Prepare Now for Whistleblower Complaints

In a little publicized section of the Consumer Product Safety Improvement Act of 2008 (“2008 Act”), employees in virtually every corner of the consumer products industry were given the right to file lawsuits claiming their employer retaliated against them for having raised consumer product safety concerns. This new federal whistleblower law will likely result in consumer product manufacturers, distributors and retailers facing expensive and lengthy litigation from current or former employees who recast themselves as whistleblowers to challenge adverse employment actions. There are a number of steps employers should take to protect themselves from this expected wave of new litigation.

The New Whistleblower Protections

Spurred in 2007 by massive product recalls, many of which were children's products, and widespread coverage of lead-tainted imported toys, Congress passed the 2008 Act. The 2008 Act amends the Consumer Product Safety Act of 1972 (“1972 Act”) primarily to strengthen lead testing and labeling standards for toys and games, enhance the power and duties of the Consumer Product Safety Commission, provide public access to product history and recall databases, and empower state attorneys general to enforce consumer product safety laws.

Less attention has focused on the new whistleblower protections in the 2008 Act. In an effort to encourage employees inside the consumer products industry to report safety or health concerns, Congress created a federal cause of action for unlawful retaliation against whistleblowers. The scope of protections and the legal mechanisms for their enforcement largely mirror what Congress adopted for securities fraud whistleblowers in the Sarbanes-Oxley Act of 2002 (“SOX”) which, in turn, were fashioned on long-standing protections in place for whistleblowers in health- and safety-impacting industries such as nuclear power, transportation and those affecting drinking water and air quality. Unlike many of the other provisions in the 2008 Act, the whistleblower provisions took effect immediately on the Aug. 14, 2008 date that President Bush signed the legislation into law.

This new whistleblower protection regime has the broadest sweep of any previous protections and potentially reaches more employees than ever before. It applies to all manufacturers, private labelers, distributors and retailers in the consumer products industry, not just those portions of the industry that triggered this legislation, and regardless of whether or not they are publicly traded companies subject to SOX. Consumer products, as defined in the 1972 Act, generally encompass articles and their component parts that are customarily produced or distributed for sale to, or use by, consumers, with certain exceptions relating to products regulated elsewhere such as tobacco, motor vehicles, pesticides, firearms, aircraft, boats, drugs, cosmetics and food. (The precise definition of “consumer products” under the 1972 Act can be found at 15 U.S.C. ' 2052.)

Coverage of the Consumer Products Whistleblower Legislation

The 2008 Act protects employees of a manufacturer, private labeler, distributor, or retailer of a consumer product from retaliation in compensation, terms, conditions or privileges of employment for:

• Providing to the employer, the federal government or a state attorney general information about “any violation of, or any act or omission the employee reasonably believes to be a violation of any provision” of the 1972 Act, as amended, any other statute enforced by the Consumer Product Safety Commission, or “any order, rule, regulation, standard or ban under any such Act”;
• Testifying in a proceeding concerning such violation;
• Assisting or participating in such a proceeding; and
• Objecting to, or refusing to participate in, any activity, policy, practice, or assigned task that the employee reasonably believed to be a violation of consumer product safety laws.

The perceived violation that the employee raises need not be an actual violation, but merely one that the employee “reasonably believes” is a violation. Expecting that the Department of Labor, which enforces these protections, will interpret phrases in the 2008 Act in the same way it interprets identical phrases in other federal whistleblower protections, an employee's reasonable belief that a violation has occurred will not be a significant hurdle for an employee to meet for his or her actions to be deemed protected under the 2008 Act.

Litigation an Aggrieved Whistleblower Can
Commence

The 2008 Act provides that a person who believes he or she has suffered unlawful retaliation may file a complaint with the United States Secretary of Labor within 180 days of the alleged unlawful act. The Department of Labor (DOL) will investigate the complaint, render a preliminary decision, and, if either party objects to such decision, conduct a full hearing before an Administrative Law Judge. We assume that, as under SOX and other federal whistleblower laws, the Secretary of Labor will assign the preliminary investigation phase to the Occupational Safety and Health Administration (OSHA).

The complaining individual may stop DOL proceedings and take his or her claim to federal court at certain points during the process, such as 210 days after the filing of the complaint, if the Secretary of Labor has not yet issued a final decision. While SOX's whistleblower provision is silent as to whether persons can proceed before a jury in federal court (and many courts have held they cannot), the 2008 Act expressly provides that the “action shall, at the request of either party to such action, be tried by the court with a jury.” A prevailing complainant can obtain “all relief necessary to make the employee whole, including injunctive relief and compensatory damages,” and such relief may entail reinstatement, back pay with interest, and compensation for “special damages” such as litigation costs and attorney's fees.

Steps for Employers to Minimize Risk

Employers in the consumer products industry can expect to be faced with retaliation claims filed by current or former employees who believe, or at least assert they believe, they were discharged or otherwise retaliated against because of some protected act of whistleblowing. If experience with SOX, the Atomic Energy Act and other whistleblower protections is any guide, the number of such lawsuits will be small at the outset but increase rapidly. With the prospect of a jury's deciding the claim and awarding damages, the stakes to employers in the consumer products industry will be substantially higher than the stakes faced by employers subject to other federal whistleblower protections. Accordingly, employers must act now to minimize these risks. At a minimum, employers subject to the 2008 Act should:

• Establish, disseminate and train all employees in carefully drafted procedures that allow employees to raise consumer product safety concerns to managers other than their direct and indirect supervisors. Such procedures should provide a variety of alternative mechanisms that employees can use to raise such concerns, including an anonymous “hotline.”
• Establish, disseminate and train all employees in a policy that prohibits any person from retaliating in any way against any employee who has raised a safety concern. Again, procedures should be implemented to provide multiple avenues through which employees can complain about perceived retaliation. Such avenues typically will be different from those available to employees for lodging consumer product safety concerns.
• Establish procedures for investigating complaints, but allow flexibility in such procedures to adapt to the unique needs of any situation. Such procedures should differentiate between investigations of the original consumer product safety concerns and investigations of retaliation allegations ' each addresses different issues and requires different safeguards.
• Work with Human Resources and legal counsel to assure that adverse employment decisions relating to whistleblowers not only are non-retaliatory, but also are handled thoughtfully and properly so the employer can prevail should the whistleblower challenge the decision in future litigation.

Another Step to Consider: Mandatory Arbitration

Many employers view arbitration as a cost-effective and expeditious alternative to administrative and judicial proceedings for resolving employment-related disputes. Those employers have adopted mandatory arbitration programs that require current or former employees to file any claims they wish to assert, whether the claims arise under federal or state law, in an arbitration forum rather than in court. A recent federal appellate court decision confirmed that employers can use such programs to redirect federal whistleblower claims to arbitration. In Guyden v. Aetna Inc., 28 I.E.R. Cas. (BNA) 289, 2008 WL 4426478, 2008 U.S. App. Lexis 20783 (2nd Cir. Oct. 2, 2008), the Second Circuit held that whistleblower claims brought under SOX are arbitrable and, accordingly, a court may compel a plaintiff to submit a SOX whistleblower claim to arbitration pursuant to a mandatory arbitration agreement.

The plaintiff in Guyden had filed her federal whistleblower action first in the DOL and then, when DOL had not resolved the matter within 180 days, in federal district court. Based on a number of documents in which the plaintiff had agreed to arbitrate all employment-related legal disputes, the district court dismissed her case. On appeal, the plaintiff's fundamental challenge to the mandatory arbitration agreement was her contention that Congress intended SOX whistleblower claims to be nonarbitrable. She argued that the “public purpose” of SOX's whistleblower protections, which she characterized as the transmission to the public of information about a corporation's fraudulent activity, inherently conflicts with the forced arbitration of such claims. The Second Circuit reviewed the legislative history of the SOX whistleblower provision and concluded that while the broad purpose of SOX as a whole “is to strengthen the integrity of capital markets,” the primary purpose of the SOX whistleblower protections “is to provide a private remedy for the aggrieved employee, not to publicize alleged corporate misconduct.” For that and other reasons, the court found no basis to deviate from the strong policy favoring arbitration agreements.

Employers that adopt a mandatory arbitration program are typically motivated primarily by the desire to reduce the exorbitant costs of litigation and to get a quicker final resolution of the dispute. In the context of whistleblower litigation, the confidential nature of most arbitration proceedings can take on heightened importance for employers. Effectively redirecting whistleblower claims, in which a current or former employee may level all kinds of loaded allegations against the employer, relating to health and safety issues or financial accounting irregularities, will help the employer contain the problem and reduce the leverage a whistleblower hopes to achieve with threats of public disclosure. In rejecting the plaintiff's argument in Guyden that the arbitration agreement is unenforceable because it prohibits disclosure of the arbitration hearing and the arbitrator's decision, the Second Circuit essentially blessed the concept of confidentiality in such proceedings, despite reduced public disclosure.

There are limits to the power of mandatory arbitration agreements. For example, when, as with federal whistleblower claims, federal agencies are the first stop for a claimant, mandatory arbitration agreements cannot completely insulate employers from administrative or court litigation. Just as the Equal Employment Opportunity Commission (EEOC) is not bound by an employer's agreement with its employees not to litigate federal discrimination claims in court, neither would the DOL ' or even the Consumer Product Safety Commission should it choose to investigate ' be precluded from initiating or continuing proceedings against an employer because of a mandatory arbitration agreement. As another example, jursidictions less friendly to arbitration, such as the Ninth Circuit, might reach a conclusion different from the Second Circuit's in Guyden. Moreover, Guyden only addressed SOX. Courts may view mandatory arbitration agreements differently when applied to federal whistleblower protection regimes other than SOX, such as the new consumer product safety whistleblower protections in the 2008 Act.

Finally, we note that mandatory arbitration agreements have been under assault in Congress. Powerful congressional forces have been seeking a prohibition on mandatory arbitration agreements in a number of areas, including employment disputes. Such efforts have thus far failed, but they likely will have better prospects in the new Congress.

Conclusion

Despite the limited power of mandatory arbitration agreements and their uncertain fate, employers still can enjoy the significant benefits of an enforceable agreement to arbitrate employment-related disputes, particularly whistleblower claims. Crafting an enforceable agreement can be difficult, given the large body of law ' often conflicting in different jurisdictions as to the provisions such agreement must contain or cannot contain ' but the savings in costs and resources alone usually make the effort worthwhile.

Scott Gross is a partner in the Litigation Department of Wildman Harrold. He has counseled companies for two decades on a wide variety of issues related to employment liability and litigation and focused on whistleblower issues for more than 10 years. He has also defended employers in dozens of cases before the U.S. Department of Labor against whistleblower claims pursuant to statutes such as Sarbanes-Oxley and the Atomic Energy Act. He can be reached at [email protected]. Phone: 312-201-2099.

In a little publicized section of the Consumer Product Safety Improvement Act of 2008 (“2008 Act”), employees in virtually every corner of the consumer products industry were given the right to file lawsuits claiming their employer retaliated against them for having raised consumer product safety concerns. This new federal whistleblower law will likely result in consumer product manufacturers, distributors and retailers facing expensive and lengthy litigation from current or former employees who recast themselves as whistleblowers to challenge adverse employment actions. There are a number of steps employers should take to protect themselves from this expected wave of new litigation.

The New Whistleblower Protections

Spurred in 2007 by massive product recalls, many of which were children's products, and widespread coverage of lead-tainted imported toys, Congress passed the 2008 Act. The 2008 Act amends the Consumer Product Safety Act of 1972 (“1972 Act”) primarily to strengthen lead testing and labeling standards for toys and games, enhance the power and duties of the Consumer Product Safety Commission, provide public access to product history and recall databases, and empower state attorneys general to enforce consumer product safety laws.

Less attention has focused on the new whistleblower protections in the 2008 Act. In an effort to encourage employees inside the consumer products industry to report safety or health concerns, Congress created a federal cause of action for unlawful retaliation against whistleblowers. The scope of protections and the legal mechanisms for their enforcement largely mirror what Congress adopted for securities fraud whistleblowers in the Sarbanes-Oxley Act of 2002 (“SOX”) which, in turn, were fashioned on long-standing protections in place for whistleblowers in health- and safety-impacting industries such as nuclear power, transportation and those affecting drinking water and air quality. Unlike many of the other provisions in the 2008 Act, the whistleblower provisions took effect immediately on the Aug. 14, 2008 date that President Bush signed the legislation into law.

This new whistleblower protection regime has the broadest sweep of any previous protections and potentially reaches more employees than ever before. It applies to all manufacturers, private labelers, distributors and retailers in the consumer products industry, not just those portions of the industry that triggered this legislation, and regardless of whether or not they are publicly traded companies subject to SOX. Consumer products, as defined in the 1972 Act, generally encompass articles and their component parts that are customarily produced or distributed for sale to, or use by, consumers, with certain exceptions relating to products regulated elsewhere such as tobacco, motor vehicles, pesticides, firearms, aircraft, boats, drugs, cosmetics and food. (The precise definition of “consumer products” under the 1972 Act can be found at 15 U.S.C. ' 2052.)

Coverage of the Consumer Products Whistleblower Legislation

The 2008 Act protects employees of a manufacturer, private labeler, distributor, or retailer of a consumer product from retaliation in compensation, terms, conditions or privileges of employment for:

• Providing to the employer, the federal government or a state attorney general information about “any violation of, or any act or omission the employee reasonably believes to be a violation of any provision” of the 1972 Act, as amended, any other statute enforced by the Consumer Product Safety Commission, or “any order, rule, regulation, standard or ban under any such Act”;
• Testifying in a proceeding concerning such violation;
• Assisting or participating in such a proceeding; and
• Objecting to, or refusing to participate in, any activity, policy, practice, or assigned task that the employee reasonably believed to be a violation of consumer product safety laws.

The perceived violation that the employee raises need not be an actual violation, but merely one that the employee “reasonably believes” is a violation. Expecting that the Department of Labor, which enforces these protections, will interpret phrases in the 2008 Act in the same way it interprets identical phrases in other federal whistleblower protections, an employee's reasonable belief that a violation has occurred will not be a significant hurdle for an employee to meet for his or her actions to be deemed protected under the 2008 Act.

Litigation an Aggrieved Whistleblower Can
Commence

The 2008 Act provides that a person who believes he or she has suffered unlawful retaliation may file a complaint with the United States Secretary of Labor within 180 days of the alleged unlawful act. The Department of Labor (DOL) will investigate the complaint, render a preliminary decision, and, if either party objects to such decision, conduct a full hearing before an Administrative Law Judge. We assume that, as under SOX and other federal whistleblower laws, the Secretary of Labor will assign the preliminary investigation phase to the Occupational Safety and Health Administration (OSHA).

The complaining individual may stop DOL proceedings and take his or her claim to federal court at certain points during the process, such as 210 days after the filing of the complaint, if the Secretary of Labor has not yet issued a final decision. While SOX's whistleblower provision is silent as to whether persons can proceed before a jury in federal court (and many courts have held they cannot), the 2008 Act expressly provides that the “action shall, at the request of either party to such action, be tried by the court with a jury.” A prevailing complainant can obtain “all relief necessary to make the employee whole, including injunctive relief and compensatory damages,” and such relief may entail reinstatement, back pay with interest, and compensation for “special damages” such as litigation costs and attorney's fees.

Steps for Employers to Minimize Risk

Employers in the consumer products industry can expect to be faced with retaliation claims filed by current or former employees who believe, or at least assert they believe, they were discharged or otherwise retaliated against because of some protected act of whistleblowing. If experience with SOX, the Atomic Energy Act and other whistleblower protections is any guide, the number of such lawsuits will be small at the outset but increase rapidly. With the prospect of a jury's deciding the claim and awarding damages, the stakes to employers in the consumer products industry will be substantially higher than the stakes faced by employers subject to other federal whistleblower protections. Accordingly, employers must act now to minimize these risks. At a minimum, employers subject to the 2008 Act should:

• Establish, disseminate and train all employees in carefully drafted procedures that allow employees to raise consumer product safety concerns to managers other than their direct and indirect supervisors. Such procedures should provide a variety of alternative mechanisms that employees can use to raise such concerns, including an anonymous “hotline.”
• Establish, disseminate and train all employees in a policy that prohibits any person from retaliating in any way against any employee who has raised a safety concern. Again, procedures should be implemented to provide multiple avenues through which employees can complain about perceived retaliation. Such avenues typically will be different from those available to employees for lodging consumer product safety concerns.
• Establish procedures for investigating complaints, but allow flexibility in such procedures to adapt to the unique needs of any situation. Such procedures should differentiate between investigations of the original consumer product safety concerns and investigations of retaliation allegations ' each addresses different issues and requires different safeguards.
• Work with Human Resources and legal counsel to assure that adverse employment decisions relating to whistleblowers not only are non-retaliatory, but also are handled thoughtfully and properly so the employer can prevail should the whistleblower challenge the decision in future litigation.

Another Step to Consider: Mandatory Arbitration

Many employers view arbitration as a cost-effective and expeditious alternative to administrative and judicial proceedings for resolving employment-related disputes. Those employers have adopted mandatory arbitration programs that require current or former employees to file any claims they wish to assert, whether the claims arise under federal or state law, in an arbitration forum rather than in court. A recent federal appellate court decision confirmed that employers can use such programs to redirect federal whistleblower claims to arbitration. In Guyden v. Aetna Inc. , 28 I.E.R. Cas. (BNA) 289, 2008 WL 4426478, 2008 U.S. App. Lexis 20783 (2nd Cir. Oct. 2, 2008), the Second Circuit held that whistleblower claims brought under SOX are arbitrable and, accordingly, a court may compel a plaintiff to submit a SOX whistleblower claim to arbitration pursuant to a mandatory arbitration agreement.

The plaintiff in Guyden had filed her federal whistleblower action first in the DOL and then, when DOL had not resolved the matter within 180 days, in federal district court. Based on a number of documents in which the plaintiff had agreed to arbitrate all employment-related legal disputes, the district court dismissed her case. On appeal, the plaintiff's fundamental challenge to the mandatory arbitration agreement was her contention that Congress intended SOX whistleblower claims to be nonarbitrable. She argued that the “public purpose” of SOX's whistleblower protections, which she characterized as the transmission to the public of information about a corporation's fraudulent activity, inherently conflicts with the forced arbitration of such claims. The Second Circuit reviewed the legislative history of the SOX whistleblower provision and concluded that while the broad purpose of SOX as a whole “is to strengthen the integrity of capital markets,” the primary purpose of the SOX whistleblower protections “is to provide a private remedy for the aggrieved employee, not to publicize alleged corporate misconduct.” For that and other reasons, the court found no basis to deviate from the strong policy favoring arbitration agreements.

Employers that adopt a mandatory arbitration program are typically motivated primarily by the desire to reduce the exorbitant costs of litigation and to get a quicker final resolution of the dispute. In the context of whistleblower litigation, the confidential nature of most arbitration proceedings can take on heightened importance for employers. Effectively redirecting whistleblower claims, in which a current or former employee may level all kinds of loaded allegations against the employer, relating to health and safety issues or financial accounting irregularities, will help the employer contain the problem and reduce the leverage a whistleblower hopes to achieve with threats of public disclosure. In rejecting the plaintiff's argument in Guyden that the arbitration agreement is unenforceable because it prohibits disclosure of the arbitration hearing and the arbitrator's decision, the Second Circuit essentially blessed the concept of confidentiality in such proceedings, despite reduced public disclosure.

There are limits to the power of mandatory arbitration agreements. For example, when, as with federal whistleblower claims, federal agencies are the first stop for a claimant, mandatory arbitration agreements cannot completely insulate employers from administrative or court litigation. Just as the Equal Employment Opportunity Commission (EEOC) is not bound by an employer's agreement with its employees not to litigate federal discrimination claims in court, neither would the DOL ' or even the Consumer Product Safety Commission should it choose to investigate ' be precluded from initiating or continuing proceedings against an employer because of a mandatory arbitration agreement. As another example, jursidictions less friendly to arbitration, such as the Ninth Circuit, might reach a conclusion different from the Second Circuit's in Guyden. Moreover, Guyden only addressed SOX. Courts may view mandatory arbitration agreements differently when applied to federal whistleblower protection regimes other than SOX, such as the new consumer product safety whistleblower protections in the 2008 Act.

Finally, we note that mandatory arbitration agreements have been under assault in Congress. Powerful congressional forces have been seeking a prohibition on mandatory arbitration agreements in a number of areas, including employment disputes. Such efforts have thus far failed, but they likely will have better prospects in the new Congress.

Conclusion

Despite the limited power of mandatory arbitration agreements and their uncertain fate, employers still can enjoy the significant benefits of an enforceable agreement to arbitrate employment-related disputes, particularly whistleblower claims. Crafting an enforceable agreement can be difficult, given the large body of law ' often conflicting in different jurisdictions as to the provisions such agreement must contain or cannot contain ' but the savings in costs and resources alone usually make the effort worthwhile.

Scott Gross is a partner in the Litigation Department of Wildman Harrold. He has counseled companies for two decades on a wide variety of issues related to employment liability and litigation and focused on whistleblower issues for more than 10 years. He has also defended employers in dozens of cases before the U.S. Department of Labor against whistleblower claims pursuant to statutes such as Sarbanes-Oxley and the Atomic Energy Act. He can be reached at [email protected]. Phone: 312-201-2099.