Section of Labor and Employment Law Flash | November/December 2010
Dodd-Frank Act’s Substantial Expansion of Whistleblower Law
By: Jason Zuckerman
As described in the August issue of the Flash, the whistleblower provisions of the Dodd-Frank Act (“Dodd-Frank”) provide a strong financial incentive for employees to report fraud directly to the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”), and robust protection against retaliation, including three new causes of action and enhancements to the anti-retaliation provisions of the Sarbanes-Oxley Act (“SOX”) and the False Claims Act (“FCA”). This article briefly analyzes some of the implications of these provisions.
Employers Have a Strong Incentive to Encourage Employees to Disclose Securities Law Violations Internally
The whistleblower rewards provisions of Dodd-Frank give employees a strong incentive to report securities law violations directly to the SEC, rather than disclosing violations internally. Accordingly, companies will need to establish effective internal reporting mechanisms that respond appropriately to whistleblower disclosures. To ensure that employees perceive internal reporting mechanisms as legitimate (rather than as “window-dressing” intended to protect upper management), employers must conduct prompt and thorough investigations and keep the whistleblower in the loop about corrective actions. If whistleblowers believe that their employers are not taking their concerns seriously, they will likely report their concerns directly to the SEC. Companies should consider establishing organizational ombuds programs to offer independent, impartial, and confidential assistance to employees who seek to correct unlawful conduct.
Whistleblower Litigation Will Shift from the DOL to Federal Court
The robust anti-retaliation provisions in the whistleblower award provisions of Dodd-Frank (Sections 748 and 922) authorize whistleblowers to bring retaliation actions directly in federal court without having to exhaust administrative remedies before the Department of Labor (“DOL”). In addition, Dodd-Frank amends the whistleblower protection provision of SOX to clarify that SOX plaintiffs who remove their claims to federal court are entitled to try their SOX claims before a jury. And Dodd-Frank exempts both SOX and FCA retaliation claims from mandatory arbitration. The increased opportunities to try whistleblower retaliation claims before juries will likely result in higher damages awards, especially in light of general public resentment of the role the financial services industry played in precipitating the current recession. While Section 806 of SOX and the whistleblower retaliation provisions of Dodd-Frank do not authorize punitive damages, a whistleblower could add state law tort claims, such as a common law wrongful discharge action, and potentially recover punitive damages.
Employees of Government Contractors Will Have Several Strong Options to Remedy Retaliation
Section 1079B amends the anti-retaliation provision of the FCA by expanding the scope of protected conduct, applying a three-year statute of limitations, and prohibiting associational discrimination. In 2009, Congress strengthened the FCA’s anti-retaliation provision by broadening the scope of coverage to include contractors and agents and protecting efforts to stop a violation of the FCA. In addition, Congress included in the economic stimulus bill robust whistleblower protections for individuals who disclose gross mismanagement or waste of covered funds, abuse of authority related to the use of covered funds or a violation of law relating to covered funds. And several states have recently enacted False Claims Act statutes that include whistleblower retaliation provisions that are substantially similar to the FCA’s anti-retaliation provision. In sum, employees of government contractors have multiple options to remedy retaliation. In an era of substantial belt-tightening in public expenditures, retaliation claims against government contractors will likely result in high jury awards because of public anger about fraud on the public fisc.
Potential Decline in Retaliatory Counterclaims
In the wake of questionable decisions holding that overly broad confidentiality policies trump federal whistleblower protection statutes and entitle employers to suppress evidence of fraud, some employers have resorted to aggressively prosecuting frivolous counterclaims to force whistleblowers to abandon or settle retaliation claims. But the SEC’s proposed rules implementing Section 922 of Dodd-Frank may curb this practice by specifically prohibiting any person from taking “any action to impede a whistleblower from communicating directly with the Commission staff about a potential securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.” The Commission has concluded that “efforts to impede a whistleblower’s direct communications with Commission staff about a potential securities law violation” conflict with the purpose of Section 922 “to encourage whistleblowers to report potential violations of the securities laws.” In addition, the proposed rule clarifies that the “staff is authorized to communicate directly with these individuals without first seeking the consent of the entity’s counsel.”
Broad Whistleblower Protections in the Financial Services Industry
In addition to whistleblower protections under Section 806 of SOX, Section 922 of Dodd-Frank, and state common law and statutory protections, employees in the financial services industry now have an additional cause of action for retaliation under Section 1057 of Dodd-Frank, which protects employees who disclose fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service. The scope of coverage is broad in that Section 1057 applies to organizations that extend credit or service or broker loans; provide real estate settlement services or perform property appraisals; provide financial advisory services to consumers relating to proprietary financial products, including credit counseling; or collect, analyze, maintain, or provide consumer report information or other account information in connection with any decision regarding the offering or provision of a consumer financial product or service. Protected conduct includes a disclosure of information to an employer or the newly created Bureau of Consumer Financial Protection (“Bureau”), or any other government authority or law enforcement agency, that the employee reasonably believes relates to any violation of any rule, order, standard or prohibition prescribed or enforced by the Bureau.
In sum, Dodd-Frank substantially expands whistleblower protections in the private sector, and may help avert another economic crisis precipitated by financial fraud.