As stated in the book Crisis of Conscience: Whistleblowing in an Age of Fraud, “Repeatedly in their laws and writings, the Founders underscored the moral duty of virtuous dissent, and of following individual conscience against blind obedience to unjust, brutal rulers.”2
This nonpartisan convention of conscientious whistleblowing continues to play a vital role in American society — in the private sector as much as in public life. But the moral duty to stop wrongdoing often runs into principles of contract law employed to prevent whistleblowing. Courts have grappled with the enforceability of contractual limitations in these situations.
Key Whistleblower Laws
Two whistleblower laws have emerged as the primary tools used to combat fraud upon the United States Government (the Government) and the financial markets: the False Claims Act (FCA)3 and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).4 By way of background, the FCA, which dates to 1863 and is sometimes referred to as the “Lincoln Law,” was passed in order to assist the Government in identifying and stopping fraud and abuse perpetrated by contractors and suppliers.5 An FCA case may be initiated by the Government on its own, or through a private citizen, known as a relator, in a qui tam action.6
In Vermont Agency of Natural Resources v. United States ex rel. Stevens,7 the United States Supreme Court held that an FCA relator has Article III standing because “the [FCA] gives the relator himself an interest in the lawsuit, and not merely the right to retain a fee out of recovery . . . [and] provides that ‘[a] person may bring a civil action . . . for the person and for the United States Government.’”
In return for his or her efforts, the FCA entitles a relator to receive between 15 and 25 percent of the amount recovered by the Government if the Government intervenes in the qui tam action.8 If the Government declines to intervene and the relator’s counsel continues with the case, then the relator’s share of the recovery increases to 25 to 30 percent.9 If a court determines that a relator’s case is based primarily on prior disclosures or that the relator helped plan or perpetrate the unlawful conduct, a relator’s share may be reduced.10 In fiscal year (FY) 2019, the United States Department of Justice (DOJ) recovered more than $3 billion dollars from FCA cases,11 underscoring the ongoing importance of both the FCA and qui tam actions brought by individuals in combatting fraud upon the public fisc. Notably, the healthcare industry accounted for nearly $2.6 billion of the FY2019 recoveries.12
By way of contrast, the U.S. Securities and Exchange Commission’s (SEC) Office of the Whistleblower, which was established under Section 922 of Dodd-Frank, is a much more recent initiative that became effective in July 2010.13 The SEC Whistleblower Program is markedly different in some ways from the FCA. Instead of filing a case in a federal district court under seal, an eligible whistleblower provides original information directly to the SEC and signs an attestation form. It is recommended that SEC whistleblowers be represented by counsel so that anonymity can be maintained. According to the SEC:
The Whistleblower Program was created by Congress to provide monetary incentives for individuals to come forward and report possible violations of the federal securities laws to the SEC. Under the program eligible whistleblowers . . . are entitled to an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and related actions brought by certain other regulatory and law enforcement authorities.14
To date, enforcement actions from whistleblower tips have resulted in more than $2 billion in financial recoveries for the SEC since the Whistleblower Program’s inception.15
Not surprisingly, whistleblowers are frequently current or former employees who raised concerns and faced employment retaliation or even termination. Often before they ever consider filing a formal whistleblower claim, these individuals are presented with separation and non-disclosure agreements. Many of these agreements contain releases of whistleblower claims, sometimes with specific references to the FCA or Dodd-Frank. Plaintiffs and defendants have litigated the enforceability of these contractual releases and limitations, and, in the case of Dodd-Frank, the SEC has weighed in with related enforcement actions.
Contractual Limitations and the Dodd-Frank Act
In providing financial incentives to SEC whistleblowers, Congress determined that “a critical component of the Whistleblower Program is the minimum payout that any individual could look towards in determining whether to take the enormous risk of blowing the whistle in calling attention to fraud.”16 Subsequently, the SEC promulgated Rule 21F-17(a), which states, “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”17 Both Congress and the SEC were express with their intent to protect whistleblowers and to prevent companies from avoiding SEC enforcement by imparting confidentiality and release language into separation and other post-employment agreements. The industry that the company is part of is not a consideration. Here are two examples – one in the building industry and one in the health industry.
In Matter of BlueLinx Holdings, Inc. is illustrative of this intent.18 BlueLinx Holdings, Inc. (BlueLinx) is a Delaware corporation with its principal place of business in Atlanta, Georgia.
From August 2011 through 2016, BlueLinx entered into severance agreements with outgoing employees “who were leaving the company and who were receiving severance or other post-employment consideration from BlueLinx. A severance agreement is a contract between an employer and a former employee documenting the rights and responsibilities of both parties incidental to the employee’s departure.”19 BlueLinx utilized various types of severance agreements with differing titles.
Regardless of the title of the agreement, BlueLinx frequently employed a provision that expressly prohibited its employees from sharing confidential information with anyone, unless compelled by law or the legal process.20 Importantly, none of the provisions contained an express exemption permitting an employee to provide information voluntarily to the SEC or other governmental entities. Nonetheless, the SEC had concerns about the provisions, such as this one:
[The Employee shall not] disclose to any person or entity not expressly authorized by the Company any Confidential Information or Trade Secrets . . . . Anything herein to the contrary notwithstanding, you shall not be restricted from disclosing or using Confidential Information or Trade Secrets that are required to be disclosed by law, court or other legal process; provided, however, that in the event disclosure is required by law, you shall provide the Company’s Legal Department with prompt written notice of such requirement in time to permit the Company to seek an appropriate protective order or other similar protection prior to any such disclosure by you.21
In the Matter of Health Net, Inc. is likewise illustrative of this intent.22 Health Net, Inc. (Health Net) is a Delaware corporation with its principal place of business in Woodland Hills, California.23
From before August 2011 through October 2015, Health Net entered into severance agreements with departing employees. Specifically, Health Net, in Paragraph 4 of its Waiver and Release of Claims, “expressly required an employee to waive: the right to file an application for award for original information submitted pursuant to Section 21F of the Securities Exchange Act of 1934.”24
It is worth noting that the Defend Trades Secret Act of 2016 contains a whistleblower protection provision permitting an individual to bring trade secrets to the attention of the Government, either directly or through counsel, in order to report a crime or a fraud.25
Subsequently, BlueLinx tweaked the aforementioned language to allow the filing of a claim with the SEC and other Government agencies, but also attempting to preclude the employee from enjoying a monetary recovery: “Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency.”26
The SEC determined that both Health Net and BlueLinx undermined the purpose of Rule 21F-17 and impeded its employees from participating in the SEC Whistleblower Program. As part of its settlement, BlueLinx was required to change its language and pay a civil monetary penalty to the SEC. Health Net was required to pay a civil monetary penalty and alert employees who had signed the waivers that Health Net did not prohibit them from seeking a whistleblower award from the SEC.
The BlueLinx and Health Net settlements were not the first nor the last, as KBR, Inc. and Anheuser-Busch (to name a couple) have also been so penalized by the SEC.27
Contractual Limitations and The False Claims Act
The FCA does not contain the equivalent of a Rule 21F-17(a) that would enable the DOJ to penalize employers for utilizing language in separation agreements seeking to prevent or discourage the filing of FCA qui tam actions. However, the FCA does authorize a relator to bring a private right of action for retaliation under 31 U.S.C. § 3730(h), often referred to as an “h claim.” Because an h claim is a private right of action enjoyed by a relator and under which the Government does not share in any recovery, courts have been more willing to construe and enforce knowing, voluntary, and unambiguous releases of the statutory right to bring those h claims.28
On the other hand, courts are more likely to reject defendants’ arguments that broad releases similarly prohibit relators from filing or recovering under substantive FCA claims in which the Government as a whole has an interest.29 In evaluating pre-filing contractual releases, courts have trended toward a public-policy balancing test, leaning heavily on the Supreme Court’s framework in Town of Newton v. Rumery.30 In Rumery, the Court held that “a promise is unenforceable if the interest in its enforcement is outweighed in the circumstances by a public policy harmed by the enforcement of the agreement.”31 Courts look to balance the “public interest in having information brought forward that the government could not otherwise obtain” with the public interest in “encouraging parties to settle disputes.”32
Some courts, like the Fifth Circuit, appear to have flatly refused to enforce such releases because they are against public policy. In United States ex rel. Longhi v. United States, the Fifth Circuit held:
To enforce the release and indemnification clauses contained in the stock sale agreement against Longhi would ignore the public policy objectives expressly spelled out by Congress in the FCA and would provide disincentives to future relators. In addition, enforcing the release and indemnification clauses would encourage individuals guilty of defrauding the United States to insulate themselves from the reach of the FCA by simply forcing potential relators to sign general agreements invoking release and indemnification from future suit. The district court correctly determined that enforcing the release against Longhi is against public policy. We affirm.33
Although Longhi involved a release signed after the relator filed his qui tam suit, the Fifth Circuit’s public-policy rationale above appears to also apply to pre-filing releases.34
In conducting this balancing test, other courts have generally focused on the Government’s knowledge and whether the release was signed before or after the Government learned of the allegations.35 These courts have been more willing to enforce contractual limitations on filing FCA qui tam actions where the Government had full knowledge of the fraud allegations. “The Fourth, Ninth, and Tenth Circuits agree that where the government has knowledge of the claims before the relator files the qui tam lawsuit, public policy weighs in favor of enforcing a pre-filing release of claims.”36
The enforceability of releases and waivers of FCA liability signed by relators varies from case to case and is a fact-specific inquiry under the balancing test adopted by the courts. However, in the ordinary case where an employee signs a broad release as part of a separation agreement and then decides to alert the Government to fraud by becoming an FCA relator, courts generally disfavor enforcing those agreements as against public policy.
Whistleblowers perform a vital service to the public, bringing back billions of dollars to taxpayers each year by exposing fraud, waste, abuse, and misconduct. Efforts to thwart whistleblowers from coming forward to benefit the public generally fail. Nonetheless, contractual limitations and releases continue to be litigated and should be carefully evaluated by counsel for both plaintiffs and defendants.