A Very Specialized Firm Practice: Whistleblowing

Friday, August 17, 2012 - 12:36

The Editor interviews Steven J. Pearlman and Lloyd B. Chinn, Partners, Proskauer.

Editor: Please tell us about Proskauer’s newly launched Whistleblowing and Retaliation Practice Group. What are your roles?

Pearlman: Lloyd and I will co-chair the group, which functions on a national and international platform. We intend to take a comprehensive, long-term approach to promoting our clients’ interests and safeguarding them against the tremendous risks associated with whistleblower claims. Having recently joined the firm, I look forward to leveraging my experience as whistleblower defense and employment litigator; working on a very broad platform; tapping into Proskauer’s global team of subject-matter experts; and expanding the firm’s already great success in this space.

Chinn: Proskauer’s Labor & Employment Department is one of the oldest and most respected in the country. Establishing the new practice group will enable growth within this specialized area of our employment law practice.  By adding Steve to our team, we are not only adding to expertise in this subject matter area, we are continuing the expansion of our national employment law practice, particularly in the Midwest.

I am resident in New York, and my employment law practice focuses largely on the financial services industry. Litigating retaliation and whistleblowing claims has been a particular focus of my practice.  Steve is resident in the Chicago office and really adds to the firm’s subject-matter expertise in having devoted his practice to whistleblower issues. We will work as co-equals to serve clients throughout all phases of whistleblower matters, from prevention, through the investigative process and, if necessary, on to litigation.

Editor: What does the firm’s decision to establish a specialized practice say about the ascendance of whistleblower issues? Do you see a trend toward including whistleblower protections in the drafting of legislation?

Chinn: There is no general whistleblower statute in the U.S. – no equivalent, for instance, of Title VII’s sweeping antidiscrimination protections – that provides a single cause of action for all subject matter and for all underlying employer misconduct. Instead, whistleblower provisions are enacted in tandem with other substantive lawmaking, particularly on a federal level.

For example, whistleblower protections were attached to substantive enactments in the Occupational Safety and Health Act, the Clean Air Act, and the Sarbanes-Oxley Act. Such protections also were attached to the Obama administration’s American Recovery and Reinvestment Act, while the Dodd-Frank Act created expansive whistleblower employment protections as well as a controversial  whistleblower bounty provision.

We expect this legislative dynamic to continue.  Whistleblower protections are regularly included when Congress enacts regulatory regimes in any substantive area, such as most recently with the Patient Protection and Affordable Care Act.

In dealing with whistleblower matters today, in-house counsel and HR staff should consider working with full-service law firms that have experience with the underlying regulatory legal issues, not just the employment law aspect. The Whistleblowing and Retaliation Practice Group will deepen Proskauer’s employment law capabilities and will be well supported by our practices in other substantive areas, such as financial services and healthcare.

Pearlman: In the very near future, the SEC will start awarding sizeable bounties, which will have a transformative impact on corporate America, reaching beyond monetary concerns and into areas such as company good will. It was necessary to take action to protect our clients.

I echo Lloyd’s remarks on the proliferation of whistleblower legislation. In early August, Senators Leahy and Grassley introduced whistleblower protections in connection with an antitrust and competition statute. Further provisions are included within broad statutory and regulatory regimes, such as the American Recovery and Reinvestment Act of 2009 and a wide range of environmental statutes; thus, there is a clear trend toward liberal, employee-favorable whistleblower protections.

Chinn: I’d like to expand on Steve’s reference to goodwill, which speaks to the complexity of these issues. The cornerstone of whistleblower claims involves allegations that a company failed to comply with laws or regulations and that some underlying misconduct caused this failure. Without at all diminishing the importance of discrimination in employment claims, whistleblowers often confront a company with allegations of both some underlying regulatory failure as well as an alleged unlawful employment action, thereby posing significant potential reputational risk, particularly to consumer-facing companies.

Even for employers with no history of litigation in this area, whistleblowing concerns have the attention of C-level executives who are looking for guidance to manage and minimize risk. Thus, Proskauer decided to address this need at the highest level by establishing a specialized practice area and by bringing in a nationally known expert like Steve.

Editor: The Southern District of New York, in Leshinsky v. Telvent GIT, S.A., et al, held that the amendments to the Sarbanes-Oxley Act (“SOX”) made by the Dodd-Frank Act explicitly expanding the whistleblower protections to employees of subsidiaries of publicly traded companies can be applied retroactively. Please discuss the history behind this decision and its impact going forward.

Pearlman: In its March, 2011 decision in Pezza v. Investors Capital Corporation, the U.S. District Court, District of Massachusetts, allowed retroactive application of the Dodd-Frank amendment to SOX. Concurrently, in another matter, the U.S. Department of Labor Administrative Review Board (“ARB”) also concluded that retroactive application was appropriate.

However, in July, 2011, the U.S. District Court, District of Nevada, took a diametrically opposed view in Henderson v. Masco Framing Corporation. The Nevada court stressed the very strong presumption against retroactivity in general and, in this particular context, that retroactive application would eliminate certain established and expected rights. I agree with the Henderson logic.

The July, 2012 Leshinsky ruling created a federal district court split in reverting to the liberal interpretations established in Pezza and Johnson. Moreover, the Leshinsky logic seems to contradict the language of SOX, which provided a cause of action for employees of publicly traded companies. The impact of Leshinsky may be to open the floodgate for hundreds of thousands (if not millions) of employees to sue under SOX. Non-publicly traded companies are facing unexpected risks and will need to come into compliance right away.

Editor: When is retroactivity justified?

Chinn: Retroactivity is appropriate when it is expressly provided for in the statute or when an amendment merely clarifies (but does not change the meaning of) existing language. In this case, plenty of courts interpreted the SOX (prior to Dodd-Frank) so that it did not protect employees of subsidiaries of publicly traded entities.  So the Dodd-Frank amendments to SOX from an employer’s standpoint did more than “clarify” SOX – they changed the existing understanding of the statute’s meaning. Employers are entitled to act in accordance with expectations based on existing law, and retroactivity should apply only if, in fairness, we all knew that was the rule anyway.

Pearlman: When the law is clear, companies can comply, and SOX clearly states that it applies to employees of publicly traded companies. Retroactive application of Dodd-Frank’s outright change to the law is unfair to non-publicly traded companies, which were blindsided and now face a potential avalanche of liability issues.

This is consistent with judicial splits we have seen in similar contexts. For example, the First Circuit recently held that whistleblower protections under SOX are not applicable to contractors of publicly traded companies. However, the ARB disagreed, leaving companies wondering how to proceed. Leshinsky really underscores that this is a conflicted area of law.

Editor: Please describe some common reasons for whistleblower complaints and strategies to address them.

Chinn: Employees become whistleblowers for a wide variety of reasons.  At best, individuals come forward because they witness misconduct and want to see their company move forward in a lawful, ethical fashion. At worst, the individuals are themselves culpable for misconduct, and they become whistleblowers in order to insulate themselves from bad outcomes relating to their employment status, regulatory action or even litigation.

The latter are encouraged by the disconcerting fact that Dodd-Frank does not prohibit outright culpable whistleblowers from recovering a bounty. We also often encounter self-styled whistleblowers whose employment was already in jeopardy because of their own poor performance, and their “whistleblowing” is nothing more than an attempt to protect their employment status or enhance the terms of their separation from the company.  While I acknowledge the legitimate claims of honest whistleblowers, ever-expanding whistleblower protection provisions also invite claims that are not meritorious.

Dodd-Frank’s bounty provision presents a particular conundrum for businesses. On one hand, companies are required to have robust internal compliance programs that encourage internal reporting of alleged misconduct.  On the other, Dodd-Frank’s bounty provision provides a strong financial incentive for employees to skip their employer’s internal compliance processes and proceed directly to the SEC.  Although it very much remains in a company’s interest to persuade its employees to present their concerns internally, whether they will be able to do so successfully in light of the bounty provision remains to be seen. 

Pearlman: Lloyd and I are developing formalized strategies for minimizing risks. Currently, companies tend to handle whistleblower issues reactively, in response to litigation. They often defend the claim on a one-off basis, and then review policies. This approach doesn’t scratch the surface of required action. So we’ve developed a comprehensive whistleblower rapid response system.

It starts with revamping codes of conduct, whistleblower protection policies and intake forms and then establishing a consistent process for compliance personnel to work with Legal and HR and break down communication silos. Quick response is critical because it reassures whistleblowers that they’re being taken seriously, so companies are well served to appoint a specific HR liaison.

While many whistleblowers fall on the opportunistic end of the spectrum, honest whistleblowers can be a real company asset. Working with them to resolve legitimate claims and underlying issues can dwarf the financial and reputational risks associated with whistleblower litigation.

We also are developing predictive risk radars to help companies identify and quantify risk. Companies that centralize and standardize procedures for gathering, vetting and auditing data also gain tools to analyze whether, for instance, certain product lines, geographic areas, plants or even individual supervisors are giving rise to whistleblower claims.

Editor: What is the interplay of risk parameters in the whistleblower context? Can internal investigations help mitigate these issues?

Chinn: We’ve already discussed the problems of culpable or opportunistic whistleblowers, particularly from an employment law perspective. I think it is important, though, to emphasize a company’s overriding interest in encouraging its employees to come forward with good faith grievances, notwithstanding those problems. Because of the underlying regulatory risk that may be associated with a governmental investigation or enforcement action, a business must be willing to take the risk that its efforts to encourage internal whistleblowing will generate some number of false or bad faith complaints. By actively investigating and resolving legitimate claims, a company can correct regulatory problems, gain credibility with its employees and, therefore, increase the likelihood that they will report internally instead of going directly to a regulator. All that being said, as noted earlier, Dodd-Frank’s bounty opportunities may make reporting to the SEC irresistible, even for honest employees with the best intentions and meritorious claims. Employers who do everything right in addressing complaints internally still face the specter of being reported externally when employees see the possibility of a 10-to-30 percent payday for awards over $1 million. Right now, I don’t think anyone knows the answer to that problem.

Editor: Do you have any final comments?

Pearlman: Right from the start, the employer community crystallized its objections to the Dodd-Frank whistleblower provisions in a letter submitted by the Association of Corporate Counsel to the SEC. This new regime, and particularly the bounty provision, creates a tremendous problem as employers are legitimately concerned that employees will sidestep multi-million-dollar internal compliance infrastructures in order to profit financially as whistleblowers.

This concern is borne out by the impending awards I mentioned earlier, so there will be greater need for whistleblower risk minimization. With our new Whistleblowing and Retaliation Practice Group, Proskauer is well positioned to protect clients in this space.

Please email the interviewees at spearlman@proskauer.com or lchinn@proskauer.com with questions about this interview.