Washington D.C. Employment Law Update : Washington D.C. Employment Lawyer & Attorney : Littler Mendelson Law Firm : Virginia, Tyson's Corner

Protected disclosures could be made to a member of Congress or a representative of a committee of Congress; an inspector general; the Government Accountability Office (GAO); a federal employee responsible for contract or grant oversight or management at the relevant agency; an authorized official of the Department of Justice (DOJ) or other law enforcement agency; a court or grand jury; or a management official or other employee of the contractor, subcontractor, or grantee who has the responsibility to investigate, discover, or address misconduct.

Employees or contractors who believe they have been retaliated against for whistleblowing would have three years to submit a complaint to the Inspector General of the executive agency involved. An aggrieved employee would be eligible to receive equitable relief and compensatory damages, including reinstatement, backpay, attorneys’ fees and costs associated with filing the complaint. An employee who has exhausted these administrative remedies would be permitted to file a claim in federal district court.

These whistleblower rights could not be waived under any agreement, policy, or form, including any predispute arbitration agreement, other than an arbitration provision in a collective bargaining agreement. Agency heads would be required to ensure that all contractors, subcontractors, and grantees of the agency notify their employees in writing of the whistleblower rights and remedies provided under this amendment.

Sen. McCaskill last introduced provisions similar to those included in the above amendment as standalone legislation – the Non-Federal Employees Whistleblower Protection Act (S. 241) – in January 2011. Although the Senate Committee on Homeland Security and Governmental Affairs approved that bill on April 25, 2012, it failed to advance any further. Now that these protections are incorporated into a larger authorization bill, it has a greater chance of passage.

Contractor and Civilian Cuts

On November 30 the Senate rejected another amendment offered by Sen. Ben Cardin (D-MD) that sought to strike a provision (Sec. 341) of the Defense bill added by Sen. John McCain (R-AZ) that applies a 5% across-the-board cut to Defense Department contractors and civilian employees. The White House has already threatened to veto the bill on account of various provisions, including section 341. In a Statement of Administration Policy, (pdf) the Administration emphasizes that it:

objects to section 341, which would reduce funding for the civilian and contractor workforce by a rate that is at least equal to the percentage of funding saved from the planned reductions in military personnel end strength. This would require savings in the civilian and service contractor workforces in excess of $5 billion over planned savings through FY 2017. The Administration believes the size of the civilian workforce should be determined based on workload and funding, not on arbitrary comparisons to the military. To comply with this legislation, the Department would need to significantly divest workload and impose workforce caps.

Update: On November 4, 2012, the Senate incorporated S. 3254 into the House version of the National Defense Authorization Act for FY 2013 (H.R. 4310) as an amendment, and approved the measure by unanimous consent.

Specifically, the bill would make it unlawful for an employer to “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against a whistleblower in the terms and conditions of employment” because the individual provides to the DOJ information about an act or omission that he or she reasonably believes violates an antitrust law or other criminal law committed in conjunction with the potential antitrust law violation. The bill would also protect any individual who participates or assists in an investigation or proceeding regarding an antitrust violation. The whistleblower protections would not apply to an individual who planned and initiated the antitrust law breach or other criminal law violation committed along with the antitrust violation.

An aggrieved employee or contractor would have the opportunity to file a complaint with the Secretary of Labor, and would be entitled, if the claim is successful, to reinstatement, back pay with interest, and any other compensation for special damages incurred as a result of the whistleblower discrimination. If the Secretary does not issue a final decision within 180 days of the filing of the complaint, the whistleblower would be able to file suit in federal district court. The protections afforded by this bill are modeled on similar whistleblower laws currently in effect.

In a press release, Sen. Grassley said:

Chairman Leahy and I worked together ten years ago to establish whistleblower protections for private sector employees as part of the Sarbanes-Oxley reform effort. We updated those provisions three years ago, and today’s initiative is a further extension of our efforts. The legislation recognizes the value of whistleblowers that are willing to come forward with information about criminal antitrust violations in the private sector.

According to the press release, the bill is based on recommendations in a July 2011 report by the Government Accountability Office that found widespread support for anti-retaliatory protection in criminal antitrust cases.

This bill has been referred to the Senate Judiciary Committee.

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In May 2011, the Securities and Exchange Commission (SEC) issued its final rule on the whistleblower bounty program under Section 922. As discussed in the Littler Report: Dodd-Frank and The SEC Final Rule: From Protected Employee to Bounty Hunter, the SEC final rule provides a monetary incentive of 10 to 30% of any recovery by the SEC for employees who contribute original information that leads the SEC to recover monetary sanctions of $1,000,000 or more. Based on certain factors whistleblowers may recover between 10% and 30% of any recovery by the SEC. The final rule does not require employees to follow internal reporting procedures before reporting suspected violations to the SEC, but reporting internally is a factor that may increase the whistleblower’s award.

The Dodd-Frank provision applicable to the CEA also creates monetary incentives for whistleblowers, and prohibits employers from discharging, demoting, suspending, threatening, harassing (directly or indirectly) or otherwise discriminating against an employee for: (1) providing information to CFTC in accordance with the commodity whistleblower incentive program; or (2) assisting in an investigation or judicial or administrative action relating to the information provided. Employees alleging violations of this new law may bring an action in the appropriate federal district court. Such claims may not be brought more than two years after the violation complained of by the whistleblower. Relief for prevailing employees under this new private right of action includes reinstatement, backpay plus interest, and special damages, including attorneys' fees, expert witness fees and litigation costs. As discussed in Littler’s Insight: Cementing a Trend: Financial Reform Act Dramatically Expands Whistleblower Protections, one notable difference between sections 748 and 922 of Dodd-Frank is the ability of a commodity whistleblower to appeal any determination regarding an award made by the CFTC, not just awards outside of the 10 to 30 percent range, within 30 days.

According to a fact sheet (pdf) and a Q&A document (pdf) on the final rule, the CFTC-approved regulations are substantially similar to the agency’s proposed rule, but include minor changes to “ensure consistency and promote harmonization” with the SEC’s final rule and program. Other provisions of the rule include the following:

• A whistleblower may appeal certain Commission decisions including award denials and amounts to the appropriate U.S. Circuit Courts of Appeal;
• Whistleblowers may receive an award based upon violations that occurred prior to the date of enactment of the Dodd-Frank Act (July 21, 2010);
• Whistleblowers who submit original information after the date of enactment of the Dodd-Frank Act but before these proposed rules become effective, will also be eligible for an award provided they comply with the Commission’s procedures within one hundred and twenty (120) days of the rules’ effective date;
• A whistleblower who has submitted information after July 16, 2011 may have a private cause of action for employment retaliation of whistleblower activities. Whistleblowers who ultimately are not entitled to an award are still protected by the anti-retaliation provisions;
• The determination of the amount of the award will be in the Commission’s discretion and based upon certain criteria;
• Those not entitled to receive an award under the program include employees of certain listed government, law enforcement and regulatory agencies; a person convicted of a criminal violation related to the underlying judicial or administrative action; a person who submits information that is based on facts underlying a covered action already submitted by another whistleblower; and any whistleblower who fails to submit information to the Commission in the form the Commission requests;
• Whistleblowers will not be eligible for an award if they knowingly and willfully make any false, fictitious, or fraudulent representations to the Commission or another authority in connection with a related action.

These regulations will be effective 60 days after they are published in the Federal Register.

Like the SEC final rule, the CFTC rule does not require employees to first avail themselves of their organization’s internal reporting process. The CFTC acknowledged that a number of comments to the proposed rule criticized the ability of a whistleblower to by-pass an employer’s internal reporting process. Commissioner Jill E. Sommers expressed disappointment regarding this failure during the Agency’s opening meeting to discuss the rule. In a statement, Sommers emphasized:

The primary purpose of a Whistleblower program is not to pay awards to whistleblowers. The primary purpose is to prevent, detect and remedy violations of the Commodity Exchange Act as efficiently and cost-effectively as possible. In order to be efficient and cost-effective in this regard, I believe robust internal compliance programs and thorough internal investigations are absolutely necessary to successfully prevent, detect and remedy violations, particularly given the Commission’s resource restraints. I believe that this rule does not sufficiently address the potential for thousands of new tips or complaints and how this new office will prepare for this outcome. . . . Setting up a Whistleblower program that allows all Whistleblowers to by-pass internal compliance programs will likely deprive such programs of the very information they need in order to be robust and effective. . . . I believe a better approach to our Whistleblower program would have been to require internal reporting as the norm, with the ability for a Whistleblower to bypass internal reporting upon a good faith showing that such reporting would be impracticable or unsafe for the Whistleblower. Another potential approach would have been to require simultaneous reporting internally and to the Commission. This would have ensured that any internal investigation could be conducted under the watchful eye of the Commission, and would have made certain that the Whistleblower knew that the Commission was watching. We did not explore these options, and I believe we should have.

The outcry over the SEC’s similar position on this practice has led to the recent introduction of legislation that would require employees to first report potential misconduct through the company’s internal reporting system before being eligible to cash in on the monetary rewards offered under the Dodd-Frank Act SEC and CFTC whistleblower bounty programs.

More information on the CFTC’s opening meeting and rule can be found here.

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As discussed in Littler’s Report: Dodd-Frank and The SEC Final Rule: From Protected Employee to Bounty Hunter, the SEC’s rule does not require employees to first report violations through their company’s internal channels in order to qualify for the award, although it does create incentives for employees to do so. For example, the rule makes whistleblowers eligible for an award if they report internally and the company informs the SEC about the violations. Therefore, all information provided by the employer to the SEC is to be attributed to the whistleblower for award purposes. Additionally, a whistleblower’s voluntary participation in the company’s internal compliance and reporting system would constitute a factor that could increase the amount of the award, while the whistleblower’s interference with the company’s reporting process could decrease the amount of the award.

The Whistleblower Improvement Act of 2011 (H.R. 2483), introduced by Rep. Michael Grimm (R-NY), seeks to preserve the integrity of a company’s internal reporting system and prevent employees whose job it is to investigate misconduct from being considered whistleblowers. Specifically, the bill would deny any award granted under the whistleblower protection program to employees who fail to first report information constituting possible securities fraud to their employers before reporting such information to the SEC. In addition, the whistleblower would be required to report such information to the SEC no later than 180 days after providing the information to the employer. The bill would create an exception to the internal reporting requirement if 1) the SEC determines that the employer lacks either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting, or 2) the SEC determines in a preliminary investigation that an employer’s internal reporting system would not have been a viable option based on evidence that the alleged misconduct was committed by or involved the complicity of the highest level of management, or other evidence of bad faith on the part of the employer.

An award under this program would also be denied to a whistleblower:

who has legal, compliance, or similar responsibilities for or on behalf of an entity and has a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations or to cause such entity to investigate or respond to the misconduct or violations, if the information learned by the whistleblower during the course of his or her duties was communicated to such a person with the reasonable expectation that such person would take appropriate steps to so respond.

This legislation also would eliminate the minimum award requirement, and instead give the SEC discretion in granting any award up to 30% of the sanctions imposed.

Finally, the bill would insert a new requirement that the SEC notify the employer of the whistleblower’s allegations prior to commencing any enforcement action against the employer in order to give it time to investigate the alleged misconduct and take remedial action. In the event the employer responds in good faith and takes appropriate corrective action, the SEC would treat the employer as having self-reported the alleged violations. This option would not apply if, during its preliminary investigation, not to exceed 30 days, the SEC determines that notification would jeopardize its overall investigation into the securities law violation allegations, based on evidence that the misconduct was committed by or involved complicity of the highest level of management or bad faith by the entity

This bill has been referred to the House Committees on Financial Services and Agriculture.

For more information on this legislation, see Littler's ASAP:  The Whistleblower Improvement Act: New Legislation Takes Aim at Dodd-Frank Whistleblower Bounty Provisions by Ilyse Schuman and Gregory Keating.

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For example, the rule makes whistleblowers eligible for an award if they report internally and the company informs the SEC about the violations. In essence, all information provided by the employer to the SEC will be attributed to the whistleblower for award purposes. Second, a whistleblower’s voluntary participation in the company’s internal compliance and reporting system would constitute a factor that could increase the amount of the award, while the whistleblower’s interference with the company’s reporting process could decrease the amount of the award. In addition, the final rule extends the amount of time from 90 to 120 days in which the employee can report the information to the SEC after first reporting it internally and still be considered a whistleblower. According to the SEC, this would allow an employee to report the information through company channels while still preserving his “place in line” for a possible award.

One significant change from the proposed rules is that the SEC will allow the aggregation of smaller actions that arise from the same “nucleus of operative facts” to go towards the $1 million threshold entitling the whistleblower to an award. Under the proposed rule, awards would have only been available if the SEC brought a single judicial or administration action in which it obtained sanctions of more than $1 million.

In addition, the final rule clarifies who would be excluded from award eligibility. As stated in the rule, the final regulations “provide greater clarity and specificity about the scope of the exclusions applicable to senior officials within an entity who learn information about misconduct in connection with the entity’s processes for identifying, reporting, and addressing possible violations of law.”

For example, as discussed in a fact sheet on the final rule, those people who will not be considered whistleblowers eligible for awards include:

• People who have a pre-existing legal or contractual duty to report their information to the SEC.
• Attorneys (including in-house counsel) who attempt to use information obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under SEC rules or state bar rules).
• People who obtain the information by means or in a manner that is determined by a U.S. court to violate federal or state criminal law.
• Officers, directors, trustees or partners of an entity who are informed by another person (such as by an employee) of allegations of misconduct, or who learn the information in connection with the entity’s processes for identifying, reporting and addressing possible violations of law (such as through the company hotline).
• Compliance and internal audit personnel.
• Public accountants working on SEC engagements, if the information relates to violations by the engagement client.

Notably, however, in some instances a company’s compliance and internal audit personnel as well as public accountants could become whistleblowers when:

• The whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors.
• The whistleblower believes that the entity is engaging in conduct that will impede an investigation.
• At least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.

The final rule also clarifies that employees are protected from retaliation if they possess a reasonable belief that the information they are providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur. Under the rule it is also unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the SEC, including threatening to enforce a confidentiality agreement.

The final rule will become effective 60 days after it is published in the Federal Register.

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The final rule amends the employee protection provisions of the following six environmental statutes: Safe Drinking Water Act; Federal Water Pollution Control Act; Toxic Substances Control Act; Solid Waste Disposal Act; Clean Air Act; and the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Separate procedures are applicable to the ERA.

Among other things, the final rule clarifies that under the six environmental statutes, it is unlawful for an employer covered by those laws to discharge or otherwise retaliate against any employee with respect to the employee’s compensation, terms, conditions, or privileges of employment because the employee, or any person acting pursuant to the employee’s request, engaged in certain protected activities specified in the rule. Similarly, it is unlawful for an employer to intimidate, threaten, restrain, coerce, blacklist, discharge, discipline, or in any other manner retaliate against any employee because the employee has:

• Commenced or caused to be commenced, or is about to commence or cause to be commenced, a proceeding under one of the aforementioned six environmental statutes or a proceeding for the administration or enforcement of any requirement imposed under these statutes;
• Testified or is about to testify in any such proceeding; or
• Assisted or participated, or is about to assist or participate, in any manner in such a proceeding or in any other action to carry out the purposes of such statutes.

With respect to the ERA, the final rule states that it is a violation for an employer to take the previously discussed adverse actions against an employee for notifying the employer of an alleged violation of the ERA or the Atomic Energy Act (AEA); refusing to engage in any practice made unlawful by the ERA or AEA if the employee has identified the alleged illegality to the employer; or testifying or is about to testify before Congress or at any federal or state proceeding regarding any provision (or proposed provision) of either statute.

In addition, the rule requires every employer subject to the ERA to post a notice regarding the employee’s whistleblower rights. A copy of such a poster – Your Rights Under the Energy Reorganization Act – is included in the final regulation.

As for filing a complaint with the agency and the subsequent investigation, the final rule notes that for the six environmental statutes, no particular form of complaint is required. The employee must allege – either orally or in writing and as supplemented by follow-up interviews – that he or she:

• engaged in a protected activity;
• the employer knew or suspected that the employee engaged in the protected activity;
• the employee suffered an adverse action; and
• the circumstances were sufficient to raise the inference that the protected activity was a motivating factor in the adverse action.

The final rule explains that this prima facie standard may be satisfied if the complainant shows that the adverse action took place shortly after the protected activity, for example, as it gives rise to the inference that it was a motivating factor in the adverse action. An employer can rebut this claim – and OSHA will thus dismiss the complaint – if it can show, by a “preponderance of the evidence,” that it would have taken the same adverse action in the absence of the complainant’s protected activity.

The prima facie standard is slightly different under the ERA. Under this Act, an employee must show that the protected activity was a “a contributing factor” in the adverse action alleged in the complaint. The employer can rebut this claim by showing by “clear and convincing evidence” that it would have taken the same adverse action absent the protected activity. According to OSHA, the ERA statutory burdens of proof do not address the evidentiary standard that applies to a complainant’s proof that the protected activity was a contributing factor in an adverse action. Therefore, “[a]dhering to traditional Title VII discrimination law,” OSHA has taken the position that “the complainant must prove by a ‘preponderance of the evidence’ that his or her protected activity contributed to the adverse action; otherwise, the burden never shifts to the employer to establish its ‘clear and convincing evidence’ defense.”

The final rule also sets forth the specific procedures and timeframes for conducting investigations, issuing orders and findings, holding administrative hearings, and moving for judicial enforcement of employee whistleblower complaints.

The final rule is effective as of the date it is published in the Federal Register, which is scheduled for January 18, 2011. 

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The whistleblower provisions are contained in Section 402 of the bill. Specifically, this section would make it unlawful for an employer in the food industry to:

discharge an employee or otherwise discriminate against an employee with respect to compensation, terms, conditions, or privileges of employment because the employee, whether at the employee's initiative or in the ordinary course of the employee's duties (or any person acting pursuant to a request of the employee)

(1) provided, caused to be provided, or is about to provide or cause to be provided to the employer, the Federal Government, or the attorney general of a State information relating to any violation of, or any act or omission the employee reasonably believes to be a violation of any provision of this Act or any order, rule, regulation, standard, or ban under this Act, or any order, rule, regulation, standard, or ban under this Act;
(2) testified or is about to testify in a proceeding concerning such violation;
(3) assisted or participated or is about to assist or participate in such a proceeding; or
(4) objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be in violation of any provision of this Act, or any order, rule, regulation, standard, or ban under this Act.

This section provides aggrieved employees with the ability to file a complaint with the Department of Labor, and, if the complaint is not resolved in a specified amount of time, a civil action in federal court. To prevail on a claim under this section, an employee would need to prove only that his or her protected actions constituted a “contributing factor” to the employer’s adverse employment decision. To rebut such claims, an employer must demonstrate “by clear and convincing evidence” that it would have taken the same unfavorable personnel action regardless of the employee’s protected activity. Remedies for violations of this section include reinstatement to the same position, backpay, other compensatory damages if applicable, costs and attorneys’ fees. An employee who brings an action in bad faith could face a $1,000 penalty.

President Obama is expected to sign this bill into law.

UPDATE:  On Tuesday, January 4, 2011, President Obama signed this bill into law.

(1) provided, caused to be provided, or is about to provide or cause to be provided to the employer, the Federal Government, or the attorney general of a State information relating to any violation of, or any act or omission the employee reasonably believes to be a violation of any provision of this Act or any order, rule, regulation, standard, or ban under this Act, or any order, rule, regulation, standard, or ban under this Act;
(2) testified or is about to testify in a proceeding concerning such violation;
(3) assisted or participated or is about to assist or participate in such a proceeding; or
(4) objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be in violation of any provision of this Act, or any order, rule, regulation, standard, or ban under this Act.

An aggrieved employee would have 180 days to file a complaint with the Department of Labor (DOL). If the DOL does not act within the stipulated timeframe, the employee would be entitled to file a civil complaint in federal court.

The employee would have to prove only that his or her protected actions constituted a “contributing factor” to the employer’s adverse employment decision. To rebut such claims, an employer must demonstrate “by clear and convincing evidence” that it would have taken the same unfavorable personnel action regardless of the employee’s protected activity. A prevailing employee would be entitled to reinstatement with the same seniority status that the employee would have had, but for the discharge or discrimination; the amount of back pay, with interest; and compensation for any special damages sustained as a result of the discharge or discrimination, including litigation costs, expert witness fees, and reasonable attorney's fees. If, on the other hand, the DOL were to find that the claim brought by the employee was frivolous or brought in bad faith, an employer could be awarded up to $1,000 in attorneys’ fees.

The legislation also reflects continued Congressional scrutiny of mandatory arbitration agreements. The bill provides that the whistleblower protections may not be waived by any agreement, policy, form or condition of employment.

The rights and remedies in this section may not be waived by any agreement, policy, form, or condition of employment.

The Senate approved this bill on November 30, 2010 by a 73 – 25 margin. The measure has not yet advanced in the House of Representatives due to procedural objections. 

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Specifically, Section 922 of the Act adds Section 21 F to the Exchange Act, entitled “Securities Whistleblower Incentives and Protection.” This program provides monetary rewards to those who voluntarily contribute original information that leads the SEC to recover monetary sanctions of $1,000,000 or more in criminal and civil proceedings in federal court or through administrative action. Whistleblowers would be eligible for amounts between 10% and 30% of the monetary sanctions that are collected, based on the original information provided by the whistleblower.

Some commentators have questioned whether the monetary incentives provided to whistleblowers would reduce the effectiveness of a company’s existing compliance, legal, audit and similar internal processes for investigating and responding to potential violations of the federal securities laws. With this possible tension in mind, the SEC stated that they: “included provisions in the proposed rules intended not to discourage whistleblowers who work for companies that have robust compliance programs to first report the violation to appropriate company personnel, while at the same time preserving the whistleblower’s status as an original source of the information and eligibility for an award.” At the same time, according to the SEC, the proposed rules would not prohibit a whistleblower in a compliance function from reporting information to the Commission where the company did not provide the information to the Commission within a reasonable time or acted in bad faith.

In determining whether a company acted in bad faith, the SEC will, among other things, consider whether the entity or any personnel who were responsible for responding to allegations of misconduct took affirmative steps to hinder the preservation of evidence or a timely and appropriate investigation. For example, an effort by company officials to destroy documents or to interfere with witnesses would constitute bad faith conduct. Similarly, if a company engaged in a sham investigation of allegations, then the company’s response would constitute bad faith according to the SEC. The proposed rule does not set a fixed time frame for what is considered “reasonable”. Instead, the SEC states that a “reasonable time” in this context will necessarily be a flexible concept that will depend on all of the facts and circumstances of the particular case.

As discussed in an SEC fact sheet, the proposal includes provisions designed to encourage employees to avail themselves of their company’s internal compliance programs. For example, an employee who reports information through internal company channels would still be considered a whistleblower by the SEC, so long as the employee provides the same information to the agency within 90 days. The proposal also allows the SEC to consider higher percentage awards for whistleblowers who first report their information through effective company compliance programs. Accordingly, the SEC “does not expect our receipt of whistleblower complaints to minimize the importance of effective company processes for addressing allegations of wrongful conduct.”

The proposal includes additional definitions of phrases contained in the definition of “original information” so as to further describe when a whistleblower provides such information. Original information is that which is derived from the whistleblower’s independent knowledge or analysis; is not already known to the Commission, and is not exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information. The proposed rule defines “independent knowledge” as factual information in the whistleblower’s possession that is not obtained from publicly available sources. According to the SEC, this proposed definition does not require that a whistleblower have direct, first-hand knowledge of potential violations. Thus, a whistleblower could have “independent knowledge” of information even if that knowledge derives from facts or other information that has been conveyed to the whistleblower by third parties.

In contrast, the SEC will not consider information to be derived from independent knowledge or independent analysis if the would-be whistleblower obtained the knowledge or information:

• Through a communication that was subject to the attorney-client privilege (unless disclosure of that information is otherwise permitted under SEC rules or state bar rules);
• As a result of the legal representation of a client on whose behalf the whistleblower’s services, or the services of the whistleblower’s employer or firm, have been retained, and the person seeks to make a whistleblower submission for his or her own benefit (unless disclosure of that information is otherwise permitted under SEC rules or state bar rules);
• Through the performance of an engagement required under the securities laws by an independent public accountant, if that information relates to a violation by the engagement client or the client’s directors, officers or other employees;
• Because the individual is a person with legal, compliance, audit, supervisory, or governance responsibilities for an entity, and the information was communicated to the individual with the reasonable expectation that they would take steps to cause the entity to respond appropriately to the violation, unless the entity did not disclose the information to the SEC within a reasonable time or proceeded in bad faith;
• Otherwise from or through an entity’s legal, compliance, audit or other similar functions or processes for identifying, reporting and addressing potential non-compliance with law, unless the entity did not disclose the information to the SEC within a reasonable time or proceeded in bad faith;
• By a means or in a manner that violates applicable federal or state criminal law; or
• From any of the individuals described above.

The SEC has attempted to maximize the submission of high-quality tips and to enhance the utility of the information reported to the SEC. Toward this end, the proposed rules would impose certain procedural requirements designed to deter false submissions, including a requirement that the information be submitted under penalty of perjury and requiring an anonymous whistleblower to be represented by counsel who must certify to the SEC that he or she has verified the whistleblower’s identity.

The proposed rule clarifies a number of definitions and program requirements, as well as describes the procedures for submitting information to the SEC and for making an award claim after an action is brought. For example, the proposal defines a whistleblower as “an individual who, alone or jointly with others, provides information to the Commission relating to a potential violation of the securities laws.” This definition differs from that set forth in the Act in that it includes the phrase “potential violation.”

One of the SEC’s rationales for including the word “potential” is that it clarifies that the whistleblower anti-retaliation protections set forth in Section 21F(h)(1) of the Exchange Act do not depend on an ultimate adjudication, finding or conclusion that conduct identified by the whistleblower constituted a violation of the securities laws. In other words, even if the whistleblower provides information to the SEC that is not ultimately found to constitute an SEC violation, that individual is still protected from any adverse employment actions as a result. The proposed rule further explains that an individual need not satisfy all of the procedures and conditions to qualify for an award under the Commission’s whistleblower program in order to be protected against retaliation. As stated in the preamble to the proposed rule, the SEC “believe[s] the statute extends the protections against employment retaliation in Section 21F(h)(1) to any individual who provides information to the Commission about potential violations of the securities laws regardless of whether the whistleblower fails to satisfy all of the requirements for award consideration set forth in the Commission’s rules.”

The proposed rule considers the provision of information “voluntary” if it is provided before receiving any formal or informal request, inquiry, or demand from the Commission, Congress, any other federal, state or local authority, any self-regulatory organization, or the Public Company Accounting Oversight Board about a matter to which the information in the whistleblower’s submission is relevant. According to the SEC, this is to encourage whistleblowers to provide information about possible SEC violations as soon as possible.

With respect to the investigation process, the Act permits the SEC to communicate directly with the whistleblower without first obtaining the consent of the company’s counsel. The proposed rule further clarifies that it is allowed to do so even if the whistleblower at issue is a director, officer, member, agent, or employee of the entity.

Although the SEC invites comment on any aspect of the proposed rule, the agency’s proposal lays out 43 separate areas of inquiry for public comment. For example, the SEC is seeking input on whether it should promulgate rules regarding the interpretation or implementation of the anti-retaliation provisions of the Exchange Act. If so, the agency asks, should these anti-retaliation provisions be applied broadly to any person who provides information to the Commission concerning a potential violation of the securities laws, or should they be limited by the various procedural or substantive prerequisites to consideration for a whistleblower award? In addition, the SEC asks whether it should consider promulgating a rule to exclude frivolous or bad faith whistleblower claims from the protections afforded by the anti-retaliation provisions. The SEC is also inviting comments on whether it should promulgate rules to ensure that the anti-retaliation provisions are not used to protect employees from otherwise appropriate employment actions (i.e., employment actions that are not based on reporting potential securities law violations).

Comments on the proposal must be submitted on or before December 17, 2010, and contain the File Number S7-33-10. Written comments should be sent in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Alternatively, comments may be submitted electronically through the SEC’s Internet comment form; the federal eRulemaking portal; or via email to: rule-comments@sec.gov. The file number: S7-3310 should be included in the subject line.

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A discussion of the new provisions follows:

• Section 922 – Whistleblower protection. This section amends the Securities Exchange Act to establish a new securities whistleblower incentive and protection program. In essence, it provides monetary rewards to those who contribute original information that leads to recoveries of monetary sanctions of $1,000,000 or more in criminal and civil proceedings. This program awards whistleblowers with between 10% and 30% of any monetary sanctions that are collected, based on the original information provided by the whistleblower. “Original information” is defined as information that is derived from the independent analysis or knowledge of the whistleblower and is not derived from an allegation in court or government reports nor exclusively from news media. The Securities and Exchange Commission (SEC) has discretion in determining the amount and whether or not a whistleblower is to be awarded. This section also includes various protections for whistleblowers, including a prohibition on discharging, demoting, suspending, threatening, harassing (directly or indirectly) or otherwise discriminating against an employee for providing information to the SEC or assisting in an investigation or judicial or administrative action relating to the information provided. The bill would allow one who has been retaliated against to bring an action against his or her employer in federal court for reinstatement, double back pay plus interest, and attorneys’ fees and litigation costs. The legislation provides that no pre-dispute arbitration agreement shall be valid or enforceable if it requires arbitration of a dispute arising under this section.
• Section 748 – Commodity Whistleblower Incentives And Protection. This section would amend the Commodity Exchange Act by adding a “Commodity Whistleblower Incentives and Protection” section that provides whistleblower incentives and protections similar to those set forth in Section 922.
• Section 1057 – Employee Protection. This section provides protection against firings of, or discrimination against, employees who provide information or testimony to the Bureau of Consumer Financial Protection (CFPB or “Bureau”) – an independent consumer entity within the Federal Reserve created by the legislation. These new provisions, which are very broad in scope, stipulate that:

No covered person or service provider shall terminate or in any other way discriminate against, or cause to be terminated or discriminated against, any covered employee or any authorized representative of covered employees by reason of the fact that such employee or representative, whether at the initiative of the employee or in the ordinary course of the duties of the employee (or any person acting pursuant to a request of the employee), has –

(1) provided, caused to be provided, or is about to provide or cause to be provided, information to the employer, the Bureau, or any other State, local, or Federal, government authority or law enforcement agency relating to any violation of, or any act or omission that the employee reasonably believes to be a violation of, any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau;

(2) testified or will testify in any proceeding resulting from the administration or enforcement of any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau;

(3) filed, instituted, or caused to be filed or instituted any proceeding under any Federal consumer financial law; or

(4) objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be in violation of any law, rule, order, standard, or prohibition, subject to the jurisdiction of, or enforceable by, the Bureau.

A “covered employee” would include any individual performing tasks related to the offering or provision of a consumer financial product or service. Any predispute arbitration agreement would be deemed invalid and unenforceable to the extent that it requires arbitration of a dispute arising under this section.

An employee aggrieved under this section would have 180 days to file a complaint with the Secretary of Labor. An employee would have a viable cause of action if the Secretary determines that any of the employee’s actions described in paragraphs (1) – (4), above, constituted a “contributing factor” to the alleged adverse employment action. In its defense, an employer would have to demonstrate “by clear and convincing evidence” that it would have taken the same adverse actions regardless of the employee’s conduct. This new burden-shifting framework is advantageous to the employee.

• Section 929A – Protection For Employees of Subsidiaries and Affiliates of Publicly-Traded Companies. This section extends the whistleblower protection provisions in the Sarbanes-Oxley Act of 2002 (“SOX”) to employees of subsidiaries and affiliates of publicly-traded companies whose financial information is included in the consolidated financial statements of such companies. Section 806 of the Sarbanes-Oxley Act creates protections for whistleblowers who report securities fraud and other violations.
• Section 1079A – Financial Fraud Provisions. This section amends the False Claims Act (FCA) by, among other things, expanding protected whistleblower conduct under the FCA to include an “agent or associated others in furtherance of an action under this section.” In essence, the provision clarifies that those “associated” with the whistleblower are protected by the FCA. Additionally, the amendment allows a civil action to be brought in this instance within three years after the date of the act of discrimination or retaliation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act ushers in a new era of accountability and transparency for Wall Street and beyond. The whistleblower provisions in the new law necessitate even greater emphasis on compliance policies and practices by affected employers.

For more information on these provisions, see Littler's Insight:  Cementing a Trend: Financial Reform Act Dramatically Expands Whistleblower Protections by Gregory C. Keating, Eric A. Savage, Ilyse W. Schuman, Roberta Limongi Ruiz and Amy E. Mendenhall.

This entry was written by Ilyse Schuman and Greg Keating.

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Specifically, according to a press release issued by McCaskill’s office, this bill would do the following:

• Provide time limitations for review of claims of retaliation: The legislation provides a clear and time limited process for a report of a reprisal to be investigated by an agency Inspector General (IG) and for the head of an agency to make a subsequent finding on it.
• Give access to jury trials: The bill allows a whistleblower to take his or her case to court and provides access to a jury trial after the administrative review process is completed.
• Ensure coverage for disclosures made to a whistleblower’s management: The legislation provides that disclosures of fraud, waste and abuse or other wrongdoing can be made to the whistleblower’s employer, as well as to Congress and IGs.
• Protect disclosures of contractors’ violation of law, rule, or regulation: The bill provides protections for disclosures made by a whistleblower where the whistleblower reasonably believes there has been a violation of law, rule or regulation related to an agency contract.
• Cover “abuse of authority” by contract managers: The bill covers a broad range of disclosures including disclosures of “abuse of authority” by contract managers. This definition, importantly, captures cronyism and other abuses that are corrupt but technically may not be illegal, and accounts for other uncertainties of contracting law.
• Establish the burden of proof in whistleblower cases: This provision will bring contractor whistleblower burdens of proof in line with those included in the Whistleblower Protection Act (WPA).
• Give whistleblowers the right to view an IG’s investigative file: In the past, despite spending significant resources and many months to seek justice through a government investigation, whistleblowers have not been able to access the evidence associated with their case. The bill clarifies that both whistleblowers and their employer have a right to view the investigative file.
• Protect employees against conditions of employment that eliminate their whistleblower rights: It is common that employees, as a precondition of hiring, must agree to gag orders that eliminate their whistleblower rights, waive their statutory remedies against retaliation and submit any dispute to company-financed arbitrators, as well as other similar prerequisites that make the whistleblower law irrelevant.

What is notable about this bill is that unlike other legislation that applies to contractors, the definition of “covered funds” applies to the recipients of contract funds and grant monies. The bill defines “covered funds” as “any contract, grant, or other payment received by any non-Federal employer if the Federal Government provides any portion of the money or property that is provided, requested, or demanded.” This expansive definition would therefore subject a wide variety of entities – including hospitals that receive federal assistance in the form of Medicare/Medicaid, and universities that accept federal grant money – to the provisions of this bill.

The Non-Federal Employee Whistleblower Protection Act of 2009 has been referred to the Senate Committee on Homeland Security and Governmental Affairs.

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