Each year seems to bring significant developments in whistleblower law, and 2023 has been no exception. As whistleblower activity increases, so, too, has the scope of its protections. From state to federal government, from the SEC to the U.S. Supreme Court, courts and regulators in the last 12 months or so largely have made it easier for employees to raise whistleblower claims while making it harder for employers to defend them. Below are some of the highlights, including two important decisions effectively expanding the scope of protections under California’s general whistleblower law (Section 1102.5), a U.S. Supreme Court that seems to be leaning toward a ruling that may favor SOX plaintiffs, and an SEC enforcement action against a private company to enforce its whistleblower protection rule.
California Supreme Court Adopts Expansive Interpretation of Protected Activity Under California’s General Whistleblower Law
Section 1102.5 of the California Labor Code prohibits employers from retaliating against an employee “for disclosing information” reasonably believed to be a violation of state or federal law to a government agency or “to a person with authority over the employee, or to another employee who has authority to investigate, discover, or correct the violation or noncompliance.” For the last few years, there has been something of a circuit split in California on what it means to “disclose” in this context. Does Section 1102.5 protect employees who report suspected unlawful activity even if the recipient of the report already knows about it? Or does the law protect disclosure of only previously unknown information?
The California Supreme Court resolved this question on May 22, 2023 in favor of employees, holding in People ex rel. Garcia-Brower v. Kolla’s, Inc. that Section 1102.5 does not require that a reported violation be unknown to the recipient. People ex rel. Garcia-Brower v. Kolla’s, Inc., 14 Cal. 5th 719 (2023). Although it recognized that “disclose” often refers to sharing previously unknown information, the court noted the California legislature has used “disclose” to mean “bringing into view” information “to which the discloser tends to have special access,” regardless of whether it is already known to some or all of the recipients, such as when a judge discloses campaign contributions. For the court, these usages illustrated that “disclose” “need not mean only the revelation of information previously unknown to the recipient.” And applying this narrower reading of “disclose” to the whistleblower statute would, in the court’s view, be contrary to its remedial purpose. The court also held that disclosure is protected even if the recipient of the disclosure is engaged in the wrongdoing being disclosed.
The upshot is that, under Section 1102.5, employee Y may be deemed to “blow the whistle” even if employee X has already blown it first, even if employee Y knows this before coming forward,[1] and even if the employer of X and Y is already aware of and involved in the alleged wrongdoing or trying to correct it.
Ninth Circuit Endorses Expansive Interpretation of California’s General Whistleblower Law
In Killgore v. SpecPro Pro. Servs., LLC, 51 F.4th 973 (9th Cir. 2022), an employee sued under California Labor Code Section 1102.5(b) on the basis that he was fired for reporting suspected illegality about an environmental assessment report to the U.S. Army Reserve Command (his employer’s customer) and his supervisor. The employer moved for summary judgment on multiple grounds, several of which are relevant here: that Section 1102.5 does not protect (1) disclosures to people who do not have authority over the discloser; (2) reporting made in the course of an employee’s normal duties; and (3) disclosures made before the allegedly illegal act was complete. On appeal, the Ninth Circuit rejected each ground and ruled for the employee:
- Under Section 1102.5, an employee can engage in protected activity by disclosing suspected illegality to someone who has authority over the employee, even if that person lacks the power to correct it. Section 1102.5 complaints often arise when an employee discloses suspected unlawful activity internally to their employer. But in the context of internal complaints, Section 1102.5 can apply only if the employee discloses the information “to a person with authority over the employee, or to another employee who has authority to investigate, discover, or correct a violation or noncompliance[.]” In Killgore, the employer argued that the plaintiff’s disclosure to his supervisor could not have been protected because his supervisor is a private citizen in the employ of a private firm and lacked the power to correct the Army Reserve’s alleged non-compliance. The court rejected this argument, however, reading the key clause in (b)—“to a person with authority over the employee or another employee who has the authority to investigate, discover, or correct the violation or noncompliance” (emphasis added)—as disjunctive, and that “who has authority to investigate . . .” modified only the last antecedent, i.e., “another employee” rather than also “a person with authority over the employee.”
- Under Section 1102.5(b), an employee can engage in protected activity even if disclosure is part of the employee’s “normal duties.” In so holding, the court pointed to Section 1102.5(b)’s 2014 amendment, which added that a whistleblower’s disclosures are protected “regardless of whether disclosing the information is part of the employee’s job duties.” Cal. Lab. Code § 1102.5(b). Based on this amendment, “[e]ven if the district court were correct that [the plaintiff’s] reports to [the government customer] were a normal function of his employment, his disclosures were clearly protected under state law at the time they were made.”
- That the employee disclosed suspected illegality before the alleged illegality was complete is not necessarily fatal to whether they had a reasonable belief of illegality. The employer argued that the plaintiff could not have reasonably believed there was a violation of the environment assessment report because the plaintiff was fired before the report had even been completed and therefore before any illegality could have occurred. The court disagreed. Under Section 1102.5(b), “[a]n employer may not retaliate against an employee for disclosing wrongful conduct “or because the employer believes that the employee disclosed or may disclose information” about a violation of law.” (Emphasis in case.) Relying on the “may disclose” language, the court found that Section 1102.5(b) also protects “anticipated whistleblower” activity and an employer cannot “fire the potential whistleblower before completing the illegal act and thereby escape liability.”
U.S. Supreme Court May Issue Decision Making It Harder for Employers to Defeat SOX Whistleblower Claims
The U.S. Supreme Court heard oral argument in the SOX case Murray v. UBS on October 10, 2023. We covered the Second Circuit’s decision and issues presented earlier this year. The question before the Court is whether SOX’s contributing-factor standard requires that a whistleblower plaintiff make a showing of retaliatory intent, or whether it is enough for a plaintiff to show that the protected activity in some way contributed to the adverse employment action, regardless of whether the employer intended to retaliate against the employee. Put somewhat differently, is there a meaningful distinction between causation and intent under the contributing-factor standard and does it require a SOX whistleblower plaintiff to prove retaliatory intent? Although a technical question, it is one that could have far-reaching implications.[2]
Oral argument certainly does not always reveal which way Justices will vote. The Justices’ questioning here, however, suggests that the Court may reverse the Second Circuit in favor of the employee and establish a SOX standard that does not require retaliatory intent. Justices Jackson, Sotomayor, Kagan, Gorsuch, and, to a lesser extent, Barrett and Kavanaugh, all at various points appeared less than convinced by the causation-intent distinction underlying the company’s position in the SOX context. Justice Gorsuch, in particular, pushed back against the idea that the statute requires a SOX whistleblower plaintiff to prove retaliatory intent:
SCALIA: We can talk about the other flaws in the instructions that were given here that we think are independent reasons to affirm the Second Circuit. But, again, if you’re instructing a jury about retaliatory intent in a case that’s involving Sarbanes-Oxley whistleblower retaliation –
JUSTICE GORSUCH: I just don’t see those words in this statute.
SCALIA: – I think it becomes a little bit confusing for a jury.
JUSTICE GORSUCH: I see discrimination in this statute, and I see whistleblowing activity, and I know there’s a causation requirement, but I don’t see the retaliation in this statute.
SCALIA: Yeah.
JUSTICE GORSUCH: So help me out. You’re asking me to read things into a statute that aren’t there, aren’t you, counsel?
Justice Kavanaugh also seemed to suggest that, at the end of the day, the standard might not make much practical difference because, supposedly, employers often have all the facts and can still prove that the protected activity was not a contributing factor.
JUSTICE KAVANAUGH: But they’ll have – to pick up on Justice Kagan’s point, I’m sorry to interrupt, but the – the employer will have the information that shows, okay, we fired 10 other employees as well who hadn’t engaged in the protected activity for the same reason. Or here’s our list of performance ratings and, see, we fired these other people who had the same performance rating. That’s how the employer wins these cases, but they – the employer has the information. Once you put that in, then the jury, as was went on in the closing arguments here, has to figure out is that enough to show that the protected activity wasn’t the – you know, whatever the – the reason.[3]
A decision is expected by the end of this term before summer 2024.
SEC Takes Unprecedented Action Against Private Company’s Employment Agreement
SEC Rule 21F-17(a) prohibits taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” Among other contexts, this can apply to employment or separation agreements that contain certain confidentiality or non-disparagement provisions, if such provisions are, in the SEC’s view, overly broad and operate to impede a whistleblower from coming forward. Since the rule’s promulgation in 2010, the SEC has limited its enforcement of this Rule to publicly held companies. The SEC’s recent enforcement action may signal a change.
In September 2023, the SEC charged a privately owned energy and technology company with violating Rule 21F. The SEC took aim at the private company’s confidentiality requirements in their severance agreements. The agreements included standard protection-of-rights language: “nothing in this agreement is intended to limit in anyway your right or ability to file a charge or claim with any federal, state or local agency.”[4] But the agreement also waived the employee’s right to receive any recovery of a monetary award for filing their claim or participating in the governmental agency investigation or action, without providing a carveout for whistleblowing activity to the SEC. Even though the SEC found no evidence that this waiver in fact discouraged any employee from reporting to the SEC, it still entered a cease-and-desist order and issued a $225,000 fine. In doing so, it made clear that private companies, as well as public, must comply with Rule 21F:
Both private and public companies must understand that they cannot take actions or use separation agreements that in any way disincentivize employees from communicating with SEC staff about potential violations of the federal securities laws . . . .
Any attempt to stifle or discourage this type of communication undermines our regulatory oversight and will be dealt with appropriately.[5]
All employers, both public and private, should review their employment and separation agreements to ensure compliance with Rule 21F in light of the SEC’s latest enforcement actions.
We can only expect further developments in 2024 and beyond, and the MoFo team will report on them as they arise.
[1] People ex rel. Garcia-Brower v. Kolla’s, Inc., 14 Cal. 5th 719, 731 (2023) (“there is no indication that an employee must also have reasonable cause to believe that he or she is the first to report the alleged violation, and we see no basis for reading such a requirement into the statute.”).
[2] https://www.mofo.com/resources/insights/230828-scotus-poised-to-resolve-circuit-split.
[3] As counsel for respondents noted, however, employers often do not have this type of comparative evidence, especially in reduction-in-force cases (which Murray v. UBS was) and may not have it in a way that is clear and convincing.
[4] https://www.sec.gov/files/litigation/admin/2023/34-98322.pdf.
[5] https://www.sec.gov/news/press-release/2023-172.
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