Underscoring the Importance of Robust Internal Reporting Programs
Since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010, the compliance, finance and legal communities have carefully watched and dissected the law’s follow up rules and judicial rulings. This is especially true as they relate to:
the definition of who is a “whistleblower” and whistleblower protections; and
reporting rules for securities violations.
A major concern for employers was that whistleblower allegations under Dodd-Frank would spike as underperforming employees sought to prevent terminations for cause by seeking to trigger the protections of the whistleblower law.
The early rounds and five previous district courts had ruled that the definition of “whistleblower” under Dodd-Frank could apply to employees who only reported the securities violations to their employer and did not follow up with a report to the U.S Securities and Exchange Commission (SEC).
Recently, the U.S Court of Appeals for the Fifth Circuit disagreed.
So Will Dodd Frank Whistleblower Claims Decline?
Finally, employers may have a little news to cheer about. The Fifth Circuit ruled in Asadi vs. GE Energy (USA), LLC that because the plaintiff failed to report any information to the SEC, no whistleblower protection would apply to Asadi’s claim of wrongful termination. Asadi reported securities violations only to his employer, who terminated him one year later.
The Fifth Circuit adopted the literal definition of “whistleblower” under Dodd-Frank. The Court quoted Dodd-Frank, Section 922, codified at 15 U.S.C. § 78u-6, which encourages individuals to provide information relating to a violation of U.S. securities laws to the SEC and:
“encourages such [securities] disclosures through two related provisions that:
(1) require the SEC to pay significant monetary awards to individuals who
provide information to the SEC which leads to a successful enforcement action;
and (2) create a private cause of action for certain individuals against employers
who retaliate against them for taking specified protected actions.”
If adopted by more courts, this stricter limitation on the definition of a Dodd-Frank whistleblower could have significant impact on reducing whistleblower claims under Dodd-Frank.
The Hand That Giveth, Taketh Away – Will Asadi Erode the Incentive to Report Internally?
While employers may see a potential decline in Dodd-Frank whistleblower claims, there is a countervailing concern. Will the Fifth Circuit decision provide employees with a clear incentive to skip internal reporting programs and proceed directly to the SEC?
Commissioner Troy Paredas highlighted the problem during a November 3, 2010, SEC meeting: "What will be the net impact on corporate conduct and legal compliance if individuals bypass a corporation's internal procedures for identifying, investigating and sanctioning unlawful activity in favor of reporting alleged violations to the SEC?" he said. "It would be unfortunate if, as result of the Dodd-Frank whistleblower program, effective corporate compliance programs were thwarted."
And what if Asadi Does not Carry the Day?
It remains to be seen if the Asadi decision will truly shift the tide in terms of the bar that is being set for plaintiffs on Dodd-Frank retaliation claims. If other courts or the rule-making bodies side with the more expansive definition of whistleblower, employees may continue to seek to file claims with Dodd-Frank instead of the Sarbanes-Oxley Act of 2002 (SOX) under which many of these claims were previously filed.
For employees, if the broader interpretation continues, more whistleblower claims may be brought under Dodd-Frank which, for a whistleblower, has the benefit of:
providing 2x back pay (SOX is only 1x);
substantially longer statute of limitations for bringing claims (years versus days under SOX);
jurisdiction is in the federal district court versus state court; and
no requirement to first file with the Secretary of Labor and wait 180 days for a final decision.
Best Practices Regardless
Regardless of how the legal landscape shakes out, from a practical perspective, employers should be asking themselves what they can do to both help insulate their organizations from whistleblower claims under Dodd-Frank, as well as to continue to encourage early, internal reporting.
Maintain a strong, effective compliance program with regular communications to employees about:
their duty to speak up and report suspected misconduct
the organization’s commitment to address problems early on, and
The organization’s zero tolerance for retaliation.
Develop and communicate a Securities Policy and provide regular and impactful employee training;
Ensure that the company maintains a robust employee reporting system or helpline designed to identify and collect issues, especially securities violations, from employees, contactors, etc.
Have a helpline investigation and response plan to ensure that any terminations, especially securities violations, are not related to any retaliatory claims
Potential whistleblowers and employers alike will continue to closely monitor this development to see if it is an aberration or a trend toward further limits on the Dodd-Frank whistleblower law.
The practical reality is that most employees who perceive retaliation and bring claims against their organization – whatever the avenue – are not focused on the intricacies of the law or the continual directional shifts of the courts. They are seeking relief and restitution, and escalating claims of retaliation have a devastating impact on workplace culture and drain precious internal time and resources.
Contributing Author: Randy Stephens