Avoiding Whistleblower Retaliation Claims Under the Dodd-Frank Act

Dodd-Frank gives individuals, including current employees, incentive to come forward with claims of suspected securities fraud in two ways: 1) by offering financial awards to whistleblowers; and 2) by providing such whistleblowers with protection from retaliation. With regard to the financial awards, if the SEC brings a successful enforcement action based on information provided by the whistleblower and the resulting enforcement action results in a monetary sanction of $1 million or more, the whistleblower receives between 10% and 30% of the award. Thus, the minimum award under Dodd-Frank is $100,000. Given some of the recent headline-grabbing numbers in SEC enforcement actions (not necessarily involving whistleblower involvement) ' e.g., $550 million settlement with Goldman Sachs, $153.6 million against JP Morgan Securities, LLC ' the whistleblower awards are potentially staggering in scope (the SEC's press releases regarding the above settlements are available at www.sec.gov/news/speech/2010/spch071510rsk.htm and www.sec.gov/news/press/2011/2011-131.htm ).

Who Is a Whistleblower?

The Act and the SEC's implementing regulations (www.sec.gov/rules/final/2011/34-64545.pdf) define a whistleblower as an individual (or multiple individuals) who, based on a reasonable belief, provides the SEC with information about a possible violation of federal securities laws that has occurred, is ongoing or is about to occur. Information can be provided: 1) directly to the SEC; 2) through “initiating, testifying or assisting in any investigation or judicial or administrative action of the [SEC] based upon or related to such information”; or 3) by making disclosures that are “required or protected under” the Sarbanes-Oxley Act, the Securities and Exchange Act of 1934, 18 U.S.C. ' 1513(e) (providing truthful information to a law enforcement officer relating to a federal offense), or “any other law, rule or regulation subject to the jurisdiction of the [SEC].” Retaliation against whistleblowers ' defined as discharge, demotion, suspension, direct or indirect threats, harassment or discrimination in any other manner in the terms and conditions of employment ' is prohibited. Given judicial interpretation of retaliation claims in the employment context (most notably, the Supreme Court's 2006 decision in Burlington Northern and Santa Fe Railway Co. v. White, wherein the Court held the standard for a retaliation claim under Title VII was whether the employer's conduct “might have dissuaded a reasonable worker from making or supporting a charge of discrimination”), the SEC and courts will most likely continue to take a very expansive view as to what conduct constitutes retaliation. A successful retaliation claim can result in reinstatement, double back pay and attorney's fees and costs.

Who Is Ineligible?

Subject to several exceptions, certain categories of employees are ineligible from receiving whistleblower awards (e.g., an individual engaged in an internal audit function at the company who learns of the misconduct in the performance of his duties); however, an individual's ineligibility for a whistleblower award is a separate and distinct issue from whether or not he or she is protected from retaliation. The Act expressly provides that the anti-retaliation provisions apply regardless of whether the whistleblower ultimately receives a financial award.

The most controversial aspect of the whistleblower provision is that an employee is not required first to utilize his or her company's internal reporting procedure before going to the SEC to report suspected violations. Thus, whistleblowers are free to bypass the comprehensive and often robust internal procedures public companies implemented as a result of the Sarbanes-Oxley Act. Indeed, the Act precludes any person from taking action that impedes an individual from communicating with the SEC about possible securities law violations, including enforcing or threatening to enforce confidentiality agreements.

Steps to Follow to Minimize the Risk of Retaliation Claims

1. Assume, until a thorough investigation demonstrates otherwise, that the individual is a “whistleblower” protected from retaliation. As noted above, only whistleblowers, as the term is defined by law, are protected from retaliation. If an employee reports a matter to the SEC that the employer doubts is a violation of federal securities law, or the employer is not aware of any credible evidence to support the claim, is the employee a whistleblower as defined by the law? Maybe. Initially, however, it is prudent to be over-inclusive in determining whether the anti-retaliation provisions apply. Again, it is irrelevant for purposes of the prohibitions against retaliation whether the individual's report to the SEC results in a monetary sanction. The safest course of action will often be to assume the employee engaged in legally protected activity until a thorough investigation provides facts to the contrary. In situations where the claim is particularly specious ' such as a claim raised by an employee with a history of performance problems who is aware his employment is in jeopardy ' the resulting investigation will be the best way to establish the lack of merit in the underlying claim. Failure to conduct an investigation, however, will often leave an employer vulnerable to a retaliation claim.

2. Communicate with appropriate personnel regarding the complaint. While every situation and organization is different, and therefore the approach will vary, it is often advisable to communicate with the individual's supervisor(s), human resources, legal and perhaps more senior management (particularly in small companies) and inform such personnel that: a) a complaint was made; b) the nature of the complaint; c) the identity of the complainant (subject to the caveat below); d) the company's no retaliation policy; e) the complaint will be investigated in accordance with your company's policy and by appropriate personnel; f) there should be no internal discussion or communication (particularly e-mail) regarding the matter or with the complainant unless in accordance with the official investigation; and g) perhaps most importantly, no employment action may be undertaken regarding the complainant without consulting with the appropriate human resources and other personnel involved in the matter. A common fear that makes companies reluctant to identify the whistleblower is the concern that the employee will be targeted for retaliation. Consider the consequences, however, if an uninformed supervisor learns about the matter independently and he or she engages in retaliatory personnel action, or the supervisor is completely unaware and disciplines the employee for an unrelated reason. In either scenario, the employer is forced to prove a negative ' that the supervisor did not know about the complaint or that the discipline was unrelated to the protected activity ' an inherently difficult task. However, disclosure of the whistleblower's identity is not appropriate in all circumstances. Indeed, in a recent decision by the Department of Labor's Administrative Review Board (Menendez v. Halliburton, Inc.), the Department of Labor (DOL) held that disclosure of the whistleblower's identity, where the employer's policy expressly provided that whistleblower complaints were confidential, could itself be considered retaliatory.

3. Keep the whistleblower informed. How the company reacts to the situation, particularly in the beginning of the process, will likely dictate whether the situation can be managed and resolved internally or whether the matter becomes the subject of a lawsuit. In the initial meeting with the whistleblower, he or she should be thanked for bringing the matter to the company's attention, given pertinent information regarding the company's policy for investigating such matters, and told of the company policy prohibiting retaliation. In addition, the employee should be told that the investigation will be commenced shortly (or the investigation is already underway) and the company should identify a contact person with whom the employee can and should communicate should he or she have any questions or concerns while the investigation is pending, including concerns regarding retaliation. Failure to provide this information and assurance to the whistleblower may result in the employee's believing his or her complaint is not being taken seriously or disregarded. Additionally, in the absence of such assurance, innocuous events may be erroneously perceived as retaliatory.

4. Keep the whistleblower in the loop and promptly remediate any retaliatory conduct. Once the matter has been fully investigated and the violation, if any, has been remediated, maintain communication with the employee to ensure there is no retaliation (and more importantly in many respects, perceived retaliation) in the weeks and months after the investigation concludes. If at any point you learn of retaliatory conduct, it must be promptly remediated and the whistleblower advised regarding what steps were taken (without revealing confidential human resources information, of course). Before remediating retaliatory conduct, make sure the steps taken would not be perceived as themselves retaliatory. For example, if an internal transfer was determined to be the appropriate remedy because of issues in the employee's department, would the transfer result in fewer opportunities for advancement and itself be seen as retaliatory? Likewise, appropriate disciplinary action should be taken against the retaliating employee. Failure to do so will send the signal that the company does not take its anti-retaliation policy seriously.

Conclusion

Given the financial incentives, the political climate and the cottage industry of law firms looking for company insiders to become whistleblowers (and clients), retaliation claims are on the rise and the trend is likely to continue. Following the steps above should significantly reduce the risk of your organization becoming the next defendant in a Dodd-Frank retaliation claim.

Russell E. Adler is of counsel in the Labor and Employment Practice Group of Pepper Hamilton LLP, resident in the New York office. He represents employers in the defense of employment discrimination claims, contractual disputes, wage and hour and a variety of other employment-related claims.

As a result of the recent financial crisis, Washington enacted significant financial reforms through the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or the Act) (www.sec.gov/about/laws/wallstreetreform-cpa.pdf). In addition to the broad changes to the financial system put in place by Dodd-Frank (which are beyond the scope of this article), the Act created a whistleblower program designed to incentivize individuals to report federal securities law violations directly to, among others, the Securities and Exchange Commission (SEC). This article provides an overview of the Act's whistleblower and anti-retaliation provisions, as well as practical steps to help employers avoid retaliation claims.

Dodd-Frank's Whistleblower

And Anti-Retaliation Provisions

Dodd-Frank gives individuals, including current employees, incentive to come forward with claims of suspected securities fraud in two ways: 1) by offering financial awards to whistleblowers; and 2) by providing such whistleblowers with protection from retaliation. With regard to the financial awards, if the SEC brings a successful enforcement action based on information provided by the whistleblower and the resulting enforcement action results in a monetary sanction of $1 million or more, the whistleblower receives between 10% and 30% of the award. Thus, the minimum award under Dodd-Frank is $100,000. Given some of the recent headline-grabbing numbers in SEC enforcement actions (not necessarily involving whistleblower involvement) ' e.g., $550 million settlement with Goldman Sachs, $153.6 million against JP Morgan Securities, LLC ' the whistleblower awards are potentially staggering in scope (the SEC's press releases regarding the above settlements are available at www.sec.gov/news/speech/2010/spch071510rsk.htm and www.sec.gov/news/press/2011/2011-131.htm ).

Who Is a Whistleblower?

The Act and the SEC's implementing regulations (www.sec.gov/rules/final/2011/34-64545.pdf) define a whistleblower as an individual (or multiple individuals) who, based on a reasonable belief, provides the SEC with information about a possible violation of federal securities laws that has occurred, is ongoing or is about to occur. Information can be provided: 1) directly to the SEC; 2) through “initiating, testifying or assisting in any investigation or judicial or administrative action of the [SEC] based upon or related to such information”; or 3) by making disclosures that are “required or protected under” the Sarbanes-Oxley Act, the Securities and Exchange Act of 1934, 18 U.S.C. ' 1513(e) (providing truthful information to a law enforcement officer relating to a federal offense), or “any other law, rule or regulation subject to the jurisdiction of the [SEC].” Retaliation against whistleblowers ' defined as discharge, demotion, suspension, direct or indirect threats, harassment or discrimination in any other manner in the terms and conditions of employment ' is prohibited. Given judicial interpretation of retaliation claims in the employment context (most notably, the Supreme Court's 2006 decision in Burlington Northern and Santa Fe Railway Co. v. White, wherein the Court held the standard for a retaliation claim under Title VII was whether the employer's conduct “might have dissuaded a reasonable worker from making or supporting a charge of discrimination”), the SEC and courts will most likely continue to take a very expansive view as to what conduct constitutes retaliation. A successful retaliation claim can result in reinstatement, double back pay and attorney's fees and costs.

Who Is Ineligible?

Subject to several exceptions, certain categories of employees are ineligible from receiving whistleblower awards (e.g., an individual engaged in an internal audit function at the company who learns of the misconduct in the performance of his duties); however, an individual's ineligibility for a whistleblower award is a separate and distinct issue from whether or not he or she is protected from retaliation. The Act expressly provides that the anti-retaliation provisions apply regardless of whether the whistleblower ultimately receives a financial award.

The most controversial aspect of the whistleblower provision is that an employee is not required first to utilize his or her company's internal reporting procedure before going to the SEC to report suspected violations. Thus, whistleblowers are free to bypass the comprehensive and often robust internal procedures public companies implemented as a result of the Sarbanes-Oxley Act. Indeed, the Act precludes any person from taking action that impedes an individual from communicating with the SEC about possible securities law violations, including enforcing or threatening to enforce confidentiality agreements.

Steps to Follow to Minimize the Risk of Retaliation Claims

1. Assume, until a thorough investigation demonstrates otherwise, that the individual is a “whistleblower” protected from retaliation. As noted above, only whistleblowers, as the term is defined by law, are protected from retaliation. If an employee reports a matter to the SEC that the employer doubts is a violation of federal securities law, or the employer is not aware of any credible evidence to support the claim, is the employee a whistleblower as defined by the law? Maybe. Initially, however, it is prudent to be over-inclusive in determining whether the anti-retaliation provisions apply. Again, it is irrelevant for purposes of the prohibitions against retaliation whether the individual's report to the SEC results in a monetary sanction. The safest course of action will often be to assume the employee engaged in legally protected activity until a thorough investigation provides facts to the contrary. In situations where the claim is particularly specious ' such as a claim raised by an employee with a history of performance problems who is aware his employment is in jeopardy ' the resulting investigation will be the best way to establish the lack of merit in the underlying claim. Failure to conduct an investigation, however, will often leave an employer vulnerable to a retaliation claim.

2. Communicate with appropriate personnel regarding the complaint. While every situation and organization is different, and therefore the approach will vary, it is often advisable to communicate with the individual's supervisor(s), human resources, legal and perhaps more senior management (particularly in small companies) and inform such personnel that: a) a complaint was made; b) the nature of the complaint; c) the identity of the complainant (subject to the caveat below); d) the company's no retaliation policy; e) the complaint will be investigated in accordance with your company's policy and by appropriate personnel; f) there should be no internal discussion or communication (particularly e-mail) regarding the matter or with the complainant unless in accordance with the official investigation; and g) perhaps most importantly, no employment action may be undertaken regarding the complainant without consulting with the appropriate human resources and other personnel involved in the matter. A common fear that makes companies reluctant to identify the whistleblower is the concern that the employee will be targeted for retaliation. Consider the consequences, however, if an uninformed supervisor learns about the matter independently and he or she engages in retaliatory personnel action, or the supervisor is completely unaware and disciplines the employee for an unrelated reason. In either scenario, the employer is forced to prove a negative ' that the supervisor did not know about the complaint or that the discipline was unrelated to the protected activity ' an inherently difficult task. However, disclosure of the whistleblower's identity is not appropriate in all circumstances. Indeed, in a recent decision by the Department of Labor's Administrative Review Board (Menendez v. Halliburton, Inc.), the Department of Labor (DOL) held that disclosure of the whistleblower's identity, where the employer's policy expressly provided that whistleblower complaints were confidential, could itself be considered retaliatory.

3. Keep the whistleblower informed. How the company reacts to the situation, particularly in the beginning of the process, will likely dictate whether the situation can be managed and resolved internally or whether the matter becomes the subject of a lawsuit. In the initial meeting with the whistleblower, he or she should be thanked for bringing the matter to the company's attention, given pertinent information regarding the company's policy for investigating such matters, and told of the company policy prohibiting retaliation. In addition, the employee should be told that the investigation will be commenced shortly (or the investigation is already underway) and the company should identify a contact person with whom the employee can and should communicate should he or she have any questions or concerns while the investigation is pending, including concerns regarding retaliation. Failure to provide this information and assurance to the whistleblower may result in the employee's believing his or her complaint is not being taken seriously or disregarded. Additionally, in the absence of such assurance, innocuous events may be erroneously perceived as retaliatory.

4. Keep the whistleblower in the loop and promptly remediate any retaliatory conduct. Once the matter has been fully investigated and the violation, if any, has been remediated, maintain communication with the employee to ensure there is no retaliation (and more importantly in many respects, perceived retaliation) in the weeks and months after the investigation concludes. If at any point you learn of retaliatory conduct, it must be promptly remediated and the whistleblower advised regarding what steps were taken (without revealing confidential human resources information, of course). Before remediating retaliatory conduct, make sure the steps taken would not be perceived as themselves retaliatory. For example, if an internal transfer was determined to be the appropriate remedy because of issues in the employee's department, would the transfer result in fewer opportunities for advancement and itself be seen as retaliatory? Likewise, appropriate disciplinary action should be taken against the retaliating employee. Failure to do so will send the signal that the company does not take its anti-retaliation policy seriously.

Conclusion

Given the financial incentives, the political climate and the cottage industry of law firms looking for company insiders to become whistleblowers (and clients), retaliation claims are on the rise and the trend is likely to continue. Following the steps above should significantly reduce the risk of your organization becoming the next defendant in a Dodd-Frank retaliation claim.

Russell E. Adler is of counsel in the Labor and Employment Practice Group of Pepper Hamilton LLP, resident in the New York office. He represents employers in the defense of employment discrimination claims, contractual disputes, wage and hour and a variety of other employment-related claims.