Whistleblowers: The US Perspective
20.1 Overview of US whistleblower statutes
The US legal system contains a multitude of state and federal laws that protect individuals who report potential misconduct (whistleblowers) from retaliation for making the report. Some of these laws protect specific classes of individuals, such as truck drivers, nuclear engineers, pilots and miners. Others relate to specific conduct such as motor vehicle safety issues, violations of the Clean Air Act, violations of the Clean Water Act or violations of the Affordable Care Act. Each of these laws is structured differently. As a result, the precise steps that a whistleblower must take to file a report, whether the whistleblower has a private right of action and the scope of protection may vary depending on the statutory basis for the whistleblower claim.
20.1.1 The SEC whistleblower regimes
US securities laws protect whistleblowers who report potential misconduct by entities and individuals subject to regulation by the US Securities and Exchange Commission (SEC). This protection was originally created by the Sarbanes-Oxley Act (SOX) in 2002. It was then strengthened and expanded by the Dodd-Frank Act (DFA) in 2009, which created the Whistleblower Protection Program (the Program), pursuant to which, individuals who voluntarily report ‘original information’ about potential violations of federal securities laws are protected from retaliation and entitled to a financial award if the information leads to a successful judicial or administrative enforcement action in which the SEC obtains monetary sanctions over US$1 million. The Program has been a significant success for the SEC. Since August 2011, the Program has received over 22,000 whistleblower reports from individuals in all 50 states and 114 foreign countries. In fiscal year 2017 alone, the SEC received over 4,400 whistleblower reports, including 550 (approximately 12 per cent) from foreign whistleblowers. As a result of these reports, the SEC has instituted enforcement actions that have resulted in penalties of more than US$1.7 billion and awarded over US$326 million to 59 different whistleblowers.
The Program rewards individuals for making reports pursuant to both SOX and the DFA whistleblower provisions. Under both statutes, individuals qualify as whistleblowers if they report alleged misconduct and have ‘a reasonable belief that the information [they are] providing relates to a possible securities law violation . . . that has occurred, is ongoing, or is about to occur’. A belief is reasonable if it is both subjectively and objectively reasonable; that is, the employee must have both ‘a subjectively genuine belief that the information demonstrates a possible violation, and that this belief is one that a similarly situated employee might reasonably possess.’
To satisfy the subjective component of this standard, the employee must have ‘actually believed the conduct complained of constituted a violation of pertinent law’. For the objective component, ‘[the] employee need not show that an actual violation occurred so long as “the employee reasonably believes that the violation is likely to happen.”’ ‘A belief is objectively reasonable when a reasonable person with the same training and experience as the employee would believe that the conduct implicated in the employee’s communication could rise to the level of a violation of’ the securities laws.
While the standard for whistleblower status is similar under both statutes, there are also some material differences. First, there are differences in who is protected. SOX protects employees, contractors and subcontractors of publicly traded companies and rating agencies from retaliation for reporting certain criminal offences (mail or wire fraud) or the potential violation of ‘any rule or regulation of the Securities and Exchange Commission, or any provision of federal law relating to fraud against shareholders’ either internally or to certain government entities. The DFA, on the other hand, prohibits any employer from taking adverse employment actions against employees who report potential violations of the securities laws to the SEC.
Second, there are differences in what misconduct can be reported. DFA protections only apply to whistleblowers who report potential violations of the securities laws, while SOX prohibits retaliation against whistleblowers who report potential violations of a wider range of laws.
Third, there are differences in the definition of retaliation. The DFA prohibits a broader range of retaliatory conduct. Pursuant to the statute, no employer ‘may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower’. The SOX prohibition is substantially similar, but does not specifically prohibit indirect action against employees.
Fourth, there are procedural differences in how whistleblowers must report the conduct. SOX specifically states that whistleblowers are protected against retaliation if they report misconduct internally to ‘a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct)’ or externally to a federal regulatory or law enforcement agency, or the US Congress. The DFA, on the other hand, statutorily defines a whistleblower as ‘any individual who provides . . . information relating to a violation of the securities laws’ to the SEC. Recognising that SOX whistleblowers – who can report internally – are also protected under DFA, the SEC attempted to extend DFA protection to whistleblowers who report internally pursuant to SOX. This interpretation, however, was unanimously rejected by the Supreme Court, which held that the DFA only protects employees who report misconduct to the SEC.
Finally, there are significant differences in how a whistleblower can bring a claim for retaliation. SOX is enforced by the Occupational Safety and Health Administration (OSHA), which is responsible for investigating claims. Once a whistleblower makes a claim, OSHA will conduct an initial investigation to determine if the whistleblower has made a prima facie showing that their whistleblower report was a contributing factor to an unfavourable employment decision. If OSHA comes to this determination, the employer can then rebut the claim with clear and convincing evidence. Once OSHA makes a final finding, either party may appeal to the Department of Labor’s Office of Administrative Law Judges (ALJ). The regulations then allow for limited discovery, after which the ALJ will conduct a hearing and render a decision. The ALJ’s decision can be appealed by the unsuccessful party to the Department of Labor’s Administrative Review Board, with further appeal to the United States Circuit Court of Appeals for the circuit in which the employee resided or the violation allegedly occurred. Additionally, a SOX whistleblower may bring a retaliation claim in federal court if the Secretary of Labor ‘has not issued a final decision within 180 days of the filing of [a] complaint and there is no showing that such delay is due to the bad faith of the claimant’.
Individuals claiming DFA protections, on the other hand, may immediately bring a claim in federal court. There, courts will employ a burden-shifting standard. The employee must initially meet the ‘rather light burden of showing by a preponderance of evidence that [the whistleblower report] tended to affect [the adverse action] in at least some way.’ Once the employee has made this prima facie showing of retaliation, the burden shifts to the employer to prove that there was a legitimate non-retaliatory reason for the decision. Only if the employer is able to provide a non-retaliatory reason does the burden shift back to the employee to show that the proffered legitimate reason is a pretext.
20.2 The corporate perspective: preparation and response
20.2.1 Preparing for a whistleblower report
There is no legal requirement to create whistleblower policies, but companies that are potentially subject to SOX or DFA whistleblower requirements should ensure that they are prepared by creating policies and procedures that address how they will respond to and protect whistleblowers. These policies and procedures must be appropriately tailored to take into account factors such as the size of the company, the statutory whistleblower provisions that apply, and the nature of its business. At a minimum, whistleblower policies should include the following three types of guidance.
First, the whistleblower policy needs to make clear how an employee or external party can report information about potential misconduct. There are a number of methods that firms can use to facilitate whistleblower reports, including designating an employee from legal or compliance who will receive those reports, creating a web-based interface for making reports, or creating a telephone hotline. Ultimately, the company should adopt one or more methods that will best facilitate reports. Regardless of the method chosen, whistleblowers must also be able to escalate the report to a designated senior employee or board member in the event that the conduct implicates legal, compliance or senior executive management.
Second, the policy should explain how the company will investigate a whistleblower claim. This aspect of the policy should not mandate that specific steps will be followed in each case, as the actual nature and scope of any investigation will depend heavily on the nature and circumstances of the claim. Among the aspects that may be included are (1) who is responsible for initially investigating a whistleblower claim, (2) who is responsible for making an initial determination on the merit of the claim, (3) the circumstances under which the company will conduct a more extensive investigation and (4) who is responsible for ultimately evaluating the whistleblower report and implementing remedial improvements if necessary.
Finally, the policy should ensure that when the identity of a whistleblower is known and the whistleblower is an employee, steps are taken to protect that person from retaliation. This protection could include designating an employee from legal or compliance to monitor the status of the whistleblower to ensure that they are not subject to adverse actions. Additionally, the policy should make clear that any personnel who retaliate against a whistleblower will be subject to discipline.
20.2.2 Responding to a whistleblower report
Once a company learns that a whistleblower report has been made, it should adhere to its whistleblower policy. First, the company should assess the whistleblower’s claim to determine what responsive action is appropriate. As discussed above, the nature of the inquiry will depend on the claim, but could range from an informal assessment by the compliance team to a formal investigation conducted by external counsel. Ultimately, the determination of how to investigate the claim will depend on the severity of the alleged conduct and the credibility of the claim. In conducting the inquiry, it is critical that the company make clear to any employees who are interviewed that even though the substance of the interview may be protected by the company’s attorney–client privilege, the employee retains the right to disclose the facts discussed during the interview to the appropriate authorities.
Second, in the case of a whistleblower report by an employee whose identity is known, in addition to the steps outlined in the whistleblower policy to protect the employee, the company should also ensure that it has documented any previous warnings or disciplinary actions taken against the employee, as well as adhere to consistent disciplinary procedures. Such documentation and adherence will, if necessary, support the company’s position that a whistleblower employee was disciplined or terminated for conduct unrelated to a whistleblower report.
20.2.3 Defending anti-retaliation suits
If a whistleblower brings a retaliation action it will be difficult, if not impossible, to defeat the action at an early stage in the litigation. This difficultly exists because the standard for what constitutes an adverse employment action is purposely vague to allow for ‘a factual determination on a case-by-case basis’, which has been interpreted by courts to reflect a ‘congressional intent to prohibit a very broad spectrum of adverse action against . . . whistleblowers.’ As a result, courts have refused to create a bright-line standard for what constitutes an adverse employment action and instead ‘pore over each case to determine whether the challenged employment action’ constitutes an adverse action. While any action can be construed by an employee as retaliatory, in practice, whistleblower claims are generally predicated on conduct, such as dismissals, demotions or decreased compensation.
Despite these difficulties, there are certain defences that may be successfully asserted in a retaliation lawsuit. First, an employer can argue that there was no causal connection between the protected activity and the adverse employment decision. Two factors that can sever the causal connection are the passage of time or a legitimate intervening event. The passage of time between a whistleblower’s report and their termination can demonstrate that the adverse action was not retaliatory. The Second Circuit has declined to establish a bright-line rule, but in the absence of additional evidence of a defendant’s retaliatory motive, the passage of two months may be sufficient to sever the causal connection. However, to the extent that there is evidence of other retaliatory actions against the whistleblower, courts will allow for a longer gap between the protected activity and termination. Similarly, a legitimate intervening event that occurs after the whistleblower’s disclosure to the SEC will sever the causal connection and create a non-retaliatory justification for the termination. For example, one court granted summary judgment for an employer because, after making his disclosure to the SEC, the whistleblower told investors that the external directors were ‘worthless’, which provided a non-retaliatory justification for the whistleblower’s dismissal. However, because causation is generally a question of fact, a court is unlikely to decide as a matter of law that either the passage of time or an intervening event has severed the causal chain.
An employer could argue that the whistleblower did not have a reasonable belief that the alleged conduct constituted a violation or potential violation of the securities law. In particular, whistleblower complaints need to provide more than ‘self-serving averments’ or ‘bald statement[s]’ in support of the claim that the plaintiff had a reasonable belief that the conduct was illegal.
There are certain defences that may be more applicable to either DFA or SOX whistleblower claims. First, DFA whistleblower claims may be amenable to arbitration. As a general principle, US federal courts ‘strongly [favour] arbitration as an alternative dispute resolution process’, and statutory claims may be submitted to arbitration unless the statute explicitly prohibits arbitration. As a result, some courts have held that DFA retaliation claims are amenable to arbitration, although a prohibition on arbitration was added to other whistleblower retaliation statutes by the DFA. The Third Circuit, the only circuit court to examine this issue so far, has concluded that ‘although Congress conferred on whistleblowers the right to resist the arbitration of certain types of retaliation claims, that right does not extend to Dodd-Frank claims arising under [the Dodd-Frank whistleblower provision].’ SOX claims, on the other hand, are not arbitrable as a result of an amendment to SOX that was passed as part of the DFA.
Finally, in some instances, an employer can argue that an anti-retaliation claim is barred because it is extraterritorial. In Liu Meng-Lin v. Siemens AG, for example, the Second Circuit held that DFA whistleblower protection does not generally apply extraterritorially and that the plaintiff, a resident of Taiwan who was employed by the Chinese subsidiary of a German company, did not have a valid anti-retaliation complaint because neither his report to superiors in China and Germany regarding allegedly corrupt activities that took place outside the United States, nor the decision by Siemens in Germany or China to terminate him, had a sufficient connection to the United States to treat it as a domestic application of the statute. The Second Circuit, however, declined to ‘define the precise boundary between extraterritorial and domestic applications’ of the anti-retaliation provision because the case was ‘extraterritorial by any reasonable definition.’ Nonetheless, this suggests that many foreign whistleblowers may not be protected by the DFA.
20.2.4 Anti-retaliation suits by the SEC
In addition to potential suits by a whistleblower, the SEC has asserted an independent right to bring whistleblower retaliation claims. In June 2014, the SEC brought its first enforcement action against a registered investment adviser for retaliation. Subsequent actions show that this remains an enforcement priority for the SEC. In particular, the SEC may enforce the DFA anti-retaliation provision for ‘conduct occurring outside the United States that has a foreseeable substantial effect within the United States.’ Therefore, even if a company can successfully avoid a retaliation suit by a whistleblower on extraterritorial grounds, the SEC could still bring a suit for the same conduct.
20.3 The whistleblower’s perspective: representing whistleblowers
In determining whether to advise a client to make a whistleblower report, there are several key preliminary considerations. First, if the client is implicated in the wrongdoing this will impact whether they receive a whistleblower award and the amount of any award. The SEC in the DFA Implementation Release noted that ‘culpable whistleblowers can enhance the Commission’s ability to detect violations of the federal securities laws, increase the effectiveness and efficiency of the Commission’s investigations and provide important evidence for the Commission’s enforcement actions.’ As such, pursuant to SEC regulations, the SEC ‘will assess the culpability or involvement of the whistleblower in matters associated with the Commission’s action or related actions’ in determining the amount of a whistleblower award. In at least one case, it appears that the SEC gave an award to a culpable whistleblower. In an April 2016 order, the SEC stated that a whistleblower was subject to a parallel proceeding and that the award was ‘subject to an offset for any monetary obligations’, including disgorgement, prejudgment interest, and penalty amounts that the whistleblower had yet to pay towards a judgment. In ordering this relief, the SEC noted that the whistleblower had previously been advised of the potential offset and did not object.
Second, counsel should consider whether the putative whistleblower is subject to any professional confidentiality obligations that would be implicated. In particular, SEC regulations generally exclude attorneys from recovering under the Program. Information obtained through communications that are subject to the attorney–client privilege or information obtained ‘in connection with the legal representation of a client’ is generally not considered ‘original information’. These exclusions are clearly directed at attorneys to ‘send a clear, important signal to attorneys, clients, and others that there will be no prospect of financial benefit for submitting information in violation of an attorney’s ethical obligations.’ Similarly, certain fiduciaries and professionals engaged by the company who obtained the information through those roles are generally not deemed to have ‘original information’ about misconduct. However, there is no general bar on the use of information that is otherwise deemed confidential by a company.
Disclosing to the SEC
Neither DFA nor SOX whistleblower provisions mandate that a whistleblower make their initial disclosure to the SEC. Therefore, a whistleblower can choose to disclose initially to the SEC or first make an internal report to the employer.
From a rewards perspective, there is no benefit to disclosing first to the SEC. Pursuant to SEC regulations, the date of a whistleblower’s initial internal report will be treated as the date of disclosure to the SEC, so long as the whistleblower makes a report to the SEC within 120 days of the internal report or a report to another federal agency. Therefore, delaying SEC disclosure to make an internal report first will not affect whether the whistleblower is the first person to provide original information and thereby qualifies for an award.
Moreover, reporting directly to the SEC could, in theory, reduce an award as one of the factors that the SEC considers in determining the amount of an award is whether the whistleblower reported the potential misconduct through internal company compliance systems and whether the whistleblower co-operated with any internal investigations. Therefore, reporting directly to the SEC could reduce an award if the whistleblower is perceived to have circumvented the company’s internal reporting system.
However, there is one major potential benefit to first disclosing to the SEC – guaranteed protection as a whistleblower under DFA. In particular, the Supreme Court has held that individuals must report to the SEC in order to be protected as whistleblowers under the DFA. Therefore, if an employee only makes an internal report the employee will lose the anti-retaliation protection provided by the DFA. Moreover, because the SEC treats all whistleblower complaints as confidential and the Program provides additional confidentiality protections to ensure that a whistleblower’s identity is protected, whistleblowers receive an added protection through SEC disclosure.
Once a whistleblower decides to make a report to the SEC, the process itself is fairly simple. Whistleblowers may submit a complaint either through the online Tips, Complaints, and Referrals (TCR) Portal on the SEC’s whistleblower website or by mailing or faxing a TCR Form to the SEC Office of the Whistleblower. Once the form is received, it will be reviewed by Division of Enforcement staff, who will then determine who is best placed to investigate the allegations. In some instances, the TCR will be sent to another federal or state enforcement agency, in which case information that could identify the whistleblower is generally withheld.
20.4 Filing a qui tam action under the False Claims Act
Individuals who report fraud against the United States government have another option for disclosing information – the False Claims Act. This Act was initially created in 1863 to combat price-gouging during the Civil War, but the modern incarnation of the statute is a result of congressional concern regarding defence procurement fraud. Since the statute was enhanced in 1986, there has been a significant growth in False Claims Act suits, from 30 in 1987 to 674 in 2017. As a result of these suits, the US Department of Justice (DOJ) collected US$56 billion between 1986 and 2017, including US$3.4 billion in the 2017 fiscal year alone.
The False Claims Act can be used to prosecute claims for false monetary claims against the government, false statements in aid of false claims, conspiracies to defraud the government into paying a false claim, or false statements intended to reduce an obligation to the government. Moreover, pursuant to the False Claims Act, private individuals – referred to as relators – may bring qui tam claims on behalf of the government alleging that a defendant has committed fraud against the US government. If the prosecution of the qui tam claim is successful, the relator may receive between 15 per cent and 30 per cent of the recovery. This can result in substantial compensation for a whistleblower, as False Claims Act defendants may be liable for penalties of US$5,000 to US$10,000 per violation and for treble damages.
20.4.1 How a qui tam action operates
To bring a qui tam action, the relator must file their complaint in federal court under seal. The initial complaint is only served on the DOJ, which has 60 days to examine the merits of the claim. During this 60-day period (which is often subject to extensions), the DOJ will determine whether to terminate or settle the claim, intervene and take ‘primary responsibility’ for the claim, or decline to intervene and allow the relator to proceed alone. After this period expires, the complaint is unsealed and the defendant will receive notice of the claim.
At this stage, the government’s ‘ultimate election among the options has a direct effect on the relator’s right to share in a recovery.’ If the government decides to intervene in the action, the relator is entitled to 15 per cent to 25 per cent of any recovery, while the government receives the remaining recovery. The precise amount will ‘depend upon the extent to which the person substantially contributed to the prosecution of the action.’ If, on the other hand, the government decides not to pursue the case, the relator will be entitled to 25 per cent to 30 per cent of the recovery, with the government again receiving the remainder of the recovery. The relator is also entitled to ‘an amount for reasonable expenses which the court finds to have been necessarily incurred, plus reasonable attorneys’ fees and costs.’ However, one study has revealed that the majority of plaintiffs voluntarily dismiss the qui tam action if the DOJ declines to intervene, despite the potential for a larger award.
In addition to this basic framework, there are also limitations on awards, which may reduce or eliminate a possible award. First, a relator’s award will be reduced if they ‘planned and initiated’ the False Claims Act violation. Second, if the court determines that the information is ‘based primarily on disclosures of specific information’ relating to governmental investigations or news accounts, the award will be reduced to no more ‘than 10 percent of the proceeds, taking into account the significance of the information and the role of the person bringing the action in advancing the case to litigation.’ Finally, a relator is entitled to no award if they are ‘convicted of criminal conduct arising from his or her role in the violation’. Additionally, there are provisions that preclude filing additional suits based on substantially similar qui tam or government enforcement proceedings. These provisions are intended to achieve ‘the golden mean between adequate incentives for whistle-blowing insiders . . . and discouragement of opportunistic plaintiffs who have no significant information to contribute of their own’.
In addition to determining the quantum of a qui tam award, the DOJ’s decision may also have a substantial impact on the outcome of the lawsuit. Statistics published by the DOJ show that cases where the DOJ intervenes are substantially more likely to generate recoveries than declined cases. DOJ declination may also signal a lack of merit to the court.
Recently enacted DOJ policy also encourages DOJ attorneys to ‘consider whether the government’s interests are served’ by seeking dismissal of the qui tam action. Pursuant to this policy, DOJ attorneys are encouraged to seek dismissal in order to (1) curb meritless qui tam actions, (2) prevent ‘parasitic or opportunistic’ actions that duplicate a pre-existing investigation, (3) prevent interference with government programmes, (4) preserve the DOJ’s litigation prerogatives; (5) safeguard national security, (6) preserve government resources or (7) address ‘egregious procedural errors’ that would frustrate a proper investigation.
However, even if the DOJ decides not to intervene a case, it still has an oversight role in the litigation. First, the DOJ retains the continuing right to dismiss or settle an action being prosecuted by a relator, although at least some courts have suggested that this is not an absolute right. Second, the DOJ retains the right to veto private dismissals or settlements because any judgment will have preclusive effect on a future lawsuit by the US government based on the same facts. That said, a minority of courts have held that the DOJ can only object by showing ‘good cause’ in a case where it has not intervened.
20.4.2 Effects of filing a qui tam action
A qui tam action can have a substantial impact on both the relator and the defendant. First, the relator faces both reputational and financial risk. By filing a qui tam action the relator has agreed to be publicly identified because the unsealed complaint will identify them as the complainant. Relators have tried to avoid this consequence by moving to dismiss and seal cases if the DOJ declines to intervene, but have met with, at best, limited success. For relators who are still employed by the defendant, this risk is mitigated by the anti-retaliation provisions in the False Claims Act, which provide for reinstatement and double damages in the event of retaliation. Nonetheless, depending on the situation, relators may have legitimate concerns about the impact on their professional reputations.
Relators often face additional financial risks if the government declines to intervene. In particular, relators may be responsible for the defendant’s reasonable legal fees if the defendant prevails and ‘the court finds that the claim of the person bringing the action was clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.’
A qui tam action also creates financial and reputational risks for a defendant. A successful qui tam action could cost a corporation millions, if not billions, of dollars. Moreover, defendants also risk debarment from additional federal contracts. From a reputational perspective, the corporation faces negative publicity associated with public accusations of committing fraud against the government, although at least one court has suggested that this impact is minimised when the DOJ declines to intervene.
1 Daniel Silver is a partner and Benjamin A Berringer is an associate at Clifford Chance US LLP.
2 The exact nature of this protection depends significantly on the statute that creates the protection. For example, the Surface Transportation Assistance Act states that ‘no person’ is allowed to ‘discriminate’ against truck drivers and certain other employees ‘with respect to his compensation, terms, conditions, or privileges of employment’ for making a whistleblower report. 49 U.S.C. § 31105. On the other hand, the Sarbanes-Oxley Act prohibits a broader range of conduct, but applies to a narrower class of employers. See below, footnotes 16 to 23 and accompanying text.
3 The Surface Transportation Assistance Act protects truck drivers and certain other employees from retaliation for reporting violations of regulations related to the safety of commercial vehicles. 49 U.S.C. § 31105.
4 The Energy Reorganization Act protects employees of operators, contractors and subcontractors of nuclear power plants licensed by the Nuclear Regulatory Commission from retaliation for reporting violations of the Atomic Energy Act. 42 U.S.C. § 5851.
5 The Wendell H Ford Aviation Investment and Reform Act for the 21st Century protects employees, contractors, and subcontractors of air carriers from retaliation for, inter alia, reporting violations of laws related to aviation safety. 49 U.S.C. § 42121.
6 The Federal Mine Safety and Health Act of 1977 prohibits employment discrimination against a miner, representative of miners, or applicant for employment in any coal or other mine as a reprisal for making safety-related complaints. 30 U.S.C. § 815.
7 The Moving Ahead for Progress in the 21st Century Act prohibits discrimination by motor vehicle manufacturers, parts suppliers or dealerships against employees who provide information about any motor vehicle defect or violation of the Motor Vehicle Safety Act. 49 U.S.C. § 30171.
8 The Clean Air Act contains a provision protecting employees from retaliation for reporting violations of the Clean Air Act. 42 U.S.C. § 7622.
9 The Federal Water Pollution Control Act contains a provision protecting employees from retaliation for reporting violations of the Act. 33 U.S.C. § 1367.
10 The Affordable Care Act protects employees from retaliation for reporting violations of certain of its provisions, including, inter alia, discrimination based on an individual’s receipt of health insurance subsidies, denial of coverage for a pre-existing condition, and an insurer’s failure to rebate a portion of an excess premium to customers. 29 U.S.C. § 218c.
11 Compare, e.g., 42 U.S.C. § 7622 (no private cause of action for whistleblower retaliation under the Clean Air Act), with 29 U.S.C. § 1132(a) (creating a private cause of action for the enforcement of ERISA provisions, including anti-retaliation provisions).
12 The SEC has defined original information as ‘information derived from your independent knowledge (facts known to you that are not derived from publicly available sources) or independent analysis (evaluation of information that may be publicly available but which reveals information that is not generally known) that is not already known by us.’ US Securities and Exchange Commission Office of the Whistleblower, Frequently Asked Questions, https://www.sec.gov/about/offices/owb/owb-faq.shtml. The SEC has also stated that information from certain individuals, including attorneys and fiduciaries, may not be deemed original. See below, footnotes 74 to 76 and accompanying text.
13 See 15 U.S.C. § 78u-6. Dodd-Frank also imposed a similar regime under the Commodity Exchange Act. See 7 U.S.C. § 26.
14 U.S. Securities and Exchange Commission, 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program 23-26 (2017), https://www.sec.gov/files/sec-2017-annual-report-
15 Id. at 33. A significant number of the international reports came from the United Kingdom (84 reports) and Canada (73 reports).
16 Press Release, U.S. Securities and Exchange Commission, SEC Awards Almost $4 Million to Overseas Whistleblower, https://www.sec.gov/news/press-release/2018-209.
17 17 C.F.R. § 240.21F-2(b)(i). Prior to 2011, the Department of Labor applied a ‘definitively and specifically’ standard to SOX claims, which required that the whistleblower show that the conduct was definitively and specifically related to one or more of the laws listed in SOX. See, e.g, Welch v. Cardinal Bankshares Corporation, ARB No. 05-064, ALJ No. 2003-SOX-15 (ARB 31 May 2007) (Whistleblower report related to deviation from generally accepted accounting practices was not necessarily protected activity under SOX because an accounting deviation is not inherently a violation of the securities laws). However, in a 2011 decision, the Department of Labor clarified that the reasonable belief standard applied. Sylvester v. Parexel Int’l LLC, ARB No. 07-123, ALJ Nos. 2007-SOX-039, -042 (ARB 23 May 2011). The SEC has stated that a reasonable belief is sufficient under either statute. See Implementation of the Whistleblower Provisions of Section 21f of the Sec. Exch. Act of 1934, Release No. 64545 (S.E.C. Release No.), Release No. 34-64545, 101 S.E.C. Docket 630, 2011 WL 2045838 (25 May 2011) (DFA Implementation Release), at *7, n. 36 (adopting the reasonable belief standard and noting that the SOX anti-retaliation provision has the same requirement). However, at least some courts still apply the definitively and specifically standard for SOX claims. See, e.g. Riddle v. First Tenn. Bank, 497 F. App’x. 588 (6th Cir. 2012) (‘[A]n employee’s complaint must “definitively and specifically relate” to one of the six enumerated categories found in 18 U.S.C. § 1514A.’). But see Genberg v. Porter, 882 F.3d 1249, 1255 (10th Cir. 2018) (holding that the ‘definitive and specific’ standard used by the District Court was ‘obsolete’ and reversing grant of summary judgment for defendant based on that standard); Wiest v. Lynch, 710 F.3d 121, 131 (3d Cir. 2013) (adopting reasonable belief standard based on Sylvester decision).
18 Ott v. Fred Alger Mgmt., Inc., 2012 WL 4767200, at *4 (S.D.N.Y. 27 September 2012) (quoting DFA Implementation Release, at *7).
19 Welch v. Chao, 536 F.3d 269, 277 n.4 (4th Cir. 2008) (interpreting whether a plaintiff qualified for whistleblower status under SOX).
20 Stewart v. Doral Fin. Corp., 997 F. Supp. 2d 129, 137 (S.D.N.Y. 2014) (quoting Sylvester, 2011 WL 2165854, at *13).
21 Wiest, 710 F.3d at 132.
22 The Supreme Court has ruled that this protection extends to employees of a non-public company who report fraud against shareholders of a public company that receives services from the non-public company. Lawson v. FMR LLC, 134 S. Ct. 1158, 1166, 188 L. Ed. 2d 158 (2014).
23 18 U.S.C. § 1514A. Judicial decisions have made clear that disclosures regarding third parties are protected activity. See, e.g., Sharkey v. J.P. Morgan Chase & Co., No. 10 Civ. 3824, 2011 WL 135026, at *5–6 (S.D.N.Y. 14 January 2011) (finding that the plaintiff properly pleaded that a report concerning a third-party client’s illegal activity constituted a protected activity under SOX).
24 The DFA defines a whistleblower as ‘any individual who provides . . . information relating to a violation of the securities laws to the Commission.’ 15 U.S.C. § 78u-6(a)(6).
25 15 U.S.C. § 78u-6(h)(1)(A).
26 18 U.S.C. § 1514A(a) (identified classes of employers may not ‘discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee’).
27 18 U.S.C. § 1514A. Administrative decisions have made clear that disclosures to other entities, including the IRS and local law enforcement, may also be protected. See, e.g., Vannoy v. Celanese Corp., ARB No. 09-118, ALJ No. 2008-SOX-064 (ARB 28 September 2011) (finding that disclosures to the IRS constituted protected activity under SOX); Funke v. Federal Express Corp., ARB No. 09-004, ALJ No. 2007-SOX-043 (ARB 8 July 2011) (finding that reports to local law enforcement constituted protected activity).
28 15 U.S.C. § 78u-6(a)(6). This provision arguably conflicts with the broader anti-retaliation provision of the DFA, which states that an employer cannot ‘discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment’ in retaliation for: (1) providing information to the SEC; (2) initiating, testifying in, or assisting an SEC investigation or action; or (3) making disclosures that are protected by the Sarbanes-Oxley Act or ‘any other law, rule, or regulation subject to the jurisdiction of’ the SEC. 15 U.S.C. § 78u-6(h)(1)(A).
29 17 C.F.R. § 240.21F-2.
30 Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767, 769, 200 L. Ed. 2d 15 (2018).
31 See 29 C.F.R. § 1980.104(e).
33 29 C.F.R. § 1980.104(e)(4).
34 29 C.F.R. § 1980.106.
35 29 C.F.R. §§ 1980.107, 1980.109.
36 29 C.F.R. § 1980.110.
37 29 C.F.R. § 1980.112.
38 18 U.S.C. § 1514A(b)(1)(B).
39 Feldman v. Law Enf’t Assocs. Corp., 752 F.3d 339, 348 (4th Cir. 2014).
40 Implementation Release at 18, n. 41.
42 See, e.g., In re KBR, Inc., Securities Exchange Act Release No. 74619 (1 April 2015) (KBR agreed to settle charges that its standard form confidentiality provision, which stated that witnesses needed permission of the company to disclose matters discussed in internal investigation interviews, undermined the Program.). The company should also ensure that similar language is used in any interview conducted by counsel as part of an internal investigation.
43 DFA Implementation Release, at *8.
44 Anthony Menendez v. Halliburton, Inc., 2011 WL 4915750, at *10 (ARB 13 September 2011) (SOX anti-retaliation claim).
45 Wanamaker v. Columbian Rope Co., 108 F.3d 462, 466 (2d Cir. 1997) (ADEA anti-retaliation claim).
46 See e,g., Ott, 2012 WL 4767200 at *3 (employee alleged that she was terminated for reporting to the SEC that she believed that the hedge fund’s trading policy allowed the firm to trade ahead of customer orders).
47 See, e.g., In re Paradigm Capital Management, Inc., S.E.C. File No. 3-15930 (2014) (hedge fund settled claims by SEC that it retaliated against an employee who was relieved of his responsibilities following complaint).
48 See, e.g., O’Mahony v. Accenture Ltd., 537 F. Supp. 2d 506, 508 (S.D.N.Y. 2008) (SOX whistleblower allegations were adequately pled where defendant reduced plaintiff’s level of responsibility and compensation shortly after plaintiff reported defendant’s alleged fraudulent activity).
49 Fraser v. Fiduciary Trust Co. Int’l, No. 04 CIV. 6958 (PAC), 2009 WL 2601389, at *6 (S.D.N.Y. 25 August 2009) aff’d, 396 F. App’x 734 (2d Cir. 2010).
50 Gorman–Bakos v. Cornell Coop. Extension, 252 F.3d 545, 554 (2d Cir. 2001).
51 Garrett v. Garden City Hotel, Inc., No. 05-CV-0962, 2007 WL 1174891, at *21 (E.D.N.Y. 19 April 2007) (collecting cases).
52 See, e.g., Mahony v. KeySpan Corp., No. 04 CV 554 SJ, 2007 WL 805813, at *6 (E.D.N.Y. 12 March 2007) (denying motion for summary judgment in SOX whistleblower case despite 13-month gap between protected activity and termination because a ‘reasonable juror could find that the string of retaliatory acts culminating in Plaintiff’s termination is evidence that Plaintiff’s protected activity was a contributing factor in the adverse employment action’).
53 Feldman, 752 F.3d at 349.
54 See, e.g., Mahony, 2007 WL 805813, at *6. (‘The gap in time between protected activity and adverse employment action is merely one factor which a jury can consider when determining causation. A jury may look to other facts to decide whether the protected activity precipitated the adverse employment action, including evidence of a strained relationship between the parties that portended the employee’s termination.’)
55 Livingston v. Wyeth Inc., 2006 WL 2129794, *10 (M.D.N.C. 28 July 2006).
56 Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 223 (2d Cir. 2014).
57 Nat’l City Golf Fin. v. Higher Ground Country Club Mgmt. Co., LLC, 641 F. Supp. 2d 196, 201 (S.D.N.Y. 2009).
58 Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220, 226 (1987).
59 See, e.g., Murray v. UBS Sec., LLC, 2014 WL 285093, *11 (S.D.N.Y. 27 January 2014) (holding SOX’s prohibition on predispute arbitration does not apply to DFA retaliation claims); Ruhe v. Masimo Corp., 2011 WL 4442790, *5 (C.D. Cal. 16 September 2011) (refusing to read an anti-arbitration provision into 15 U.S.C. § 78u).
60 Khazin v. TD Ameritrade Holding Corp., 773 F.3d 488, 493 (3d Cir. 2014).
61 18 U.S.C. § 1514A(e)(2).
62 763 F.3d 175, 179-180 (2d Cir. 2014).
64 Employers may also be able to argue that the SOX whistleblower provisions do not apply to foreign employees. See, e.g., Asadi v. G.E. Energy (USA) LLC, No. 4:12-345, 2012 WL 2522599 (S.D. Tex. 28 June 2012) (Neither SOX nor DFA anti-retaliation provisions protected US citizen employed by US company who was temporarily relocated to a foreign country because ‘the majority of events giving rise to the suit occurred in a foreign country’). But see Walters v. Deutsche Bank, et al., 2008-SOX-70, slip op. at 41 (ALJ 20 March 2009) (US citizen working in Switzerland was protected as a whistleblower because ‘all elements essential to establishing a prima facie violation of Section 806 allegedly occurred in the United States’).
65 In re Paradigm Capital Management, Inc., S.E.C. File No. 3-15930 (2014).
66 See, e.g., In re KBR, Inc., S.E.C. File No. 3-16466 (2015) (cease and desist order forbidding KBR, Inc. from violating Rule 21F-17, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC and imposing civil monetary penalties of US$130,000 for violations).
67 15 U.S.C. § 78aa(b)(2).
68 DFA Implementation Release, at *89.
69 17 C.F.R. § 240.21F-6(b)(1).
70 Order Determining Whistleblower Award Claim, Exchange Act Release No. 34-77530, 2016 WL 1328926 (5 April 2016).
72 See 17 C.F.R. § 240.21F-4(b)(4)(i)-(ii).
73 See DFA Implementation Release, at *27. The SEC has, however, provided for exceptions to the attorney exclusions in order to balance an attorney’s ethical obligations with the desire to prevent securities law violations. As a result, information obtained through a confidential communication or legal representation will be deemed ‘original information’ in three situations: (1) if the attorney is representing an issuer and reasonably believes that the disclosure is necessary to prevent the issuer from committing a material violation of the securities law or to rectify a material violation, which is likely to cause substantial injury to financial interests, or to prevent perjury or fraud upon the SEC in the course of an SEC investigation or administrative proceeding; (2) when allowed to make the disclosure pursuant to applicable state attorney conduct rules; or (3) ‘otherwise’. The SEC has not provided guidance on the circumstances that would qualify an attorney to invoke the ‘otherwise’ exclusion.
74 17 C.F.R. § 240.21F-4(b)(4)(iii). The SEC has stated that information from these sources will not be deemed ‘original’ if: (1) the whistleblower is in a leadership position and learned the information either from another person or in connection with internal compliance procedures; (2) the whistleblower is an internal audit or compliance employee or external adviser; (3) the whistleblower was retained to conduct an internal investigation into the company; or (4) the whistleblower is an employee of a public accounting firm, and the information was obtained while performing a function required under the federal securities laws, and relates to a violation by the client or its employees.
75 17 C.F.R. § 240.21F-4(b)(7); see also, In re the Claim for an Award in Connection with [Redacted], Securities Exchange Act of 1934 Release No. 82996 (5 April 2018) (awarding US$2.2 million to whistleblower who initially provided notification to another federal agency).
76 See 17 C.F.R. § 240.21F-4(b) (defining ‘original information’ as information ‘[n]ot already known to the Commission for any other source’).
77 See 17 C.F.R. § 240.21F-6(a)(4).
78 Digital Realty Tr., Inc. v. Somers, 138 S. Ct. 767, 769, 200 L. Ed. 2d 15 (2018); see also Verble v. Morgan Stanley Smith Barney, LLC, No. 3:14-CV-74, 2015 WL 8328561 (E.D. Tenn. 8 December 2015) (employee who was terminated for assisting federal authorities, including the FBI, was not a protected whistleblower because he had not provided information to the SEC).
79 Digital Realty, 137 S.Ct. at 769.
80 17 C.F.R. § 240.21F-7. For added protection, a whistleblower may also submit a complaint anonymously through an attorney. See 2015 Annual Report at 17.
81 See https://www.sec.gov/about/offices/owb/owb-tips.shtml.
82 See US Securities and Exchange Commission, Division of Enforcement, Enforcement Manual (4 June 2015), https://www.sec.gov/divisions/enforce/enforcementmanual.pdf.
84 United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 649-51 (D.C. Cir. 1994). Defence contracting remains one of the most frequent targets of qui tam complaints, constituting approximately 14 per cent of qui tam complaints. The healthcare industry is the most frequent target, accounting for approximately 58 per cent of qui tam complaints. US Dep’t of Justice, Fraud Statistics – Overview: 1 October 1987 – 30 September 2017 (19 December 2017), https://www.justice.gov/opa/press-release/file/1020126/download.
86 Press Release, US Dep’t of Justice, Justice Department Recovers Over $3.7 Billion From False Claims Act Cases in Fiscal Year 2017 (21 December 2017), https://www.justice.gov/opa/pr/justice-department-recovers-over-37-billion-false-claims-act-cases-fiscal-year-2017.
87 31 U.S.C. § 3729.
88 31 U.S.C. § 3730(b).
89 See 31 U.S.C. § 3730(d). However, as discussed further below this can in some circumstances be reduced to 10 per cent or less. See below, notes 98 to 101 and accompanying text.
90 31 U.S.C. § 3729.
91 31 U.S.C. § 3730(b).
92 31 U.S.C. § 3730(b).
93 31 U.S.C. § 3730(b)-(c).
94 Roberts v. Accenture, LLP, 707 F.3d 1011, 1015 (8th Cir. 2013).
95 31 U.S.C. § 3730.
98 See David Freeman Engstrom, Public Regulation of Private Enforcement: Empirical Analysis of DOJ Oversight of Qui Tam Litigation Under the False Claims Act, 107 Nw. U. L. Rev. 1717-18 (stating that in a randomly selected 460 case subsample of the 4,000 unsealed qui tam actions filed between 1986 and 2011 ‘roughly 60% of cases in which DOJ declined intervention appeared to generate no further litigation prior to a voluntary dismissal by the relator’).
99 31 U.S.C. § 3730(d)(3).
100 31 U.S.C. § 3730(d)(1).
102 31 U.S.C. § 3730(e)(4)(A).
103 United States ex rel. Springfield Terminal R. Co. v. Quinn, 14 F.3d 645, 649 (D.C. Cir. 1994).
104 See US Dep’t of Justice, Fraud Statistics – Overview: 1 October 1987 – 30 September 2015 (12 July 2016), https://www.justice.gov/civil/file/874921/download (indicating that settlements and judgments in qui tam actions where the government intervened represented 94 per cent of all qui tam settlements and judgments obtained between 1987 and 2015).
105 See, e.g., United States ex rel. Jamison v. McKesson Corp., 649 F.3d 322, 331 (5th Cir. 2011) (noting that DOJ decision to intervene in cases involving 7 of 400 defendants suggested that the unintervened claims ‘presumably lacked merit’); United States ex rel. Karvelas v. Melrose-Wakefield Hosp., 360 F.3d 220, 242 n.31 (1st Cir. 2004) (‘[T]he government’s decision not to intervene in the action also suggested that [relator’s] pleadings of fraud were potentially inadequate.’); United States ex rel. Mikes v. Straus, 78 F. Supp. 2d 223, 225-26 (S.D.N.Y. 1999) (suggesting that ‘the reason the Government chose not to intervene in this matter is its recognition that Relator’s allegations . . . were a ‘stretch’ under the False Claims Act’). But see United States ex rel. Williams v. Bell Helicopter Textron Inc., 417 F.3d 450, 455 (5th Cir. 2005) (noting that ‘a decision not to intervene may not [necessarily be] an admission by the United States that it has suffered no injury in fact, but rather [the result of] a cost-benefit analysis’ (citations and internal quotation marks omitted)); United States ex rel. Downy v. Corning, Inc., 118 F. Supp. 2d 1160, 1170 (D.N.M. 2000) (noting that intervention decision may have been driven by a ‘lack of available Assistant United States Attorneys’ or ‘respect for the skill of the relator’s attorneys’).
106 U.S. Dep’t of Just., Justice Manual § 4-400.
108 31 U.S.C. § 3730(c)(2)(b).
109 See United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998) (‘A two step analysis applies here to test the justification for dismissal: (1) identification of a valid government purpose; and (2) a rational relation between dismissal and accomplishment of the purpose.’) [Internal citations and quotations omitted.]
110 See, e.g., Searcy v. Philips Elecs. N. Am. Corp., 117 F.3d 154, 160 (5th Cir. 1997) (noting the ‘danger that a relator can boost the value of settlement by bargaining away claims on behalf of the United States’).
111 United States ex rel. Killingsworth v. Northrop Corp., 25 F.3d 715, 722 (9th Cir. 1994); but see Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 931 n.8 (10th Cir. 2005). (‘Even where the Government has declined to intervene, relators are required to obtain government approval prior to entering a settlement or voluntarily dismissing the action.’)
112 United States ex rel. Wenzel v. Pfizer, Inc., 881 F. Supp. 2d 217, 222–23 (D. Mass. 2012) (‘[Relator] filed his claim with the expectation that his identity would be revealed to the public in the event that the government entered the case.’). Relators have attempted to avoid this outcome by filing under a pseudonym or creating a corporation to file the complaint. This strategy, however, will only work if the case is not litigated. If it is litigated, this is unlikely to provide significant protection because the defendant is likely to seek discovery regarding the relator’s identity and the basis of their knowledge. Moreover, in some cases there is no way to effectively hide the source of the information. See, e.g., id. at 223 (noting that ‘it is doubtful that redaction would provide any protection given the very specific allegations contained in the complaint’).
113 Id. at 221 (collecting cases and noting that ‘[m]ost courts have . . . decided that a relator’s general fear of retaliation is insufficient to rebut the presumption of public access’).
114 31 U.S.C. § 3730(h).
115 31 U.S.C. § 3730(d)(4). US courts also have the inherent authority to impose sanctions, as well as authority pursuant to Rule 11 of the Federal Rules of Civil Procedure.
116 See Press Release, US Dep’t of Justice, GlaxoSmithKline to Plead Guilty and Pay $3 Billion to Resolve Fraud Allegations and Failure to Report Safety Data (2 July 2012), https://www.justice.gov/opa/pr/glaxosmithkline-plead-guilty-and-pay-3-billion-resolve-fraud-allegations-and-failure-report (announcing settlement of civil and criminal actions against pharmaceutical company, including a US$1.043 billion settlement resolving four related qui tam actions).
117 31 U.S.C. § 3729 (2012).
118 United States ex rel. Pilon v. Martin Marietta Corp., 60 F.3d 995, 999 (2d Cir. 1995). (‘[A] defendant’s reputation is protected to some degree when a meritless qui tam action is filed, because the public will know that the government had an opportunity to review the claims but elected not to pursue them.’)