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To Report or Not Report; Conflicting Guidance From the Courts -- What is a Whistleblower to Do?

Posted  September 10, 2012

By Gordon Schnell and Marlene Koury (published in the American Banker)

Under the recently implemented whistleblower provisions of the Dodd-Frank Act, whistleblowers who report violations of the securities laws are supposed to be protected from being fired.  These protections — which can include reinstatement, double back pay and special damages — are designed to serve as an incentive for whistleblowers to come forward despite the significant risk that they will be retaliated against for exposing their employers’ wrongdoing.  The problem is that due to two recent and conflicting court decisions on the subject, there remains a very open question on exactly who is covered by these whistleblower protections.

Both cases dealt with whistleblowers who reported violations of the Foreign Corrupt Practices Act (FCPA), the statute that makes it illegal for U.S. companies to bribe officials in foreign countries to secure business there.  In both cases, the whistleblowers only reported the alleged violations internally to their supervisors within their respective companies.  They did not report them to the SEC.  And in both cases, the whistleblowers were fired for their coming forward.   So the question before the two courts was whether these whistleblowers were entitled to invoke the whistleblower protections under Dodd-Frank even though they never reported the alleged wrongdoing to the government.

Each court took a different view.  In April, the federal court in Tennessee found that these anti-retaliation protections could apply to FCPA whistleblowers who only report internally.  See Nollner v. Southern Baptist Convention, Inc., 2012 WL 1108923 (M.D. Tenn. April 3, 2012).  But in June, the federal court in Texas found that merely reporting internally may not be sufficient.  You may also need to report to the SEC to invoke the Dodd-Frank protections.  See Asadi v. G.E. Energy (USA), LLC, No. 4:12-345 (S.D. Tx. June 28, 2012).  The courts never ultimately decided the issue because they threw out the whistleblowers’ claims for other reasons.  But their apparent disagreement on this issue presents an unfortunate development in the ever-evolving state of whistleblower law.  If left unresolved, it will compel whistleblowers, regardless of what steps they take within their own company, to also report to the SEC.  Otherwise,  they risk being left out in the cold.

The trouble with this predicament is that in some cases, it is better for all involved — the whistleblower, the offending company and the public — for the whistleblower to work with the company to clean up its house without getting the government (and the press) involved.  In fact, one of the biggest concerns that surrounded the passing of the Dodd-Frank whistleblower provisions was that it would undermine companies’ internal compliance programs by encouraging whistleblowers to bypass them completely.  Some even argued for a requirement that whistleblowers report internally first before going to the government.

Such a precondition to Dodd-Frank coverage was rightly rejected.  And the concerns about upending compliance programs have not really been borne out.  But all of this does highlight the important role these internal programs can play — if done properly — and the need for whistleblower flexibility and autonomy in deciding what path makes most sense under the particular circumstances involved.  Unfortunately, until this apparent judicial conflict is resolved, or worse off, if the Asadi decision becomes the prevailing view, the only logical path for a whistleblower to take will be to go directly to the government as soon as possible.

There is an even more potentially problematic consequence from all of this.  That is, a message to potential whistleblowers to proceed at your own risk.  The whole point of the newly enacted Dodd-Frank whistleblower protections (and rewards) is to encourage whistleblowers to step forward in the face of what can be a lengthy, tiresome and truly harrowing experience.  But if there is any uncertainty as to whether a particular whistleblower will be covered by these protections.  Or if there is an overly rigid and restrictive view of the particular path the whistleblower must take.  It will undercut the very incentives Dodd-Frank was designed to foster.  Potential whistleblower may decide it is just not worth all of the trouble.

Tagged in: FCPA,