Whistleblower Law Blog
Federal Circuit Vacates MSPB Ruling on the Standard for Evaluating Protected Conduct under the Whistleblower Protection Act
In Chambers v. Dept. of Interior, No. 2007-3050 (Fed. Cir. Feb. 14, 2008), the Federal Circuit held that the Merit Systems Protection Board erred by conflating the standards for evaluating disclosures of risks to public health and safety and disclosures of gross mismanagement under the Whistleblower Protection Act (WPA). Chambers, the former Director of the National Park Service, was placed on administrative leave and subsequently terminated shortly after she disclosed to the media and to Congress staffing and security problems at the national monuments. The MSPB evaluated her disclosures as pertaining solely to gross mismanagement, a category of protected conduct that is difficult to establish because it requires a showing that reasonable people could not debate the error in the policy. The Federal Circuit held that Chambers’s disclosures about the consequences of a policy decision to provide what she considered inadequate funding for security at national monuments can be considered disclosures about a danger to public safety, a category of protected conduct that is established where the employee reasonably believes that the problem evidences a substantial and specific danger to public safety: While Chambers certainly expressed a disagreement with a policy decision, she also potentially disclosed a danger to public safety that may have resulted from that decision . . . . Chambers’s opinions about the consequences of the policy decisions could have disclosed a danger to public safety. Coincidentally, the Interior Department’s Inspector General released a report lapproximately one week prior to the issuance of the Federal Court’s opinion revealing that the Park Service is understaffed and that security at the national monuments is inadequate, thereby corroborating the concerns that Chambers raised in 2004. Chambers should not have had to wait nearly four years for her disclosures to be validated. Fortunately, both the House and Senate recently approved amendments to the WPA that would provide genuine protection for whistleblowers in the federal government, including the option to remove WPA actions into federal court for a jury trial. Hopefully, Congress will soon enact amendments to the WPA.
In Ciavarra v. BMC Software, Inc., C.A. No. H-07-0413 (S.D.Tex. Feb. 7, 2008), Judge Atlas broadly construed the whistleblower protection provision of SOX:
SOX Coverage Defendants moved for summary judgment in part on the basis that Plaintiff was an employee of BMC Software Distribution, Inc., a subsidiary company that is not publicly traded and is therefore not covered under SOX. Judge Atlas held that Plaintiff presented evidence from which a trier of fact could find that he was a covered employee under SOX, including evidence that he was offered a separation agreement prepared at the direction of BMC Software, Inc., the publicly traded parent company of BMC Software Distribution, Inc., and evidence demonstrating that a BMC Software, Inc. officer was the supervisor of Plaintiff’s immediate supervisor and therefore had the authority to affect Ciavarra’s employment.
Protected Activity Plaintiff alleged that he engaged in protected conduct by reporting to superiors at BMC and to BMC’s otside auditor that a $67 “reversion” invoice was not properly recognizable because it was not collectible. Holding that protected conduct under SOX includes providing information regarding any conduct which the employee reasonably believes constitutes a violation of Sarbanes-Oxley, any rule or regulation of the Securities and Exchange Commission,or any provision of Federal law relating to fraud against shareholders,Judge Atlas concluded that there was a genuine issue of material fact as to whether Plaintiff provided information to BMC management and to its outside auditor regarding the anticipated recognition of a $67 million “reversion” invoice to Verizon, and that he reasonably believed that the improper recognition of the amount reflected in the invoice was a violation of Sarbanes-Oxley and other federal laws relating to fraud against shareholders.
Temporal Proximity is Sufficient to Raise an Inference of Causation Judge Atlas held that a gap of approximately three months between Plaintiff’s protected conduct and his discharge raised an inference of causation sufficient to avoid summary judgment.
Level of Detail Required in Pleading Protected Conduct Following the close of discovery, Defendants moved to amend their answer to plead that Plaintiff failed to exhaust his administrative remedies because his complaint did not plead every detail of his protected conduct. Holding that there is no requirement that a party exhaust each factual allegation in the complaint, Judge Atlas concluded that Plaintiff clearly exhausted his claim that his employment was terminated in retaliation for having brought the recognition issue to the attention of his boss’s superiors and of the outside auditors.
The Employment Law Group® Law Firm is a Contributing Author of ABA Update on Sarbanes-Oxley Whistleblower Retaliation Claims
The Employment Law Group® law firm is a contributing author of an annual update on the whistleblower retaliation provision of the Sarbanes-Oxley Act of 2002, a copy of which is available here. This annual update is a project of the ABA Section of Labor and Employment Law Committee on Federal Labor Standards Legislation Subcommittee on the Sarbanes-Oxley Act of 2002.
More than five years after SOX was enacted, the scope of protected conduct is still unsettled, but one aspect of protected conduct is becoming clear, SOX protection is not limited solely to disclosures about shareholder fraud. Disregarding the plain meaning of SOX, employers have convinced a few DOL ALJs and at least one federal judge that SOX protected conduct is limited exclusively to complaints pertaining to shareholder fraud. On February 7, 2008, Judge Marrero of the Southern District of New York held in Mahony v. Accenture Ltd., 2008 WL 344710 (S.D.N.Y 2008) that SOX contains six provisions that enumerate six specific forms of misconduct which, if reported by an employee, protect the whistleblower from employer retaliation: (1) 18 U.S.C. § 1341 (mail fraud); (2) 18 U.S.C. § 1343 (wire fraud); (3) 18 U.S.C. § 1344 (bank fraud); (4) 18 U.S.C. § 1348 (securities fraud); (5) any rule or regulation of the SEC; or (6) any provision of federal law relating to fraud against shareholders. Applying basic principles of statutory construction, Judge Marrero rejected the employer’s contention that the phrase “related to fraud against shareholders” modifies each of the preceding phrases. Accordingly, a disclosure about a reasonably perceived violation of any rule of regulation of the SEC, including rules designed to prevent fraud, is protected under SOX. For example, a disclosure about inadequate internal accounting controls would be protected.
Ethics Resource Center Underscores the Need for Stronger Whistleblower Protections for Federal Employees
The Ethics Resource Center (“ERC”) released a report underscoring the need for stronger whistleblower protection laws. The ERC’s survey found that 1) nearly six in ten government employees saw at least one form of misconduct in the past twelve months; 2) one in four government employees works in an environment conducive to misconduct; 3) only one in 10 said there is a strong ethical culture in their federal workplace; 4) three in ten employees did not report because they feared retaliation from management; and 5) one in six employees who reported misconduct they observed experienced retaliation. When federal employees do not report misconduct, public health and safety, and the public fisc are at risk. Fortunately, Congress has an opportunity to enact robust whistleblower protection legislation. In 2007, the House and Senate passed amendments to the Whistleblower Protection Act and Congress is expected to vote on a final bill in the coming weeks. The ERC’s report is available at https://www.ethics.org/research/nges-order-form.asp.
On January 28, 2008, President Bush signed into law the National Defense Authorization Act for Fiscal Year 2008 (H.R. 4986), which includes a provision protecting employees of defense contractors who blow the whistle on contracting fraud. Section 846 amends 10 U.S.C. § 2409 to protect employees who disclose to Congress, an Inspector General, the Government Accountability Office, or a Department of Defense employee responsible for contract oversight or management information that the employee reasonably believes is evidence of gross mismanagement of a Department of Defense contract or grant, a gross waste of Department of Defense funds, a substantial and specific danger to public health or safety, or a violation of law related to a Department of Defense contract (including the competition for or negotiation of a contract) or grant.
A complainant must be filed with the Inspector General (IG) of an agency, and unless the IG determines that the complaint is frivolous, the IG will conduct an investigation. Once the complainant exhausts administrative remedies, the complainant may bring a de novo action in federal court and is entitled to a jury trial. Remedies at the administrative level and in federal court include reinstatement, back pay, compensatory damages, and attorney fees and costs.
On January 22, 2008, the Fifth Circuit issued an opinion providing significant guidance about the parameters of protected conduct under Section 806 of the Sarbanes-Oxley Act. See Allen v. Administrative Review Board, No. 06-60849 (5th Cir. Jan. 22, 2008). Affirming the ARB’s decision that the plaintiff did not engage in protected conduct, the Fifth Circuit established the following standards for assessing whether a SOX whistleblower engaged in protected conduct:
- “Reasonable Belief” Standard Protects a Mistaken Belief That an Employer Violated an SEC Rule. Consistent with the plain meaning of Section 806, which requires a plaintiff to demonstrate only a “reasonable belief” that there was a violation of one of six enumerated categories of protected conduct (not an actual violation), the Allen Court held: “Importantly, an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six enumerated categories is protected.” This is significant because it counters a popular defense contention that a SOX whistleblower must demonstrate that shareholders have been harmed by the SEC violation or other misconduct about which the whistleblower complained.
- Objective Reasonableness is Not Solely a Question of Law. In Welch v. Cardinal Bankshares Corp., 2003-SOX-15 (ARB May 31, 2007), the ARB erroneously held that objective reasonableness is a question of law. That decision is pernicious because it encourages ALJs who lack knowledge of securities law to determine prior to trial whether a SOX whistleblower engaged in protected conduct. The Allen Court, however, has held that while the objective reasonableness of an employee’s belief can be decided as a matter of law in some cases, “the objective reasonableness of an employee’s belief cannot be decided as a matter of law if there is a genuine issue of material fact . . . . [and if] reasonable minds could disagree on this issue, the objective reasonableness of an employee’s belief should not be decided as a matter of law.”
- SOX Protects a Disclosure About a Reasonably Perceived Violation of “Any Rule or Regulation of the SEC.” Although the plain language of Section 806 protects an employee who provides information to a person with supervisory authority over the employee related to a violation of “any rule or regulation of the SEC,” many employers continue to argue that protected conduct is limited to disclosures about shareholder fraud. The Fifth Circuit has rejected that tortured construction of SOX, holding that a disclosure about a violation of any SEC rule is protected.
- Consult a Securities Law Expert Before Engaging in Protected Conduct. Unfortunately, the Fifth Circuit appears to be requiring SOX complainants to become experts in securities law in order to engage in protected conduct. In particular, the Fifth Circuit held that because the plaintiff was a licensed CPA, “the objective reasonableness of [plaintiff]’s belief must be evaluated from the perspective of an accounting expert” and she therefore should have known that internal consolidated financial statements need not be compliant with SAB-101, which prohibits publicly-traded companies from recognizing sales revenue before they deliver merchandise to the customer. Under this decision, complaining to management about internal accounting repots overstating gross profit is not protected conduct because the relevant SEC rule does not technically apply to internal financial statements. This aspect of the Allen Court’s holding completely misses the point of Section 806. As Judge Levin pointed out in Morefield v. Exelon Servs., Inc., 2004-SOX-2 (ALJ Jan. 28, 2004), Section 806 “is largely a prophylactic, not a punitive measure” designed to encourage employees to head off the type of “manipulations” that have a tendency or capacity to deceive or defraud the public. By blowing the whistle, they may anticipate the deception buried in a draft report or internal document, which if not corrected, could eventually taint the public disclosure. Section 806 is not a private right of action to enforce SEC rules, but instead is a retaliation action designed to ensure that employees can disclose accounting fraud and reasonably perceived violations of SEC rules without fear of reprisal, before shareholders are defrauded.Blowing the whistle on deceptive or inaccurate draft financial statements should be protected because if left uncorrected, the draft statements will be distributed to shareholders. If an employee is retaliated against for blowing the whistle on misleading internal financial statements, then the employee will not take the risk of blowing the whistle on publicly-filed financial statements.Finally, a SOX whistleblower should not need to consult a securities lawyer in order to engage in protected conduct.
Although Section 806 of SOX has been narrowed by some courts, it continues to afford robust protection to whistleblowers and does not require proof of an actual violation of an SEC rule. The lesson of Allen is that SOX whistleblowers need to plead protected conduct in detail and be prepared to establish a strong link between their disclosure and a reasonably perceived violation of an SEC rule, which in some cases will require expert witness testimony.
Today Rep. Wynn introduced the Congressional Disclosures Act (HR 4650), which would protect federal employees and employees of government contractors who disclose information to a Member of Congress or a Congressional Committee concerning a violation of any law, gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety. The Congressional Disclosures Act amends the Lloyd Lafollette Act, codified at 5 USC § 7211, which prohibits interfering with or denying “[t]he right of employees, individually or collectively, to petition Congress or a Member of Congress, or to furnish information to either House of Congress, or to a committee or Member thereof.” As described by Government Accountability Project Legal Director Tom Devine, the Lloyd Lafollette Act is a “right without a remedy” in that there is no private right of action to enforce the right conferred by the statute. Under the Congressional Disclosure Act, however, a whistleblower subjected to retaliation could bring an action in federal court for triple lost wages, lost benefits, reinstatement, costs including reasonable expert witness fees, triple attorney fees, triple compensatory damages including emotional distress and lost reputation, and equitable, injunctive, and any other relief.
Today New Jersey Governor Jon Corzine signed into law the New Jersey False Claims Act, which is similar to the federal False Claims Act. New Jersey is the 17th state to adopt a False Claims Act. The New Jersey False Claims Act closes a loophole that the D.C. Circuit read into the federal False Claims Act in United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004). Under Totten, liability is limited to companies that present false claims directly to the federal government. This loophole has enabled subcontractors to escape liability for submitting a false claim to prime contractor where the claim was not directly presented to the federal government. The New Jersey False Claims Act closes the Totten loophole by prohibiting any company from “knowingly presenti[ng] or caus[ing] to be presented to an employee, officer or agent of the State, or to any contractor, grantee, or other recipient of State funds, a false or fraudulent claim for payment or approval.”
On December 31, 2007, President Bush signed into law the “Openness Promotes Effectiveness in our National Government Act of 2007,” which amends the Freedom of Information Act (FOIA) by providing an online mechanism for FOIA requesters to track their requests; establishes an ombudsman program to resolve FOIA disputes; imposes penalties for failure to comply with the response times set forth in the FOIA; clarifies that FOIA encompasses records maintained by government contractors; and requiring agencies to pay attorney fees from their own budgets. While this legislation addresses many critical issues, it remains to be seen whether it will result in improved response times absent increased appropriations for agency FOIA offices. In whistleblower litigation, FOIA can be a critical means of obtaining documents that corroborate the whistleblower’s concerns. However, when it takes more than a year to get a response to a FOIA request, the case may have already been tried on the merits. Hopefully, this new legislation will enable whistleblowers to promptly obtain documents.