RECENT DEVELOPMENTS IN WHISTLEBLOWING LAW
UNDER SOX AND DODD-FRANK
By Robert Y. Lewis

On September 14, 2011, the Occupational Safety and Health Administration ordered Bank of America to reinstate Eileen Foster, a former Countrywide senior vice president, and to pay her $930,000 for firing her in retaliation for blowing the whistle on Countrywide’s practice of inflating borrowers’ incomes on mortgage applications.  Foster ran Countrywide’s mortgage fraud investigation unit at the time of the Bank of America/Countrywide merger.

In interviews, Foster has said that she became concerned that fraud was being allowed to flourish at Countrywide because honest employees who tried to report wrongdoing were being targeted and fired.  In her OSHA complaint she claimed that soon after she reported her concerns up the corporate ladder, the company began an investigation of her.  That investigation continued after Bank of America took over Countrywide.  Several months later, the Bank fired Foster, saying that she had engaged in “inappropriate and unprofessional conduct” and exercised “poor judgment as a leader.”  OSHA rejected the Bank’s explanation for the firing, finding it to be in retaliation for her whistleblowing.  The Bank is appealing to the Labor Department’s administrative law judge.   

The Foster case highlights the importance, as well as the deficiencies, of the whistleblowing provision of The Sarbanes Oxley Act (SOX) under which Foster obtained relief.  The SOX whistleblower law was intended to prevent another Enron and WorldCom, by encouraging insiders to blow the whistle before corporate wrongdoing caused severe harm.  No such luck.  Several years after passage of SOX, the mortgage-backed securities scandal led to the 2008 financial meltdown, and while a few whistleblowers such as Foster popped up, they were too few and too late to avert the economy’s collapse. 

In this E-Update, we discuss the recent significant expansion of whistleblowing law contained in The Dodd-Frank Act of 2010, which Congress enacted in reaction to the 2008 financial crisis, and other developments that we believe will cause an increase in whistleblower litigation in the coming years.

I.          The SOX Whistleblower Provision

SOX, enacted in July 2002, makes it illegal for certain large corporate employers to retaliate against officers, employees, contractors, subcontractors and agents who bring to light fraud against shareholders.  18 U.S.C. § 1514A.  The law permits such whistleblowers who believe they have been subject to retaliation to file a complaint with OSHA, and ultimately to obtain judicial review of their complaint.  Id.  Remedies include reinstatement, back pay and “special damages”, as well as costs, expert witness fees and attorneys’ fees.  Id. 

II.          Dodd-Frank Expansion of Whistleblower Law

Enacted on July 21, 2010, Dodd-Frank significantly expanded the whistleblower law by (i) strengthening SOX protections of whistleblowers, (ii) expanding those protections to reach more whistleblowers, and (iii) providing significant financial inducements to whistleblowers.   

A. Strengthening and Expanding SOX Whistleblower Protection

First, Dodd-Frank strengthened and expanded SOX whistleblower protections.   

(1)  Extension of Protection to Rating Agency Employees – SOX originally only protected corporate insiders and certain outsiders -- contractors, subcontractors and agents.  Recognizing that rating agencies shared part of the blame for the financial collapse by failing timely to downgrade mortgage-backed securities, Dodd-Frank extended whistleblowing protection to rating agency employees. 

(2)      Lengthening of the Statute of Limitations – Under SOX, a whistleblower had 90 days from the date “on which the violation occurs” to file a complaint with OSHA.  18 U.S.C. §1514A.  OSHA had interpreted this statute of limitation’s accrual rule strictly, reading the date “on which to the violation occurs” to be the date the employer takes adverse action, such as firing or demoting the employee. 

This created the possibility that an employee would not timely file a complaint with OSHA for retaliation not out of slothfulness, but because she did not learn facts which gave rise to her suspicion of retaliatory motive for the action until after the 90 days had run.  That actually happened to a Nordstrom employee, who in May 2005 reported to her supervisor that she believed security vulnerabilities in Nordstrom’s information systems exposed the company to potential SEC violations.  Shortly thereafter she received her first negative work-performance review, and in November 2004, was told that Nordstrom was eliminating her job duties and there were no other opportunities for her at the company. 

The employee did not file a complaint for retaliation until October 2006.  In the complaint she explained that she did not realize her firing was retaliatory until she learned in July and August 2006 from other employees that Nordstrom had lied to her -- her job duties had not been eliminated, but were being performed by others.

But the Administrative Law Judge found this explanation for the late filing unavailing under SOX, dismissing the complaint as untimely because it was not filed within 90 days of the firing.  In November 2010, the Ninth Circuit affirmed that dismissal.  See Coppinger-Martin v. Solis, 627 F.3d 745 (9th Cir. 2010).

Reflecting Congress’ concern about cases such as Coppinger-Martin, Dodd-Frank extended the statute of limitations period from 90 to 180 days, and changed the statute of limitations commencement date from the date the violation occurs to the date the employee becomes aware of the violation.

(3) Right to Jury Trial.  Under SOX, where OSHA fails to issue a decision on an employee complaint within 180 days of its filing, the aggrieved employee may file a lawsuit in federal court.  SOX did not explicitly give the employee the right to a jury trial in such an action, and courts had disagreed on whether the claim was of the sort which the Constitution requires be triable to a jury.  Dodd-Frank makes explicit the plaintiff’s right to a jury trial on SOX retaliation claims.      

B.  Monetary Awards to Those Reporting to the SEC and CFTC

In addition to giving more protection to whistleblowers under SOX, Dodd-Frank sought to encourage whistleblowing to regulatory agencies by offering to individuals who provide original information to the SEC or CFTC monetary awards equal to 10 to 30 percent of civil or criminal monetary sanctions exceeding $1 million, which are obtained using the information.  Section 21F of the Securities Exchange Act of 1934 (15 U.S.C. 78a, et seq.). The purpose of this reward program is to “motivate those with inside knowledge to come forward and assist the Government to identify and prosecute persons who have violated securities laws and recover money for victims of financial fraud.” S. Rep. No. 176, 111th Cong., 2d Sess. 110-111 (2010).  Unlike the SOX whistleblower protection law, this whistleblower law is not limited to whistleblowers whose information relates to “fraud against shareholders.”   

C.  New Private Right of Action for Retaliation

Dodd-Frank also created a new private right of action for employees who have suffered retaliation because of their (i) whistleblowing to regulatory agencies or (ii) internal- company disclosures required or protected under SOX.  Dodd-Frank § 922.  This private cause of action is more robust than that provided by the SOX anti-retaliation provisions, even after Dodd-Frank strengthened it (see discussion above).  For instance, here the whistleblower need not exhaust administrative remedies before bringing the retaliation action in federal court, and the remedies include double back pay.

D.  New Protection for Employees in the Consumer Financial Products and Services Industry

Dodd-Frank created a new regulatory body known as the Bureau of Consumer Financial Protection tasked with regulating businesses providing consumer financial services and products.  Section 1057 of Dodd-Frank created a new cause of action for whistleblowers working in this industry.  In particular, the new cause of action is given to employees who blow the whistle on what they reasonably believe to be a violation of any law which falls within the newly created Bureau’s jurisdiction.  Remedies include reinstatement, back pay, compensatory damages, attorney’s fees, litigation costs and expert witness fees.  If reinstatement is not practicable, front pay may also be awarded.

Significantly, the law contains a burden-shifting provision very favorable to employees:  Once the whistleblower has shown by a preponderance of the evidence that whistleblowing was a “contributing factor” to the adverse action by the employer, the burden shifts to the employer to show by “clear and convincing” evidence that it would have taken the adverse action absent the whistleblowing.

Much like the original SOX whistleblowing cause of action for retaliation (see discussion above), this claim is brought first to OSHA and can be removed to federal court if OSHA does not timely issue a ruling.  

IV .          OSHA’s Efforts to Improve Whistleblowing Protection

As the above review of whistleblowing law shows, OSHA plays the critical role of conducting the initial review and investigation of many whistleblowing retaliation complaints.  Late last year the Government Accountability Office, the Labor Department’s Inspector General, issued several critical Reports of OSHA’s investigation of whistleblowing complaints.  The GAO Reports noted numerous procedural deficiencies in OSHA’s investigations, including often failing to obtain a list of suggested witnesses from the complainant or interviewing pertinent witnesses.  The Reports also criticized OSHA for not providing its investigators with the legal training concerning the statutes they were supposed to enforce. 

The GAO Reports also noted that of the 1,602 complaints resolved in a recent 12 month-period, 71 percent were dismissed or withdrawn, 21 percent were settled for money or reinstatement, and only 2 percent resulted in a decision favorable to the whistleblower.   

On August 1, 2011, in response to these critical GAO Reports, OSHA announced measures to improve whistleblower protection.  These included:

(i) Restructuring – The Whistleblowing Program will begin reporting directly to the head of OSHA, OSHA hired 25 new investigators, and the Program now has a separate budget line item for better tracking and accountability.  

(ii) New Investigations Manual – OSHA issued a new Whistleblowers Investigations Manual, which was last updated in 2003.

(iii) Internal Systems – Data collection systems have been modified and the audit program strengthened to ensure complaints are properly handled on a timely basis.

(iv) Training – OSHA will hold a September 2011 national whistleblower training conference that all investigators must attend.

IV.          Conclusion

Because fraud is often difficult to detect until it’s too late to remedy the harm – see Madoff, Enron, Worldcom, and mortgage-backed securities – lawmakers have increasingly sought to protect and encourage whistleblowers (especially those with inside information about corporate financial workings) in hopes that they will ferret out and expose the fraud at an early stage.  With monetary incentives and robust legal protections for whistleblowers now in place, time will tell whether whistleblowers, as well as governmental agencies, corporations and the courts, are up to the task.          

About Freeman Lewis LLP
Freeman Lewis LLP is a boutique business dispute resolution firm, whose founders Jennifer Freeman and Robert Y. Lewis together have more than 50 years of experience assisting clients resolve business disputes through litigation, arbitration, mediation and negotiation. Their firm focuses on commercial litigation, employment law, securities arbitration, white-collar criminal, and ERISA. For more information, visit http://www.freemanlewis.com.