Are Employees (and Other Whistleblowers) Protected From Retaliation?
Over the last thirty years, Congress passed several key laws related to whistleblowing, including the Sarbanes-Oxley Act of 2002 (“SOX”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), and the False Claims Act (“FCA”). The statutes provide employees and other whistleblowers with anti-retaliation protections for identifying, investigating, or disclosing various forms of fraud identified within a company. While the provisions share some enforcement mechanisms, they do not cover the same conduct and they do not share the same processes for bringing a claim under each law.
Both SOX and Dodd-Frank contain anti-retaliation provisions that prohibit employers from taking any adverse employment action against employees for reporting a company’s illegal conduct, such as securities or commodities fraud.
SOX’s whistleblower protection provision applies to publicly traded companies, subsidiaries, contractors, and other affiliated entities. SOX protects those who blow the whistle against these entities both internally and externally. Specifically, Section 806 of SOX provides a civil cause of action to employees whose employers retaliated against them because they provided information about, or participated in, an investigation relating to what they reasonably believed constituted a violation of: 1) securities fraud, bank fraud, mail fraud, or wire fraud; 2) the U.S. Securities and Exchange Commission (“SEC”) rules and regulations; or 3) any federal law relating to fraud against shareholders. (18 U.S.C. § 1514(a)(1)-(2)
In addition, Section 1107 of SOX prohibits employers from retaliating against an employee seeking to report wrongful conduct or an alleged federal offense to a law enforcement official or agency. Section 1107 does not differentiate between employees of private and public companies. (18 U.S.C. § 1513(b)(2)
The employee suffering retaliation has the option to file a complaint with the Occupational Safety and Health Administration (“OSHA”), which is the agency that investigates whistleblower retaliation under SOX. A SOX retaliation complaint must be filed within 180 days of either termination or other retaliatory action taken by the employer.
Unlike SOX, only whistleblowers who report securities violations to the SEC are entitled to protections available under Dodd-Frank. In 2010, Dodd-Frank significantly expanded upon the employee-protection provisions under SOX. Dodd-Frank creates a private right of action for employees who: 1) provide information to the SEC and assist in any SEC investigation related to the disclosures; or 2) disclose “required or protected” information under SOX, the Securities Exchange Act of 1934, or any law, rule, or regulation under the SEC. (15 U.S.C. § 78u-6(a)(6)
Whistleblowers are also required to report to the SEC while they are still employed with the defendant company. The Supreme Court has held that the anti-retaliation provisions under Dodd-Frank only extend to those who provide information to the SEC. (Digital Realty Tr. Inc. v. Somers, 138 S. Ct. 767 (2018)
Subsequently, in 2020, the SEC adopted amendments to the rule governing the whistleblower program that included a new definition of whistleblower to conform to the Supreme Court’s holding – requiring whistleblowers to report to the SEC in writing before experiencing the retaliation. The decision established an order of events that typically needs to occur to allege retaliation: 1) witness the fraud; 2) report the fraud to the SEC while employed with the defendant company; and 3) experience retaliation from the defendant company for blowing the whistle.
Section 21F(h)(1)(A) allows whistleblowers to pursue a retaliation case in federal court. The retaliated-against employee can file directly in federal court within three years, “after the date when facts material to the right of action are known or reasonably should have been known to the employee.” (15 U.S.C. § 76u-6(h)(1)(B)(iii)(I)
The federal FCA also provides anti-retaliation protection for whistleblowers. Corresponding state laws, if available, also include similar anti-retaliation provisions modeled after the federal statute. The FCA prohibits an employer from retaliating against an employee “because of lawful acts done by the employee . . . in furtherance of an action under this section or other efforts to stop 1 or more violations.” (31 U.S.C. § 3730(h)
An FCA whistleblower may assert a retaliation claim as a standalone cause of action. Typically, FCA whistleblowers assert retaliation claims along with fraud claims under the FCA.
The remedies available to whistleblowers are designed to make the employee whole. SOX and Section 922 of Dodd-Frank allow for reinstatement and attorneys’ costs and fees. SOX allows for a single back pay award and compensatory damages. Section 922 awards two times back pay but no punitive damages. A whistleblower who prevails in an FCA retaliation case may recover by reinstatement, double back pay and special damages, which include litigation costs, reasonable attorneys’ fees, emotional distress, and other non-economic harm from retaliation.
A recent event highlighted a troubling lack of clarity about whether existing protections for whistleblowers can be dependent upon the current enforcement mechanisms offered by the SEC. On May 18, 2022, the U.S. Court of Appeals for the Fifth Circuit held that the SEC administrative enforcement proceedings are unconstitutional. The dispute in Jarkesy involved an Administrative Law Judge decision that found a hedge fund manager liable for securities fraud. In a 2-1 ruling, the Jarkesy decision opined that in-house SEC adjudication violated the defendants’ Seventh Amendment right to a jury trial and that Congress unconstitutionally authorized the agency to exercise legislative power by permitting the SEC to decide whether to pursue enforcement cases internally or in federal court. (Jarkesy v. SEC & Exch. Comm'n, No. 20-61007, 2022 WL 1563613 (5th Cir. 2022)
The Fifth Circuit’s decision could dismantle much of the SEC’s ability to enforce the existing protections provided to whistleblowers. For example, it could preclude the SEC from taking enforcement action against a company that violates the anti-retaliation provisions of Dodd-Frank. Absent the SEC’s ability to enforce securities law, employees and other whistleblowers may incur additional exposure and less protection for identifying fraud.
Moreover, the rationale of the Jarkesy decision could trigger similar challenges to dozens of other federal administrative bodies that deploy in-house adjudication, such as the Federal Trade Commission, Social Security Administration, Department of Labor, Consumer Financial Protection Bureau, International Trade Commission, and Environment Protection Agency, among others. Though the anti-retaliation provisions of various whistleblower statutes provide some degree of protection for employees and other whistleblowers, the implications of the Fifth Circuit’s decision aimed at SEC administrative proceedings could be stacked against those who come forward to expose fraudulent activities.
Retaliation against employees who report issues is all too common. Whistleblowers who face retaliation from their current or former employers have legal options for protection pursuant to the various statutes - SOX, Dodd-Frank, the FCA and corresponding state FCAs. A steady rise in whistleblower retaliation cases has occurred in recent years, and it is prudent for any employee acting as a whistleblower to understand the protections available in the event of retaliation.