The Recovery Act's Daunting Whistleblower Provisions

The American Recovery and Reinvestment Act of 2009 (the “ARRA”) gives business a financial shot of adrenalin in hopes of stimulating the faltering economy. However, the AARA's sweeping and unprecedented whistleblower provisions in Section 1553 run the risk of engendering attacks on employers that are inconsistent with the ARRA's overarching goals.

This article describes the type of activity Section 1553 protects and the competing burdens parties must bear in pursuing and defending retaliation claims under this statute. It also provides a framework for assessing the risks Section 1553 poses to employers, identifies questions Section 1553 leaves unanswered, and presents the question of whether a few of Section 1553's provisions pass constitutional muster. Finally, this article suggests preventative steps employers should consider in light of the exposure they face under Section 1553.

What Constitutes Protected Activity Under Section 1553?

The whistleblower protection provisions in Section 1553 (also known as the “McCaskill Amendment”) were enacted to ensure stimulus funds are used and managed in an honest and fair way. More specifically, Section 1553 prohibits non-federal employers who receive stimulus funds from retaliating against an employee for complaining of information he or she reasonably believes to be evidence of one or more of the following: “gross mismanagement” of an agency contract or grant relating to covered funds; a “gross waste” of covered funds; a substantial and specific danger to public health or safety related to the implementation or use of covered funds; an “abuse of authority” related to the implementation or use of covered funds; or, a violation of law, rule or regulation related to an agency contract (including the competition for or negotiation of a contract) or grant, awarded or issued relating to covered funds. Notably, moreover, Section 1553 provides that protected disclosures to those recipients include disclosures “made in the ordinary course of an employee's duties.”

In addition, Section 1553 protects employees who complain to any of the following: the Recovery Accountability and Transparency Board; an inspector general; the Comptroller General; a member of Congress; a state or federal regulatory or law enforcement agency; 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); a court or grand jury; or, the head of a federal agency, or their representatives.

The Disparate Burdens

Governing Claims and Defenses

The AARA provides a liberal, employee-friendly framework for proving retaliation. An employee must show his or her complaint was a “contributing factor” in the adverse employment action. An employee can meet this burden through circumstantial evidence. By contrast, the employer faces a heavier burden: it must show by “clear and convincing evidence” that it would have taken the same adverse action against the employee in the absence of the complaint.

Though these burdens may seem somewhat lopsided, they are similar to the framework used in various whistleblower protection statutes administered by the United States Department of Labor, such as the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, and Section 806 of the Sarbanes-Oxley Act (“SOX”) of 2002.

What Are the Consequences Of Losing a Claim Under Section 1553?

Retaliation in violation of Section 1553 carries a heavy price. It can lead to reinstatement and affirmative action necessary to abate the violation. Plus, it could lead to the following damages: backpay; compensatory damages; employment benefits; and “other terms and conditions of employment that would apply to the person in that position if the reprisal had not been taken.” Likewise, costs and expenses, including attorneys' fees and expert witness fees reasonably incurred by the employee, may be recovered. It is worth noting that Section 1553 does not set forth explicit caps on damages.

Open Questions

On its face, Section 1553 leaves some important questions unresolved. Some of the questions have very serious practical implications. For example: what is the statute of limitations; are decision-makers subject to individual liability; and, must an employee's “reasonable belief” that a violation has occurred be both subjectively and objectively reasonable? Unfavorable answers to any of these questions could have serious consequences to employers and individual supervisors.

Another question: why does Section 1553 provide a cause of action to an employee for simply doing his or her job? This feature of Section 1553 reflects a departure from other far-reaching whistleblower statutes. For example, Administrative Law Judges (“ALJ”) adjudicating SOX whistleblower claims have recognized the anomalous nature of a rule that would allow an employee to pursue a retaliation claim for carrying out his or her assigned duties. The decision in Grant v. Dominion East Ohio Gas, 2004 SOX 63, 2005 DOLSOX LEXIS 79 (Mar. 10, 2005), is illustrative. There, an engineering technician claimed he was suspended in violation of SOX for complaining of accounting irregularities. In the course of rejecting his claims, the ALJ reasoned:

Part of Mr. Grant's duties as an engineering technician is to monitor project accounts for errors ' and bring irregularities to the attention of ' his supervisors ' for resolution. Thus, by questioning accounting discrepancies, Mr. Grant was simply doing his job ' . Accepting Complainant's contentions would lead to the conclusion that any time Mr. Grant raised a question about the company's accounting programs or procedures, or about anything else regarding the everyday functioning of the company, he would be engaging in protected activity. The purpose of the Act simply does not support such a conclusion. Id. at *112-113.

See also Andrews v. Ing N. Am. Ins. Corp., 2005 SOX 50, 51, 2009 DOL SOX LEXIS 4, at *27 (Jan. 8, 2009) (“Barron's report to Reynolds also fails to constitute protected activity because his job duties as Information Security Officer included reporting issues and concerns with the network, and an action that is part of an employee's assigned duties cannot be protected activity.”) (citations omitted).

Another question with which courts may be faced is whether some of the arguably vague portions of Section 1553 defining protected activity pass constitutional muster. The Supreme Court has directed that: “A vague law impermissibly delegates basic policy matters to ' judges, and juries for resolution on an ad hoc and subjective basis, with the attendant dangers of arbitrary and discriminatory application.” Grayned v. City of Rockford, 408 U.S. 104, 108-109 (1972). The concerns the Supreme Court highlighted in Grayned appear to be applicable here. Can courts be expected to decide uniformly and consistently when there has been “gross mismanagement” of an agency contract or “gross mismanagement” of covered funds? It seems fair to assume that what constitutes “gross” mismanagement as opposed to poor results flowing from an exercise of business judgment or an honest (albeit significant) mistake will vary. As a result, these questions may ultimately get resolved on ad hoc bases and thus run afoul of the Supreme Court's directive in Grayned.

Hopefully some of these questions will be definitively answered in the near future so that employers can have a better sense of their risks. In the meantime, the existence of these open questions requires employers to proceed cautiously and conservatively.

Preventative Steps

Employers commonly minimize the risk of whistleblower claims by offering severance packages or through arbitration agreements. Section 1553 takes these devices out of employers' hands, as it expressly prevents employees from waiving AARA whistleblower claims through any agreement, policy, form or condition of employment, including any pre-dispute arbitration agreement. Therefore, employers need to consider other measures of reducing their risks. This includes raising awareness of Section 1553's requirements through training decision-makers and promulgating appropriate anti-retaliation policies with multiple channels for lodging complaints. Furthermore, employers should ensure that any complaints lodged pursuant to Section 1553 are thoroughly investigated and resolved appropriately.

Steven J. Pearlman is a partner in Seyfarth Shaw LLP's Chicago office. He can be reached at 312-460-5000 and [email protected].

The American Recovery and Reinvestment Act of 2009 (the “ARRA”) gives business a financial shot of adrenalin in hopes of stimulating the faltering economy. However, the AARA's sweeping and unprecedented whistleblower provisions in Section 1553 run the risk of engendering attacks on employers that are inconsistent with the ARRA's overarching goals.

This article describes the type of activity Section 1553 protects and the competing burdens parties must bear in pursuing and defending retaliation claims under this statute. It also provides a framework for assessing the risks Section 1553 poses to employers, identifies questions Section 1553 leaves unanswered, and presents the question of whether a few of Section 1553's provisions pass constitutional muster. Finally, this article suggests preventative steps employers should consider in light of the exposure they face under Section 1553.

What Constitutes Protected Activity Under Section 1553?

The whistleblower protection provisions in Section 1553 (also known as the “McCaskill Amendment”) were enacted to ensure stimulus funds are used and managed in an honest and fair way. More specifically, Section 1553 prohibits non-federal employers who receive stimulus funds from retaliating against an employee for complaining of information he or she reasonably believes to be evidence of one or more of the following: “gross mismanagement” of an agency contract or grant relating to covered funds; a “gross waste” of covered funds; a substantial and specific danger to public health or safety related to the implementation or use of covered funds; an “abuse of authority” related to the implementation or use of covered funds; or, a violation of law, rule or regulation related to an agency contract (including the competition for or negotiation of a contract) or grant, awarded or issued relating to covered funds. Notably, moreover, Section 1553 provides that protected disclosures to those recipients include disclosures “made in the ordinary course of an employee's duties.”

In addition, Section 1553 protects employees who complain to any of the following: the Recovery Accountability and Transparency Board; an inspector general; the Comptroller General; a member of Congress; a state or federal regulatory or law enforcement agency; 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); a court or grand jury; or, the head of a federal agency, or their representatives.

The Disparate Burdens

Governing Claims and Defenses

The AARA provides a liberal, employee-friendly framework for proving retaliation. An employee must show his or her complaint was a “contributing factor” in the adverse employment action. An employee can meet this burden through circumstantial evidence. By contrast, the employer faces a heavier burden: it must show by “clear and convincing evidence” that it would have taken the same adverse action against the employee in the absence of the complaint.

Though these burdens may seem somewhat lopsided, they are similar to the framework used in various whistleblower protection statutes administered by the United States Department of Labor, such as the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, and Section 806 of the Sarbanes-Oxley Act (“SOX”) of 2002.

What Are the Consequences Of Losing a Claim Under Section 1553?

Retaliation in violation of Section 1553 carries a heavy price. It can lead to reinstatement and affirmative action necessary to abate the violation. Plus, it could lead to the following damages: backpay; compensatory damages; employment benefits; and “other terms and conditions of employment that would apply to the person in that position if the reprisal had not been taken.” Likewise, costs and expenses, including attorneys' fees and expert witness fees reasonably incurred by the employee, may be recovered. It is worth noting that Section 1553 does not set forth explicit caps on damages.

Open Questions

On its face, Section 1553 leaves some important questions unresolved. Some of the questions have very serious practical implications. For example: what is the statute of limitations; are decision-makers subject to individual liability; and, must an employee's “reasonable belief” that a violation has occurred be both subjectively and objectively reasonable? Unfavorable answers to any of these questions could have serious consequences to employers and individual supervisors.

Another question: why does Section 1553 provide a cause of action to an employee for simply doing his or her job? This feature of Section 1553 reflects a departure from other far-reaching whistleblower statutes. For example, Administrative Law Judges (“ALJ”) adjudicating SOX whistleblower claims have recognized the anomalous nature of a rule that would allow an employee to pursue a retaliation claim for carrying out his or her assigned duties. The decision in Grant v. Dominion East Ohio Gas , 2004 SOX 63, 2005 DOLSOX LEXIS 79 (Mar. 10, 2005), is illustrative. There, an engineering technician claimed he was suspended in violation of SOX for complaining of accounting irregularities. In the course of rejecting his claims, the ALJ reasoned:

Part of Mr. Grant's duties as an engineering technician is to monitor project accounts for errors ' and bring irregularities to the attention of ' his supervisors ' for resolution. Thus, by questioning accounting discrepancies, Mr. Grant was simply doing his job ' . Accepting Complainant's contentions would lead to the conclusion that any time Mr. Grant raised a question about the company's accounting programs or procedures, or about anything else regarding the everyday functioning of the company, he would be engaging in protected activity. The purpose of the Act simply does not support such a conclusion. Id. at *112-113.

See also Andrews v. Ing N. Am. Ins. Corp. , 2005 SOX 50, 51, 2009 DOL SOX LEXIS 4, at *27 (Jan. 8, 2009) (“Barron's report to Reynolds also fails to constitute protected activity because his job duties as Information Security Officer included reporting issues and concerns with the network, and an action that is part of an employee's assigned duties cannot be protected activity.”) (citations omitted).

Another question with which courts may be faced is whether some of the arguably vague portions of Section 1553 defining protected activity pass constitutional muster. The Supreme Court has directed that: “A vague law impermissibly delegates basic policy matters to ' judges, and juries for resolution on an ad hoc and subjective basis, with the attendant dangers of arbitrary and discriminatory application.” Grayned v. City of Rockford , 408 U.S. 104, 108-109 (1972). The concerns the Supreme Court highlighted in Grayned appear to be applicable here. Can courts be expected to decide uniformly and consistently when there has been “gross mismanagement” of an agency contract or “gross mismanagement” of covered funds? It seems fair to assume that what constitutes “gross” mismanagement as opposed to poor results flowing from an exercise of business judgment or an honest (albeit significant) mistake will vary. As a result, these questions may ultimately get resolved on ad hoc bases and thus run afoul of the Supreme Court's directive in Grayned.

Hopefully some of these questions will be definitively answered in the near future so that employers can have a better sense of their risks. In the meantime, the existence of these open questions requires employers to proceed cautiously and conservatively.

Preventative Steps

Employers commonly minimize the risk of whistleblower claims by offering severance packages or through arbitration agreements. Section 1553 takes these devices out of employers' hands, as it expressly prevents employees from waiving AARA whistleblower claims through any agreement, policy, form or condition of employment, including any pre-dispute arbitration agreement. Therefore, employers need to consider other measures of reducing their risks. This includes raising awareness of Section 1553's requirements through training decision-makers and promulgating appropriate anti-retaliation policies with multiple channels for lodging complaints. Furthermore, employers should ensure that any complaints lodged pursuant to Section 1553 are thoroughly investigated and resolved appropriately.

Steven J. Pearlman is a partner in Seyfarth Shaw LLP's Chicago office. He can be reached at 312-460-5000 and [email protected].