by Jackson Lewis
The
highly anticipated legislation expected to bring reform to Wall Street
also includes provisions that greatly expand whistleblower liability
risk for employers. The Dodd-Frank Act Wall Street Reform and Consumer
Protection Act (“DFA”) was signed into law by President Barack Obama on
July 21, 2010. The 2,319 pages of federal legislation contain the
hotly contested establishment of a “Bureau of Consumer Financial
Protection.” The establishment of this Bureau, however, is far from
being the DFA’s only change. Among its provisions, the DFA brings much
change by way of expanding whistleblower liability in the following
ways:
- Adding new whistleblower rights for direct reports to the Securities and Exchange Commission;
- Adding new whistleblower rights for financial services employees;
- Enhancing provisions for Sarbanes-Oxley whistleblowers; and
- Enhancing provisions for the anti-retaliation provisions of the False Claims Act.
The four areas of new or expanded whistleblower liability are
explained briefly in this article and will be further analyzed in an
upcoming Jackson Lewis “Special Report: The Dodd-Frank Act
Whistleblower Provisions.” The Special Report will be accompanied by a
Jackson Lewis Webinar, provided at no cost to Firm clients. Look for a
Jackson Lewis invitation on the upcoming Special Report and Webinar.
The DFA creates two new whistleblower frameworks, providing the
federal government a new scope of claims. It also enhances existing
whistleblower and anti-retaliation provisions in the Sarbanes-Oxley
Act (“SOX”) and the False Claims Act (“FCA”).
1. New Whistleblower Provisions for Direct Reports to SEC and CFTC
Section 922 of DFA Title IX, referencing investor protections and
improvements to the regulation of securities, contains a monetary
incentive for individuals to make whistleblower reports to the SEC and
the Commodity Futures Trading Commission (“CFTC”).
Individuals who provide original information to these Commissions
that results in monetary sanctions in excess of $1 million in civil or
criminal proceedings will receive a reward. “Original information” is
derived from the independent knowledge or analysis of the
whistleblower, is not known to the SEC/CFTC from any other source, and
is not exclusively derived from an allegation in an administrative
hearing, governmental report, hearing, audit or investigation or from
the news media.
The reward can range from 10 percent to 30 percent of the amount
recouped by the SEC/CFTC and is determined in the respective
Commission’s discretion, subject to judicial review if the amount is
not within the 10 percent to 30 percent statutory range.
Factors considered in determining the amount of the reward include
the significance of the information provided, the degree of assistance
provided, the programmatic interest of the Commission in deterring
violations and other factors the Commission may establish.
In contrast to qui tam actions under the FCA, the DFA does
not provide a private cause of action to whistleblowers to prosecute
securities fraud or other SEC violations. Section 922 provides,
however, a private right of action for employees or other individuals
who have suffered retaliation due to lawful whistleblower acts,
including providing information to the SEC, initiating or otherwise
participating in investigations or judicial or administrative actions
of the SEC, or making disclosures required or protected under SOX, the
Securities Exchange Act of 1934 or any other law, rule or regulation in
the SEC’s jurisdiction.
The private right of action is not limited to employees, extending
to claims by any individual claiming to have been threatened, harassed
or subjected to discrimination because of protected activity. Unlike
SOX actions, these private actions may be asserted directly in federal
court and remedies may include reinstatement, double back pay with
interest, litigation costs, expert witness fees and reasonable
attorneys’ fees. The statute of limitations for such actions is six
years after the date on which the retaliation occurred or three years
after the date on which the facts material to the right of action are
known or reasonably should be known to the employee. There is no
administrative exhaustion requirement to bringing such an action in
federal court.
2. New Whistleblower Provisions for Financial Services Employees
The DFA also contains dedicated whistleblower protection for
financial services employees who disclose information about fraudulent
or unlawful conduct related to the offering or provision of a consumer
financial product or service. Section 1057 of the DFA prohibits
retaliation against a covered employee who:
- provides, causes to be provided, or is a about to provide
or cause to be provided, to an employer, the newly-created Bureau of
Consumer Financial Protection (“Bureau”) or any other state, local or
federal government authority or law enforcement agency, information the
employee reasonably believes to be a violation of the Consumer Fraud
Protection Act of 2010 (Title X of the DFA) or any other provision of
law subject to the jurisdiction of the Bureau or any rule, order,
standard or prohibition prescribed by the Bureau;
- testifies in any proceeding regarding the same; or
- files, institutes or causes to be filed, any proceeding under any federal consumer financial law.
Employees who believe they have been retaliated against for engaging
in protected activity under Section 1057 must file a complaint with the
Secretary of Labor within 180 days of the alleged retaliation. In
order to establish a prima facie case under Section 1057, an
employee need demonstrate only that the protected activity was a
contributing factor in the adverse action. The employer must then
demonstrate by clear and convincing evidence that it would have taken
the same action absent the protected activity. The parties can appeal
the Department’s findings to the Office of Administrative Law Judges.
In the event the Department fails to issue a final order within 210
days of the filing of the complaint, the complainant can bring a claim
in federal court for de novo review and either party may request a trial by jury.
Significantly, claims under Section 1057 are exempt from arbitration agreements.
3. Enhanced SOX Whistleblower Provisions
The DFA contains very significant amendments to the SOX
whistleblower provisions. These amendments will likely have a dramatic
affect on the handling and defense of these cases. Generally, the
amendments either undo prior favorable provisions or contradict prior,
employer-friendly, interpretations of key SOX provisions.
The SOX statute of limitations period is doubled from 90 days to 180
days. This runs counter to the originally stated policy purpose of
having whistleblower litigation proceed on an expedited basis and
likely will open the door to additional claimants.
The DFA clarifies that SOX litigants are entitled to a jury trial,
an issue left unresolved by prior SOX jurisprudence and one that may
have prompted SOX litigants to resolve their claims by way of the OSHA administrative agency process rather than seeking entry to federal court.
The DFA clarifies that subsidiaries and affiliates of publicly
traded companies are subject to SOX if the financial information of the
subsidiary or affiliate is included in the consolidated financial
statements of the public company. This is in direct contradiction to
the growing line of cases and, indeed, the Department of Labor’s own
view, that employees of non-publicly traded subsidiaries were generally
not covered by SOX absent a showing of a substantial nexus between the
parent and the subsidiary.
Notably, pre-dispute arbitration agreements are no longer
enforceable under SOX, nor will the rights and remedies under SOX be
waivable by agreement.
4. Enhanced Anti-Retaliation Provisions to the False Claims Act
The DFA amends the FCA’s anti-retaliation provisions by expanding
the definition of what is deemed “protected conduct” and by clarifying
a three-year statute of limitations period. The 1986 Amendments to
the FCA provide remedies for persons wrongfully discharged or otherwise
discriminated against in their employment because of lawful acts done
in furtherance of an FCA action. Section 1079B of the DFA amends these
anti-retaliation provisions by expanding “protected conduct” to include
“lawful acts done by the employee… in furtherance of an action under
this section….” In so doing, the FCA’s protective anti-retaliation
provisions extend to individuals who take action pursuant to the DFA’s
consumer protection efforts.
The DFA further clarifies that the statute of limitations for FCA
retaliation actions is three years rather than tied to that of the
analogous state statute.
Employer Impact
We expect the new and enhanced whistleblower provisions to have a
significant impact on the whistleblower-litigation landscape. The
monetary incentives to report matters to the SEC, independently of the
SOX administrative process, coupled with enhanced provisions for both
SOX and consumer-oriented claims will likely increase the volume of
such claims.