Recent Developments in Whistleblower Litigation (United States)

By Ziyi He, University of Maryland Francis King Carey School of Law

Overview

On July 30, 2002, the Sarbanes-Oxley Act of 2002 ("SOX") was enacted and made significant changes to federal regulation of public company corporate governance and reporting obligations. Section 806 of SOX protects public company employees who report misconduct, known as whistleblowers, from retaliation. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted and expanded whistleblower protections under SOX by creating a new shield for whistleblowers who report possible securities law violations. As a result, whistleblower complaints filed against employers have increased dramatically in recent years.¹

 

Recent case law developments have arguably created a friendlier litigation environment to whistleblowers. This article will examine three important developments in whistleblower litigation since 2015: longer statute of limitations, available emotional distress damages, and lower standard of "reasonable belief."

Fourth Circuit: Four-Year Statute of Limitations Applies to SOX Whistleblower Claims and Emotional Distress Damages Are Available under SOX

On January 26, 2015, the U.S. Court of Appeals for the Fourth Circuit held in Jones v. SouthPeak Interactive Corp. of Delaware, 777 F.3d 658 (4th Cir. 2015) that a four-year statute of limitations applies to a retaliatory discharge claim brought under SOX, and that emotional distress damages are available under the statute.

In Jones, the plaintiff, a chief financial officer, raised concerns after her company improperly recorded a debt in its quarterly financial report filed with the U.S. Securities and Exchange Commission. The plaintiff then reported to the company's audit committee her suspicion that the company was engaging in fraud. When the company's outside counsel proposed an amendment to the quarterly report that denied any intentional fraud or misstatement in the earlier filing, the plaintiff refused to sign it. At that same time, the board of directors voted to terminate the plaintiff's employment.

The plaintiff filed a whistleblower complaint with the Occupational Safety and Health Administration ("OSHA") against the company and its chairman, vice president, and chief executive officer ("CEO"), alleging that she was terminated in retaliation for her attempts to correct the financial report that she believed to contain misrepresentations. Over 180 days passed and the OSHA did not issue a final decision. The plaintiff elected to file a federal lawsuit pursuant to her rights under 18 U.S.C. § 1514A(b)(1)(B).² The plaintiff waited for nearly another two years before she filed a SOX retaliation lawsuit against the company, its chairman, and CEO in a federal court. As a result, the plaintiff filed the lawsuit nearly three years after her termination. The jury found the defendants liable for back pay and compensatory damages.

On appeal, the company argued that this lawsuit was barred by the two-year statute of limitations under 28 U.S.C. § 1658(b)³, which applies to claims involving "fraud, deceit and manipulation." The Fourth Circuit rejected this argument, reasoning that the plaintiff's retaliatory discharge claim is not a claim of fraud and does not require proof that the employer's conduct was, in fact, a legally actionable fraud. Therefore, the Fourth Circuit concluded that the four-year "catch-all" statute of limitations provision under 28 U.S.C. § 1658(a)⁴ applied.

The company also argued that emotional distress damages were not permissible under the whistleblower protection provisions of SOX. The Fourth Circuit rejected this argument. First, section 1514A(c)(1) of title 18 expressly entitles a prevailing employee to "all relief necessary to make [her] whole." Second, although emotional distress damages are not enumerated in section 1514A(c)(2) of title 18, the term "shall include" sets a floor, not a ceiling. The Fourth Circuit noted that the SOX whistleblower protection provisions proscribed a wide range of retaliatory actions, including threats and harassment, and there would be times when the primary harm would be noneconomic. Therefore, the Fourth Circuit, agreeing with the Fifth and Tenth Circuits⁵, concluded that emotional distress damages were available under section 1514A(c).

To date, the Fourth Circuit, the Fifth Circuit, and the Tenth Circuit have considered the availability of emotional distress damages under the whistleblower protection provisions of SOX in Jones v. SouthPeak Interactive Corp. of Delaware, 777 F.3d 658 (4th Cir. 2015), Halliburton, Inc. v. Admin. Review Bd., 771 F.3d 254 (5th Cir. 2014), and Lockheed Martin Corp. v. Admin. Review Bd., 717 F.3d 1121 (10th Cir. 2013). The three federal circuit courts have all concluded that such damages are available.

Sixth Circuit: New "Emerging Rule" Is Adopted for Standard of Employee's "Reasonable Belief" under SOX

When filing a whistleblower claim against a company for retaliation under 18 U.S.C. § 1514A, a plaintiff must establish a prima facie case by a preponderance of the evidence that the plaintiff engaged in "protected activity."⁶ "Protected activity" includes "any lawful act done by the employee" to provide information to a supervisor regarding "any conduct which the employee reasonably believes constitutes a violation of [the enumerated laws]."⁷

The federal circuits are split over the standard of reasonable belief. The First, Fourth, Fifth, and Ninth Circuits require that an employee's report to his employer "definitively and specifically" relate to one of the laws enumerated in 18 U.S.C. § 1514A, and the employee's theory of fraud or violation "at least approximate the basic elements" of the alleged fraud or violation.⁸ However, the Second and Third Circuits have rejected the "definitively and specifically" standard, holding that an employee needs only to have a reasonable belief as to the unlawful conduct, not a reasonable belief as to each element of the suspected fraud.⁹ Recently, on May 28, 2015, the Sixth Circuit, joining the Second and the Third Circuits, concluded in Rhinehimer v. U.S. Bancorp Investments, Inc., 787 F.3d 797 (6th Cir. 2015) that an employee needs only to have a reasonable belief as to the unlawful conduct.

In Rhinehimer, the plaintiff, a financial planner, learned of unsuitable trades made by his co-worker to the detriment of the plaintiff's elderly client. The plaintiff wrote an e-mail to his supervisor criticizing the trades for destroying the client's estate plan. The plaintiff was reprimanded for his e-mail and was eventually fired. The plaintiff filed a complaint with a federal court, alleging that he was disciplined and fired in retaliation for his e-mail. The jury returned a verdict for the plaintiff.

On appeal, the sole issue was whether the jury could find that the plaintiff engaged in protected activity under section 1514A. The defendant cited the "definitively and specifically" standard in the Sixth Circuit's unpublished opinion in Riddle v. First Tennessee Bank, National Association, 497 Fed.Appx. 588 (6th Cir. 2012). The Sixth Circuit rejected the "definitively and specifically" standard as inconsistent with section 1514A and the statutory scheme. Instead, the Six Circuit held that the employee needed only to show that he reasonably believed that the complained conduct constituted a violation of the enumerated laws under section 1514A. The Sixth Circuit noted that such reasonable belief contained both a subjective component and an objective component. The subjective component is satisfied if the employee actually believed that the complained conduct constituted a violation of relevant law. The objective component is evaluated "based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee." Therefore, the Sixth Circuit held that an employee does not need to establish his reasonable belief to each element of the violation. Instead, the evaluation of the reasonableness of his belief will depend on the totality of the circumstances known (even if mistakenly perceived) by the employee at the time of the report, analyzed in light of the employee's training and experience.

The Influences on Future Litigation

Conclusion

The recent decisions of federal circuit courts have bolstered whistleblowers' chances to litigate successfully and to pursue an extra remedy. In light of a potentially longer statute of limitations, available emotional distress damages, and lower standard of establishing a prima facie case, employers need to respond to a whistleblower's report promptly and investigate the alleged misconduct proactively to mitigate the likelihood of subsequent litigation.

Additional Resources

Pamela L. Johnston, Bryan B. House, and Courtney Worcester, A Review of Recent Whistleblower Developments, The National Law Review (April 1, 2015).

Jason Zuckerman and Dallas Hammer, Recent Developments in Whistleblower Law, American Bar Association (November 7, 2015).

Rod Tanner and Edith Thomas, Recent Developments in Whistleblower Retaliation Law, Tanner And Associates Blog (October 9, 2015).

Kevin B. Leblang and Robert N. Holtzman, United States: Whistleblower Claims under SOX and Dodd-Frank: Recent Developments, Mondaq (December 8, 2015).

Jason Zuckerman, Sixth Circuit Hands a Landmark Victory to SOX Whistleblowers, Zuckerman Law Blog (June 3, 2015).

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¹In fiscal year 2015, there were 3,288 whistleblower complaint filed, which represents a 6% increase from 3,098 complaints filed in fiscal year 2014. Notably, this represents a 42% increase from 2,314 complaints filed five years ago in fiscal year 2010. Steven J. Pearlman and Harris Mufson, OSHA Releases FY 2015 Stats Showing an Increase in Whistleblower Claims, Proskauer Whistleblower Defense (Nov. 29, 2015); See also OSHA Statistics.

²See 18 U.S.C. § 1514A(b)(1)(B) (authorizing suits at law or equity in federal court if the Secretary of Labor "has not issued a final decision within 180 days of the filing of [an OSHA] complaint").

³28 U.S.C. § 1658(b) provides that "[n]otwithstanding subsection (a), a private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)), may be brought not later than the earlier of-(1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation."

⁴28 U.S.C. § 1658(a) provides that "[e]xcept as otherwise provided by law, a civil action arising under an Act of Congress enacted after the date of the enactment of this section may not be commenced later than 4 years after the cause of action accrues."

⁵See Halliburton, Inc. v. Admin. Review Bd., 771 F.3d 254, 266 (5th Cir. 2014); Lockheed Martin Corp. v. Admin. Review Bd., 717 F.3d 1121, 1138 (10th Cir. 2013).

⁶The other three elements that a plaintiff needs to prove are: (1) an employer knew or suspected, either actually or constructively, that an employee engaged in the protected activity; (2) The employee suffered an unfavorable personnel or employment action; and (3) the protected activity was a contributing factor in the unfavorable action. Feldman v. Law Enf't Associates Corp., 752 F.3d 339, 344 (4th Cir. 2014).

⁷The enumerated laws include "section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders[.]"

⁸Day v. Staples, Inc., 555 F.3d 42, 55 (1st Cir. 2009) ("[t]he employee must show that his communications to the employer specifically related to one of the laws listed in § 1514A. . . . To have an objectively reasonable belief there has been shareholder fraud, the complaining employee's theory of such fraud must at least approximate the basic elements of a claim of securities fraud."); Welch v. Chao, 536 F.3d 269, 275 (4th Cir. 2008) ("an employee must show that his communications to his employer "definitively and specifically relate[d]' to one of the laws listed in § 1514A."); Allen v. Admin. Review Bd., 514 F.3d 468, 476-77 (5th Cir. 2008) ("an employee's complaint must 'definitively and specifically relate' to one of the six enumerated categories found in § 1514A."); Van Asdale v. Int'l Game Tech., 577 F.3d 989, 996-97 (9th Cir. 2009) (agreeing with Day, Welch, and Allen's "definitively and specifically" standard).

⁹Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 221-22 (2d Cir. 2014) (holding that the "definitively and specifically" requirement is inapplicable to SOX claims); Wiest v. Lynch, 710 F.3d 121, 134 (3d Cir. 2013) ("But the whistleblower's communication need not ring the bell on each element of one of the stated provisions of federal law to support an inference that the employer knew or suspected that the plaintiff was blowing the whistle on conduct that may fall within the ample reach of the anti-fraud laws listed in § 806.").

¹⁰Crowell & Moring, Sixth Circuit Joins Other Courts in Easing Burden for SOX Whistleblowers, Whistleblower Watch (June 8, 2015).