Expanding protection for whistleblowers
A recent U.S. Supreme Court ruling expands the anti-retaliation provisions of the SOX whistleblower protections.
Private companies that have long-standing contracts with publicly traded companies are particularly at risk for liability, if they retaliate against their employees.
Private contractors who work for public corporations should take notice.
FERA expanded False Claims Act whistleblower protections.
Both public and private corporations should have comprehensive mechanisms to address compliance matters thoroughly before they become qui tam suits
The United States Supreme Court recently rendered a decision that has the potential to greatly expand whistleblower protection afforded under the Sarbanes-Oxley Act of 2002 (SOX). In Lawson v. FMR, LLC, the Supreme Court held that the anti-retaliation provisions of SOX extend to private companies that contract with publicly traded corporations, not just publicly traded corporations. In addition to SOX, the federal False Claims Act (FCA) also contains anti-retaliation provisions, which are often implicated in healthcare actions initiated by whistleblowers. This decision however, is the most significant development in the ever-expanding landscape of anti-retaliation laws. This article will examine the Lawson decision and its potential impact on private companies and will discuss recent decisions rendered pursuant to the anti-retaliation provisions of the FCA.
SOX anti-retaliation provisions
Section 806 of SOX, entitled “Protection For Employees of Publicly Traded Companies,”provides in part that “No [public] company …, or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].” SOX protects employees who provide information to, cause information to be provided to, or assist in an investigation by a federal regulatory or law enforcement agency, a member of Congress or an internal investigation by the company related to fraud. Retaliation can occur in the form of adverse employment actions such as termination, lay-offs, denial of promotions, demotions, denial of benefits, intimidation, etc. An employee who has been retaliated against can file an enforcement action with the U.S. Department of Labor, Occupational Safety and Health Administration. If successful in asserting retaliation, the employee could be entitled to receive compensatory damages, such as back pay with interest, and “special damages sustained as a result of the discrimination” including litigation costs, attorney fees, and expert witness costs. Due to the potential for high damage awards, the stakes for such retaliation actions can be high for employers that are defending against them.
Lawson v. FMR, LLC, was initiated by former employees of FMR, a private company that contracted with Fidelity, a publicly traded corporation, to manage and advise on mutual funds. Fidelity has no employees of its own and operates via contract with private companies such as FMR (sometimes known as the “contractor workforce” model). The whistleblowers in this case claimed that they were retaliated against after they made allegations of fraud in the publicly traded company's financial reports. They brought claims pursuant to SOX's anti-retaliation provisions. FMR argued, however, that these employees were not covered by SOX because they were not employees of the publicly traded company. The Supreme Court, in a 6-3 decision, opined that even though these employees were not employed by the publicly traded company, the SOX whistleblower statute covers them. The Court reasoned that in this particular context, where the publicly traded company has no employees of its own, limiting the application of the whistleblower statute only to employees of publicly traded companies would potentially insulate the entire mutual fund industry, which commonly uses the contractor workforce model. Moreover, the Court also reasoned that SOX was enacted to specifically curb rampant wrongdoing and “"mischief” by publicly traded institutions, such as Enron. Therefore, failing to extend the SOX whistleblower protections to employees of contracted private entities that serve such institutions would create a gaping loophole that hampers the intent behind SOX.
The Lawson decision could have potentially far-reaching implications. It could result in liability for contractors of publicly traded companies that retaliate against employees in violation of SOX. Private companies that have long-standing contracts with publicly traded companies are particularly at risk, and such companies should operate under the assumption that the Lawson decision now allows their employees to assert claims using the SOX anti-retaliation statute. In addition to SOX, whistleblower protection has been an integral part of the federal False Claims Act, because its very foundation rests upon qui tam relators, often current or former employees, who bring actions on behalf of the government.
FCA and whistleblower protections
The federal False Claims Act (FCA) makes actionable the submitting or causing to submit a false or fraudulent claim for payment by the government. Before Congress made changes to the FCA, courts were reluctant to extended FCA liability to entities that had not directly presented claims for payment to the government, because the statute specifically referred to “presenting” false or fraudulent claims to the government. In fact, in 2008 the Supreme Court held that linking the government’s decision to pay and a subcontractor’s false claim was too attenuated for FCA liability. Congress responded strongly, passing a law the following year to directly contradict the Supreme Court’s holding, and affirmatively made subcontractors liable and extended whistleblower protections beyond just employees.
On May 20, 2009, the Fraud Enforcement and Recovery Act (FERA) was signed into law. FERA greatly expanded FCA exposure by extending liability for false claims beyond direct government submissions for payment. In other words, merely being a recipient of federal funds (or even an indirect recipient) is enough to subject an entity to potential FCA liability. Penalties under the FCA can range from $5,500 to $11,000 per claim with up to additional treble damages. Moreover, FERA specifically expanded whistleblower protections to address retaliatory actions against “any employee, contractor, or agent.” Thus, the FCA has been altered in two major ways: liability follows the federal dollars and a vast number of relators are protected, regardless of employment status.
Recent FCA whistleblower protection cases
Courts are applying the FERA revisions to the FCA whistleblower protections exactly as Congress intended. Last year, the Northern District of Florida denied a motion to dismiss a claim based on retaliatory discharge of a relator. The relator, the employee of a professional employment service, worked onsite at a healthcare provider and performed many of the functions of a traditional employee. The court held that the FERA changes made it clear that a worker need not be a bona fide “employee” in the traditional sense to use the FCA whistleblower protections.
Moreover, the evidentiary standard for relators to meet the burden of a retaliatory action claim has recently been held to be that of a civil rights discrimination case. The First Circuit applied the burden-shifting test commonly used in civil rights discrimination cases to an FCA case, a method which has since been adopted by other courts. The court held that once a plaintiff sets forth a clear and plain case of retaliation, the burden then shifts to the defendant corporation to show a legitimate reason for the adverse employment action. If the defendant does show a legitimate reason, the plaintiff has the burden to prove that reason is a pretext for retaliation. This was the first instance that this burden-shifting method was applied in FCA cases and other courts have followed suit. Courts appear to be taking Congress’ cue in drawing a hard line on retaliation against whistleblowers.
SOX and the FCA are two of several federal laws that are designed to protect employees who come forward to report corporate wrongdoing. In light of the Lawson decision and the recent expansion of the FCA, public and private corporations would be well-advised to review their corporate compliance practices to ensure that instances of corporate fraud and misconduct are detected and addressed in a comprehensive manner. Corporations should also have robust policies in place to ensure that any adverse employment actions are separate and distinct from potential whistleblower activity on the employee's part with documentation showing the same. Those policies should apply to contractors and other workers who perform the same or similar functions as employees. Having such policies and procedures in place on the front end could save companies from dealing with retaliation actions that can be very costly to defend on the back end.
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