Employee Is Protected By Whistleblower Provisions Of The Labor Code When He Or She Reports Illegal Conduct By A Fellow Employee

A terminated employee brought claims against his former employer for wrongful termination in violation of the California False Claims Act (“CFCA”), public policy, and the whistleblower protections provided by the Labor Code.  The trial court granted summary judgment in favor of the employer.  The court of appeal held that the employee could proceed on several of his claims because his conduct in reporting possible fraud on the government was protected conduct and the Labor Code protects an employee from discrimination when he or she reports claims of illegal conduct by a fellow employee.  (McVeigh v. Recology San Francisco (--- Cal.Rptr.3d ----, Cal.App. 1 Dist., January 31, 2013).

Facts

Recology San Francisco (“Recology”) first employed Brian McVeigh (“McVeigh”) in 2000.  Recology provides San Francisco businesses and residents with waste collection, recycling, and disposal services.  McVeigh worked as an operations supervisor from late 2004 through November 2005 at Pier 96, which is a facility where recyclables that have been collected from various sources are processed for sale to vendors.  Recology operates a buy back center at Pier 96 and another one at 501 Tunnel Road in Brisbane.  At these centers, Recology employees weigh recyclables that customers present for redemption.  After weighing the material, the employee writes the weight on a tag and gives it to the customer, who presents the tag to the cashier.  The cashier logs the material and weight into a computer and pays the customer the California Redemption Value (“CRV”).  Recology also collects recyclables from other sources, such as curbside collection.  Recology puts the recyclables from all sources together at Pier 96 and ships them to third-party purchasers.  Recology is reimbursed at higher rates for recyclables purchased at the buy back centers.

McVeigh was asked by Recology to investigate “tag inflation” fraud at Pier 96, which involved an attendant recording more weight on a tag than the actual weight of the recyclables bought back by Pier 96.  The fraud resulted in an overpayment to the customer and a possible kickback to the attendant.  The suspected employee admitted to engaging in fraud.  McVeigh reported the fraud to Recology and called the San Francisco police.  The employee was arrested.  McVeigh received information regarding tag inflation at the Tunnel Road center and he reported the information to a San Francisco Police officer. 

McVeigh was transferred to Tunnel Road in September 2005 to supervise the Industrial Material Recycling Facility (“IMRF”).  After McVeigh told a Recology employee about tag inflation at the buy back department at Tunnel Road, McVeigh was told to stay out of the buy back “business” and only mind the IMRF.  During this period of time, McVeigh received two performance ratings of three out of five.  Recology put McVeigh in charge of the Tunnel Road buy back center in September 2007.  He reported suspected tag inflation and a management cover up at the buy back center to the Brisbane police department. 

McVeigh claims he saved Recology $100,000 per year by looking over each day’s CRV weight records.  He installed video surveillance equipment that he claimed caught an attendant engaging in tag inflation. The attendant was transferred to another facility.  McVeigh suggested that Recology hire a private investigator to investigate ongoing CRV theft at Tunnel Road but Recology rejected his suggestion.  McVeigh went to the Brisbane police department, which indicated a willingness to investigate the fraud.  The district attorney’s office, however, required Recology to agree to press charges against anyone caught.  Recology’s upper management rejected the proposal to have police investigate the fraud.

McVeigh filed an online “EthicsPoint” report that was sent to the Recology board of directors and senior management.  The report alleged that “employees had engaged in tag inflation and that Recology managers were aware of the problems but had not remedied them.”  Outside counsel was called in to investigate.  The operations managers threatened McVeigh that he would be fired if he continued to push the issue about the CRV fraud.  McVeigh reported the threat to an HR representative, who told McVeigh that a private investigator would be hired but later informed him the investigation had been cancelled.

McVeigh also informed the HR representative that Recology employees were involved in a scam in which recyclables were being stolen from a truck during transportation from one facility to another for processing and then being resubmitted for a second CRV refund.  McVeigh claims that he thought his job was being threatened because he was trying to protect public funds in the state CRV program.  He continued to review CRV records and informed a police sergeant about his actions.  He discovered irregularities in the weight of the recyclables during their transportation between facilities.

Recology terminated McVeigh’s employment.  McVeigh brought a lawsuit for wrongful termination in violation of the California False Claims Act whistleblower statute, public policy, and the Labor Code’s whistleblower statute.  The trial court granted summary judgment in favor of Recology.

Decision

The CFCA “permits recovery of civil penalties and treble damages from any person who knowingly presents a false claim for payment to the state or a political subdivision.”  McVeigh alleged his employment was terminated in violation of the CFCA.  To state a cause of action for retaliation under the CFCA, McVeigh was required to show that (1) he engaged in activity that is protected by statute; (2) Recology knew he engaged in the protected activity; and (3) that Recology discriminated against him because he engaged in protected activity.

McVeigh alleged that he was terminated in part because he reported that other employees assisted customers in obtaining inflated CRV tags and payments.  He asserted that “a False Claim is established by the fraud of customers and Recology employees in tag-inflation, regardless of whether Recology subsequently defrauded the State in seeking reimbursement.”  The court of appeal held that the trial court properly granted summary judgment in favor of Recology on this cause of action.  The court noted that McVeigh concedes in this cause of action that there is no economic loss to the government.  The court found “there is no possibility of a viable false claim in such a situation.”  A person violates the CFCA if he or she “‘[k]nowingly presents or causes to be presented a false or fraudulent claim for payment or approval,’ or ‘[k]nowingly makes, uses, or causes to be made or used a false record or statement material to a false or fraudulent claim.’” 

The court found that “if Recology does not use inflated customer weight tags to determine the weight of buy back center materials reported to the state, and instead reports the correct weights as determined in some other manner, the inflated weight tags are not ‘a false record or statement material to a false or fraudulent claim’ against the state.”  The inflated weight tags do not constitute false claims under these circumstances “because they do not ‘have the . . . effect of causing the [state] to pay out money it is not obligated to pay.’”  The state pays for recyclables from the buy back center based on the reported weight of those recyclables.  “If the weights are accurately reported, then the state pays no more than it is obligated to pay, and inflated weight tags are false claims only against Recology, not the state.”  If the state does not suffer any financial loss due to weight tag inflation, the investigation and reporting of that inflation by McVeigh is not conduct protected by the CFCA.

McVeigh second cause of action focuses on whether the inflated customer weight tags were used by Recology to determine the weight of the materials reported to the state that qualified for an increased reimbursement amount because they originated from the buy back center.  The court rejected the “assumption that the CFCA only protects whistleblowers who discover an actual, rather than possible false claim.”  In order to engage in protected activity, an “employee must have reasonably based suspicions of a false claim and it must be reasonably possible for the employee’s conduct to lead to a false claims action.”  The phrase “reasonably possible” means “that there must be a reasonable basis for the employee’s suspicion about fraud on the government—not that actual grounds for a false claims action must have existed.”  The court found that based on the evidence, a reasonable jury could conclude “that McVeigh had reasonable grounds to suspect that the state, as well as Recology, would be harmed by the weight tag fraud, and thus that he engaged in protected conduct under the CFCA when he sounded the alarm.” 

The fact that part of McVeigh’s job was deterring fraud does not preclude his second cause of action under the CFCA.  The court stated that it was “persuaded by the federal cases that hold fraud-alert employees should be held to a heightened notice standard.”  The heightened notice standard requires that if an employee has been assigned the task of investigating fraud for his employer, in order to state a false claims action “the employee must make it clear that the employee’s actions go beyond the assigned task.”  The court concluded that McVeigh could be found to have met this standard.  McVeigh reported his suspicions of fraud to law enforcement and to Recology and when he reported those suspicions, “he did so using terms like ‘embezzlement’ which should impart notice of potentially illegal malfeasance.”

Although McVeigh initially reported tag inflation three years before Recology terminated his employment, this fact did not preclude McVeigh from connecting his protected activity to his termination.  Just three months before Recology terminated his employment, McVeigh brought the tag inflation situation to the attention of Recology’s board of directors. 

The court concluded that the trial court erred in deciding that McVeigh could not state a prima facie case on his second cause of action under the CFCA.  McVeigh satisfied all three requirements needed to state a prima facie case under the CFCA.

McVeigh also stated a claim that he was terminated in violation of Labor Code section 1102.5, subdivision (b), which provides that an employer is prohibited from retaliating “against an employee for disclosing information to a government or law enforcement agency, where the employee has reasonable cause to believe that the information discloses a violation of state or federal statute, or a violation or noncompliance with a state or federal rule or regulation.”  Recology asserted that Labor Code section 1102.5, subdivision (b) “extends protection only for reports of illegal activity by a plaintiff’s employer, not the plaintiff’s fellow employees.” 

The court rejected Recology’s argument and concluded that the statute “protects employee reports of unlawful activity by third parties such as contractors and employees, as well [as] unlawful activity by an employer.”  The court of appeal found that that McVeigh’s report of tag inflation to the police was protected activity and Recology was not entitled to summary judgment on McVeigh’s claim under Labor Code section 1102.5, subdivision (b). 

Because the court of appeal found that McVeigh could proceed on his second CFCA cause of action, the court found that he can also proceed on his cause of action for wrongful termination in violation of public policy.  The court of appeal sent the case back to the trial court so that McVeigh can pursue his second cause of action under the CFCA claim, the Labor Code cause of action, and the wrongful termination in violation of public policy cause of action. 

Questions

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Bruce A. Scheidt, Laura Izon Powell, Kristianne T. Seargeant or David W. Tyra | 916.321.4500