held in Asadi v. G.E. Energy United States, LLC, that an employee who only reports a suspected violation internally is not a protected whistleblower for the purposes of Dodd-Frank’s anti-relation provision. In 2015, however, the Second Circuit Court of Appeals reached the opposite conclusion in Berman v. Neo@Ogilvy LLC. The question has since come before the Sixth Circuit Court of Appeals (which declined to rule on it) and is currently pending before the Courts of Appeals for the Ninth and Third Circuits, and it will almost certainly end up before the U.S. Supreme Court for resolution. Accordingly, President Trump’s federal judicial appointments—particularly his nomination of Judge Neil Gorsuch to the U.S. Supreme Court—may play a pivotal role in establishing exactly who is protected under Dodd-Frank’s proscription against whistleblower retaliation.

Ultimately, it is unlikely that President Trump will actually be in a position to completely “dismantle” Dodd-Frank. Yet, there is no question that he has at his disposal the power to greatly impact the statute at the legislative, administrative, and judicial levels, and there is little doubt that change is on the horizon.

A version of this article originally appeared in the Take 5 newsletter Five Employment Issues Under the New Administration That Financial Services Employers Should Monitor.”

Section 806 of SOX prohibits publicly traded companies, as well as their subsidiaries, contractors, subcontractors, and agents, from taking adverse personnel actions against employees for reporting activity that they reasonably believe constitutes mail fraud, wire fraud, bank fraud, securities fraud, or a violation of any Securities and Exchange Commission (“SEC”) rule or federal law relating to fraud against shareholders. In recognition of the legislative intent underlying SOX—to provide strong and broad-based protections for employees who report suspected securities violations and financial fraud—courts are increasingly applying lenient standards that favor employees in assessing the viability of a SOX retaliation claim in the face of a motion for pretrial dismissal. Fortunately for employers, however, recent decisions demonstrate that even in today’s whistleblower-friendly environment, courts will readily dismiss SOX retaliation claims that lack adequate evidentiary support.

For example, the U.S. Court of Appeals for the Second Circuit ruled in Nielson v. AECOM Tech Corp. that, in dismissing the plaintiff’s complaint, the district court incorrectly applied the “definitively and specifically” standard to find that the plaintiff had not engaged in activity protected by SOX. Under this originally well-accepted standard, an employee’s communications about a suspected violation are not protected unless they relate “definitively and specifically” to one of the categories of fraud or securities violations listed under Section 806 of SOX, and the employee must reasonably believe that each of the legally defined elements of a suspected violation occurred. Applying this standard, the district court held that the plaintiff’s complaints to his managers (that certain fire safety designs were not properly reviewed) were not protected.

On appeal, the Second Circuit deferred to evolving interpretations of SOX articulated by the Department of Labor’s (“DOL’s”) Administrative Review Board during the Obama administration. The Second Circuit jettisoned the “definitively and specifically” test in favor of the more relaxed “reasonable belief” standard, under which the plaintiff has engaged in protected activity as long as (i) he has a subjective belief that the reported conduct violates a law covered by SOX and (ii) his belief is objectively reasonable for a person in his position. Nevertheless, the Second Circuit affirmed the dismissal because, although the plaintiff alleged that he reported what he believed constituted, inter alia, shareholder fraud, he did “not plausibly allege, on the basis of assertions beyond the trivial and conclusory, that it was objectively reasonable for him to believe that there was such a violation[.]” As a result of the Nielson decision, district courts sitting in the Second Circuit now apply the more relaxed “reasonable belief” standard in determining whether a plaintiff has engaged in protected activity under SOX.

The U.S. Court of Appeals for the Third Circuit released a decision in Wiest v. Tyco Elecs. Corp. on February 2, 2016, that affirmed the dismissal of a plaintiff’s claim that he was unlawfully terminated in violation of SOX for reporting suspected securities fraud pertaining to improper accounting practices. Notably, the Third Circuit had previously reversed the district court’s prior dismissal of the plaintiff’s claim because the district court erred and applied the “definitively and specifically” standard to find that the plaintiff had not engaged in protected activity. On remand, the district court, affirmed by the Third Circuit, dismissed the plaintiff’s SOX claim on summary judgment because, regardless of whether the plaintiff had engaged in protected activity, there was no evidence that it was a factor contributing to his termination. The Third Circuit discussed the leniency of the contributing factor test, which requires only that the plaintiff show that his protected activity affected in any way the decision to terminate. Nevertheless, the Third Circuit found that the plaintiff failed to meet even this low threshold and that the defendant established that it would have terminated the plaintiff in the absence of any protected behavior.

On January 4, 2016, the U.S. District Court for the Southern District of New York in Yang v. Navigators Group, Inc., dismissed a plaintiff’s claim that she was terminated for complaining to her superiors about improper risk control procedures that she believed constituted shareholder fraud and violated securities regulations. The court initially denied a motion to dismiss the claim on the pleadings, rejecting the defendant’s contentions that the allegations were insufficient to show that the plaintiff had engaged in protected activity or reasonably believed that the complained-of conduct was unlawful. In reviewing the evidence subsequently proffered at the summary judgment stage, however, the district court found that some of plaintiff’s communications to her superiors were not protected because they failed to indicate in any way that she believed a violation under Section 806 of SOX had occurred, and, in any event, that the plaintiff was clearly fired for poor performance and there was no evidence that the concerns she raised contributed to the decision to terminate her.

In sum, the number of SOX whistleblower retaliation claims is on the rise, and relaxed legal standards have made it more difficult for employers to obtain pretrial dismissal of these claims. Yet, as the above rulings indicate, employers are not left defenseless. Armed with a properly mounted legal defense, they are frequently prevailing against whistleblower retaliation allegations in the very same cases that are applying more lenient pleading standards.

A version of this article originally appeared in the Take 5 newsletter “Five Employment Law Compliance Topics of Interest to Financial Services Industry Employers.”

 

On February 25, 2016, Congressman Elijah E. Cummings (D-MD) and Senator Tammy Baldwin (D-WI) introduced the Whistleblower Augmented Reward and Nonretaliation Act of 2016 (or WARN Act of 2016) (pdf). The bill proposes expanded protections for individuals who blow the whistle on financial fraud and securities violations and, if enacted, could have significant implications for financial services employees and employers alike.  Specifically, the WARN Act of 2016 aims to strengthen the protections and incentives available to financial crimes whistleblowers by amending the Financial Institutions Anti-Fraud Enforcement Act (“FIAFEA”), Federal Deposit Insurance Act (“FDIA”), Securities and Exchange Act (“SEA”), Commodity Exchange Act (“CEA”), and Sarbanes-Oxley Act (“SOX”).

Under the FIAFEA and FDIA, for example, individuals who report banking fraud can receive awards based on the amount of money recovered as a result of the information they provide. Currently, however, there are monetary caps on these incentive awards. The WARN Act of 2016 would eliminate those caps and permit FIAFEA and FDIA whistleblowers to receive 10 to 30 percent of the total amounts recovered—essentially amending these statutes to include whistleblower “bounty” programs mirroring those under the SEA and CEA created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).

The WARN Act of 2016 would expand the scope of employee activities protected by the FDIA’s existing anti-whistleblower retaliation provision. It would also add a whistleblower anti-retaliation provision to the FIAFEA entitling covered employees who suffer adverse personnel action for assisting with the prosecution of certain violations (e.g., mail fraud, wire fraud, or bank fraud) to recover full reinstatement, double back pay damages with interest, and litigation costs and attorneys’ fees in a civil lawsuit. The revised FIAFEA would further require the Attorney General to issue regulations compelling covered employers to educate, train, and notify employees, including by posting information on their website homepages, about employee rights and remedies under the statute.

The Act also bolsters the whistleblower anti-retaliation provisions created by the Dodd-Frank amendments to the SEA, CEA, and SOX. For example, the SEA and CEA define the term “whistleblower” to include only those who report suspected violations externally to the SEC or CFTC. Employers have relied on this to argue that the anti-retaliation protections of these statutes do not apply to employees who only report violations internally, and there is currently a circuit court split on the issue. The WARN Act of 2016 would resolve the dispute by eliminating the narrow definitions of “whistleblower” under these statutes, apparently establishing once and for all that employees who only report alleged violations internally, but not to the SEC or CFTC, are covered.

In addition, the proposed legislation would expand the scope of activities protected, and adverse personnel actions prohibited, by the SEA, CEA, and SOX anti-whistleblower retaliation provisions; amend the remedies available under the SEA and CEA  anti- retaliation provisions to include compensatory damages and punitive damages of up to $250,000, and those available under the SOX anti-retaliation provision to include double back pay and punitive damages of up to $250,000; and broaden the prohibitions against waiver of any whistleblower rights or remedies under the SEA and CEA (including waivers often contained in standard confidentiality and settlement agreements).

The bill has been referred to the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs for review, and whether it will garner any meaningful support remains to be seen. If it passes, employers will need to provide proper training on the revised regulations, ensure they have comprehensive programs in place for internal reporting and investigation of alleged financial and securities violations and employee retaliation claims, and revisit their confidentiality agreements, settlement agreements, and similar documents to ensure compliance with the Act’s enhanced prohibitions against the waiver of whistleblower rights.

On September 10, 2015, the Second Circuit Court of Appeals ruled in Berman v. Neo@Ogilvy LLC that an employee who reports an alleged securities violation only to his or her employer, and not to the SEC, is nevertheless covered by the anti-retaliation protections afforded by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).

Berman, a former finance director of Neo@Ogilvy, claimed that his employer and its corporate parent, WPP Group USA, Inc., violated the whistleblower protections of Dodd-Frank by wrongfully terminating him for raising concerns internally about business practices that allegedly constituted accounting fraud.  The companies moved to dismiss the claim, arguing that Berman was not a whistleblower subject to protection under Dodd-Frank because he did not report the alleged violations to the SEC.  The District Court agreed.

In a 2-1 decision, the Second Circuit reversed the District Court’s decision on appeal.  The Court found that the provisions of Dodd-Frank are ambiguous as to whether an employee who reports an alleged violation internally, but not to the SEC, qualifies as a whistleblower.  On the one hand, Section 21F(a)(6) of Dodd-Frank limits the definition of “whistleblower” to include only those individuals who provide information relating to an alleged securities violation to the SEC.  Yet, on the other hand, Section 21F(h)(1)(A) of Dodd-Frank’s retaliation protection provision prohibits retaliation against individuals who make disclosures that are, inter alia, required or protected under the Sarbanes-Oxley Act of 2002 (“SOX”), and SOX protects employees who make internal complaints of suspected securities laws violations without reporting them to outside agencies.

Finding that these were conflicting statutory provisions, the Court deferred to the SEC’s interpretation of the statute, under which an individual is a “whistleblower” if he or she provides information pursuant to Section 21F(h)(1)(A) of Dodd-Frank, which, as explained above, prohibits retaliation against employees for making internal complaints that would be protected by SOX.  Accordingly, the Court held that under SEC Rule 21F-2, “Berman is entitled to pursue Dodd-Frank remedies for alleged retaliation after his report of wrongdoing to his employer, despite not having reported to the Commission before his termination.”

Judge Dennis Jacobs, dissenting, opined that Dodd-Frank is “unambiguous”:  Section 21F(a)(6) is controlling because it defines who is a “whistleblower” under the relevant section of the statute and expressly provides that only those who report to the SEC can qualify.   Judge Jacobs pointed out that Dodd-Frank Section 21F(h)(1)(A), which the majority found creates ambiguity by incorporating protections provided by SOX, does not expand the statutory definition of whistleblower under Dodd-Frank, but instead identifies which acts done by whistleblowers are protected by Dodd-Frank.  In other words, according to Judge Jacobs, Section 21F(h)(1)(A) does not apply to protect a person unless he or she qualifies as a “whistleblower,” as the term is defined by Section 21F(a)(6).  Judge Jacobs criticized the majority for disregarding the plain text of Dodd-Frank’s definition of whistleblower and creating an ambiguity in the statute that does not exist solely to expand the reach of the anti-retaliation provisions of Dodd-Frank.

Notably, the Second Circuit’s decision creates a split in authority with the Fifth Circuit Court of Appeals, which came down the opposite way when faced with the same issue in 2013.  As a result, this issue is almost surely headed to the Supreme Court for resolution. Further, in holding that Dodd-Frank provides a private right of action for those who report violations only internally, the Second Circuit’s decision may lead to significantly more whistleblower retaliation claims in the future because, in comparison to the SOX whistleblower protections, Dodd-Frank offers a much longer statute of limitations, double back pay damages, and no administrative exhaustion requirement.

On August 4, 2015, the SEC issued an “Interpretation of the SEC’s Whistleblower Rules Under Section 21F of the Securities Exchange Act of 1934.” (pdf).  Unsurprisingly, and consistent with the position that it has been taking in amicus briefs on the issue, the SEC states that a whistleblower need not report suspected wrongdoing to the Commission in order to be protected by the anti-retaliation provisions of Dodd-Frank.  Rather, internal whistleblowing that is protected under the Sarbanes-Oxley Act is protected activity sufficient to state a claim under Dodd-Frank, according to the SEC.  We recently posted a video discussion of this very topic (here), noting that there is currently a sharp split of judicial authority on this critical question, and that the issue may well be headed to the Supreme Court for resolution.  The Fifth Circuit held in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), that a Dodd-Frank whistleblower must report wrongdoing to the Commission to be protected by that statute; a decision from the Second Circuit on the issue is pending in Berman v. Neo@Ogilvy LLC, 14-4626 (2d Cir.).  Ultimately, of course, it is the job of the courts to determine what Congress intended in the Dodd-Frank Act, but if the issue does indeed reach the Supreme Court – and in every federal district and appellate court case until that time – those favoring a broad interpretation of the definition of a “whistleblower” under the Dodd-Frank anti-retaliation provision will surely be citing the SEC’s new interpretation of its regulations.

 

The number of whistleblower complaints is on the rise, according to the 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program, and defending against them can be costly and disrupt business operations. Taking appropriate steps in response to internal complaints can go a long way toward minimizing the risk that the issue becomes an external dispute at OSHA or in court.

Understanding the Objectives A prompt investigation and an understanding of the objectives of the investigation are paramount. Employers should decide, for example, whether the goal is to create a factual record, prepare an investigative report addressing a particular inquiry or legal consideration, provide a basis for decision making, or serve as a defense in anticipated litigation—or any combination of these objectives. These considerations will determine whether the investigation should be undertaken by a non-attorney or by corporate counsel or outside counsel, or both. For example, if the goal is simply to correct a problem internally, perhaps corporate counsel is appropriate. If, on the other hand, there is a high likelihood that the employee’s complaint will lead to full-blown litigation, outside counsel may be more appropriate. In addition, employers must have a basic understanding of the privileges afforded to attorney work product and attorney-client communications. This is because the choice of investigator can impact whether, and to what extent, these privileges apply to the information adduced during the investigation, which, in turn, will determine whether such information will be protected from disclosure to third parties.

Whistleblowers in Compliance or Audit Functions Employers should also know how to respond to the challenge raised by complaints made by whistleblowers who work in compliance or audit functions or are otherwise responsible for receiving and investigating internal whistleblower complaints. These “trusted” whistleblowers are especially problematic because, while they should be working to investigate and correct the issue internally, they may also decide to blow the whistle themselves and report the matter to outside authorities. Further, while they are generally ineligible for financial awards under the Dodd-Frank whistleblower bounty program, these “trusted” whistleblowers can become eligible for an award if the business takes no corrective action within 120 days after they make an internal complaint. They are also protected by anti-retaliation provisions of Dodd-Frank and SOX.

Training Managers to Receive Complaints One of the most important considerations is making sure that supervisors and managers are trained and understand how to recognize and elevate a whistleblower complaint to the appropriate internal legal or compliance unit, and how to conduct themselves going forward to minimize the risk of a retaliation claim by an employee who blows the whistle. Issues are frequently first raised at the supervisory level, and the sooner that compliance and/or legal professionals receive information about a claim so that they can access the appropriate response, the sooner an internal investigation can commence, when necessary. Further, managing an employee who has made a whistleblower claim can present a host of challenges, particularly if the employee is under-performing and therefore has been or is becoming a candidate for corrective or even disciplinary action. If a current employee raises a whistleblower complaint, it is essential that the alleged wrongdoing is not compounded by retaliation against that employee (or by actions that give the appearance of retaliation). Thus, supervisors and managers should receive periodic training regarding the laws and company policies prohibiting retaliation. They should also understand the need to have any potentially adverse employment actions vetted by the legal department before taking action. Finally, supervisors and managers should be given appropriate support from the legal and/or human resources departments in terms of counseling and advice in dealing with the whistleblower on a day-to-day basis as issues arise, rather than trying to navigate these waters on their own.

On March 5, 2015, the Occupational Health and Safety Administration (“OSHA”) issued its “Final Rule” establishing the procedures for handling retaliation complaints brought under Section 806 of the Sarbanes-Oxley Act (“SOX”). Section 806, as amended by Dodd-Frank, protects employees of publicly traded companies, as well as employees of contractors, subcontractors, and agents of publicly traded companies, from being retaliated against for reporting fraudulent activity or other violations of SEC rules and regulations. The Final Rule addresses the comments that OSHA received in response to its interim rule, issued in 2011, and sets forth the final procedures for retaliation claims under SOX, including the procedures and timeframes applicable to employee complaints and OSHA investigations. While the Final Rule does not differ substantively from the interim rule, it crystalizes the SOX whistleblower complaint procedures and reflects an increasingly whistleblower-friendly landscape.

Verbal Complaints

One of the most important aspects of the Final Rule—and a subject of considerable concern to commenters—is its adherence to the interim rule provision permitting verbal SOX complaints. Prior to the interim rule, complaints had to be in writing and include a full statement of the alleged wrongful acts or omissions. The interim rule eliminated this requirement and permitted complaints to be made verbally and reduced to writing by an OSHA investigator. Commenters argued that this procedure transforms the investigator into an advocate for the complainant, lacks any standard for the investigator’s written complaint, and increases the risk that the complainant may attempt to change his or her allegations by contending that the claims were not accurately recorded by the investigator. OSHA rejected these arguments, concluding that allowing verbal complaints is “[c]onsistent with OSHA’s procedural rules under other whistleblower statues.”

Preliminary Reinstatement

The Final Rule also adopted the interim rule’s provision on preliminary reinstatement, i.e., reinstating the complainant to his or her former position during the pendency of a dispute. Commenters had suggested—without success—that OSHA include a provision that preliminary reinstatement should not be granted if the complainant is a security risk and that OSHA articulate specific circumstances under which preliminary reinstatement is appropriate. Instead, the Final Rule provides that, if there is a reasonable basis to believe that a SOX violation has occurred, a preliminary order will be issued that provides the relief necessary to make the complainant whole, including reinstatement to the position that he or she would have had but for the retaliation.

Moreover, as an alternative to actual reinstatement, the Final Rule permits OSHA to order preliminary “economic reinstatement” during the pendency of a dispute, which allows the complainant to collect his or her same pay and benefits without having to return to work. Significantly, OSHA intentionally omitted any mechanism for employers to recover the costs of preliminary economic reinstatement if the complainant is ultimately unsuccessful on his or her claim.

Notice to Respondents

One helpful development for employers is OSHA’s decision to clarify in its Final Rule the notice that respondents must receive when a complaint is filed, as well as respondents’ right to receive the information that the complainant submits to OSHA during an investigation. The Final Rule expressly provides that, when a complaint is filed, OSHA must notify the respondent of the filing of the complaint, the allegations made, and the substance of the supporting evidence. The Final Rule also notes that OSHA “generally provides the respondent with a copy of its memorandum memorializing the complaint” and that the respondent can “request that OSHA clarify the allegations in the complaint if necessary.” In addition, the Final Rule makes clear that, during an investigation, OSHA will ensure that each party receives a copy of all of the other parties’ submissions to OSHA and is given an adequate opportunity to respond to those submissions.

In the light of these generally supportive and encouraging procedures for whistleblowers, it is more important than ever for employers to correctly identify, investigate thoroughly, and take appropriate steps to address internal whistleblower complaints before they become costly, full-blown whistleblower disputes.