A recent decision by a federal appeals court expands protections for whistleblowers and could put companies that retaliate against them in violation of laws that usually apply only to mobsters.
The Seventh Circuit Court ruled in December that a company that retaliates against an employee for reporting corporate fraud to law enforcement may face liability under the Racketeer Influenced and Corrupt Organizations Act.
Originally enacted in 1970 to weed organized crime out of legitimate business affairs, RICO prohibits employees of a company engaged in interstate commerce to “conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity.” To establish a RICO violation, a plaintiff must prove the commission of two or more “predicate acts” of racketeering.
Under Section 1513 of Sarbanes-Oxley, Congress added to that list of statutorily defined predicate acts “providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense.”
Those combined provisions—RICO and Sarbanes-Oxley—establish the backdrop for the Seventh Circuit's decision in DeGuelle v. Camilli, holding that retaliation constitutes a predicate act related to the underlying wrongdoing for purposes of a RICO violation.
Given that RICO requires a plaintiff to prove only two predicate acts and retaliation can be one of them raises the possibility that “we're going to start seeing many more RICO actions,” says Martha Zackin, of counsel in the employment, labor, and benefits practice at law firm Mintz Levin. She finds the potential for a RICO violation for whistleblower retaliation “very troubling, and yet another issue that needs to be on the radar of employers.”
The case stems from a legal battle between home products manufacturer SC Johnson and former employee Michael DeGuelle. DeGuelle, who worked in the company's tax department from 1997 to 2009, alleged that he was instructed by his superiors to fabricate tax information and file false returns to the Internal Revenue Service since 2001. When he finally raised his concerns to the human resources department in 2007, DeGuelle said he received a negative performance review in retaliation for his repeated complaints about the potential tax fraud.
DeGuelle later filed a whistleblower complaint with the Department of Labor and turned over documents that he considered to be evidence of the fraud. After the Labor Department dropped the case, S.C. Johnson fired DeGuelle in April 2009, allegedly for disclosing confidential company documents and sued him for damages in Wisconsin Circuit Court. The court sided with the company and awarded it $50,000 in damages.
In addition to appealing that state court decision, DeGuelle filed a federal lawsuit in Wisconsin District Court, alleging multiple violations of RICO, including mail fraud, destruction of records, witness tampering, and retaliation.
It was a highly unusual move for a whistleblower retaliation claim to be filed in federal court, notes Steven Pearlman, partner and co-chair of the Sarbanes-Oxley whistleblower practice at law firm Seyfarth Shaw.
A district court ruled that the alleged predicate acts—the tax fraud and retaliation—did not relate to one another, because they involved “different victims, participants, and motives,” and therefore couldn't be used as the basis of a RICO charge.
The Seventh Circuit's decision is surprising given that the court recognized that S.C. Johnson went “out of its way, taking unusual steps to protect the employee.”
—Steven Pearlman,
Partner,
Seyfarth Shaw
The Seventh Circuit Court of Appeals, however, rejected this interpretation when it ruled that an employer always has an underlying motivation for the retaliation and, thus, “retaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower.”
“In addition, the motives and victims will almost never be the same,” the court wrote. “We can conceive of very few cases in which a single retaliatory act would be considered ‘related' to other predicate acts under this reasoning. This is troubling when one considers the purposes of the Sarbanes-Oxley Act and its addition ... to RICO's statutory scheme.” The Seventh Circuit reversed the district court's decision, sending the case back to the district court for review.
The Seventh Circuit's decision is surprising given that the court recognized that SC Johnson went “out of its way, taking unusual steps to protect the employee,” says Pearlman. The court acknowledged, for example, that the company took efforts to investigate the allegations by hiring an outside law firm, ultimately finding that no fraud had been committed. It additionally revoked the negative performance evaluation, because it was potentially retaliatory.
The ruling effectively means that a whistleblower who provides information to law enforcement about potential crimes could possibly state a retaliation claim even if it is later determined that no crime had actually been committed, legal experts warn.
Widespread Implications?
The court additionally acknowledged in its decision the potential danger “as expressed by many courts prior to the enactment of the Sarbanes-Oxley Act, that plaintiffs will bring claims which should be handled by state law—such as wrongful termination—into federal court under the guise of RICO.” Nonetheless, the court said it's “confident” that cases that “do not truly demonstrate a threat of continued wrongdoing” will get weeded out.
In fact, some legal experts say the ramifications of the decision may not prove as harmful as companies may fear. To establish a RICO retaliation claim, the whistleblower must report the matter to law enforcement authorities. If all an employee did was raise a complaint internally to a supervisor, or some other non-government person, that claim would then not satisfy a RICO violation, says Christopher Robertson, partner and co-chair of the Sarbanes-Oxley whistleblower practice at Seyfarth Shaw.
DEGUELLE OPINION
What follows is an excerpt from the Court's analysis in the Michael DeGuelle vs. Kristen Camilli, et al. opinion:
DeGuelle argues that the Sarbanes-Oxley Act's addition
of § 1513(e) as a RICO predicate act allows his claim to
proceed. Congress enacted the Sarbanes-Oxley Act to
address growing concerns about the reliability and accuracy
of disclosures made by publicly-traded corporations.
See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204,
116 Stat. 745 (2002). In addition to protecting investors,
Title VIII of the Act provides protection for whistleblowers
and prohibits retaliation against employees who provide
evidence of fraud to a government agency. See 18
U.S.C. § 1514A. The Sarbanes-Oxley Act also
added subsection (e) to 18 U.S.C. § 1513. That section
provides:
Whoever knowingly, with the intent to retaliate, takes
any action harmful to any person, including interference
with the lawful employment or livelihood of any
person, for providing to a law enforcement officer any
truthful information relating to the commission or
possible commission of any Federal offense, shall be
fined under this title or imprisoned not more than 10
years, or both.
18 U.S.C. § 1513(e). Section 1513(f) subjects wrongdoers
to the same penalties for entering into a conspiracy
to commit such acts. Under RICO, violations of § 1513
are considered “racketeering activity.” 18 U.S.C.
§ 1961(1). Prior to enactment of the Sarbanes-Oxley Act, retaliation against an employee in the form of interference with his or her lawful employment was not considered a racketeering act, see, e.g., Hamm v. Rhone-Poulenc Rorer Pharm., Inc., 187 F.3d 941, 953 (8th Cir. 1999), and courts denied RICO standing to employees terminated for refusing to cooperate in an alleged racketeering scheme, see Corporate Healthcare Fin., Inc. v. BCI Holdings Co., 444 F. Supp. 2d 423, 432 (D. Md. 2006) (listing cases).
The addition of § 1513(e) as a predicate act raises issues
about the relationship between retaliatory actions and
the underlying wrongdoing. The language of § 1513(e)
and logic imply that retaliatory actions always occur
after a whistleblower reports others' wrongdoing. Under
the district court's reasoning, retaliation cannot be related to the underlying wrongdoing for purposes of RICO because the retaliatory acts will always occur after the underlying wrongdoing has been disclosed. Thus, there is no “cover up.” In addition, the motives and victims will almost never be the same. We can conceive of very few cases in which a single retaliatory act would be considered “related” to other predicate acts under this reasoning. This is troubling when one considers the purposes of the Sarbanes-Oxley Act and its addition of § 1513(e) to RICO's statutory scheme.
When an employer retaliates against an employee, there
is always an underlying motivation. In this case, for
example, the motivation was to retaliate against DeGuellefor disclosing the tax scheme. Retaliatory acts are inherently
connected to the underlying wrongdoing exposed by
the whistleblower. Although there may not be the
same victims or results, in most cases retaliatory acts
and the underlying scheme “are interrelated by distinguishing
characteristics and are not isolated events.”
H.J., 492 U.S. at 240. Accordingly, we believe a relationship
can exist between § 1513(e) predicate acts and predicate
acts involving the underlying cause for such retaliation.
Such a finding is consistent with the Supreme Court's
flexible standard and acknowledges the rationale behind
the Sarbanes-Oxley Act's whistleblower provisions.
Source: Court Opinion in Michael DeGuelle vs. Kristen Camilli, et al.
“The vast majority of whistleblower claims that we see don't involve an employee who has gone to the government,” Robertson adds. “They involve an employee who has gone to a supervisor.”
“The Seventh Circuit Court of Appeals held that Mr. DeGuelle's complaint included enough unproven claims to start a lawsuit. However, Mr. DeGuelle's federal court lawsuit essentially attempts to re-litigate the Racine County suit where that court decided in SC Johnson's favor, dismissing all of DeGuelle's claims and awarding SC Johnson damages on its claims,” says Chris Beard, director of public affairs at SC Johnson. “Like the Racine county case, we believe we will prevail in the district court and that the case will be dismissed.”
Document, Document, Document
Lawyers say the lesson for companies from the Seventh Circuit decision is to document everything. Companies with the best defense are those that are able to prove that potentially predicate acts are independent of one another.
Robertson routinely asks his corporate clients in wrongful termination cases: Did the employee raise any issues internally? If not for retaliation, what was the reason for the termination? If the answer to the termination is poor performance, has that been properly documented, and can you prove that?
“If I hear crickets on the other end of the phone, I know we're in trouble,” says Robertson. “If we don't have those documents, then we're swimming upstream.”
For example, In the SC Johnson case, the company's failure to document that the firing was independent of the whistleblower claim was its “downfall,” at least in the motion to dismiss stage, says Robertson.
In any retaliation case companies also should “have human resources conduct an independent review,” advises Pearlman. It's best to bring in people who have no awareness of the alleged whistleblowing activity, he says.
Being prepared for a potential whistleblower retaliation claim is going to prove especially important in the year to come. “The risks are getting higher it seems for every month that passes,” says Pearlman.
2011 brought many more whistleblower cases than previous years, and that is only going to continue, legal experts predict.
In addition to the new whistleblower cause of action under Dodd-Frank, whistleblower claims are starting to be coupled with state-law claims, stresses Pearlman, “and now we're starting to see to see the possibility of RICO claims brought concurrently with Sarbanes-Oxley and Dodd-Frank-type claims.”
What companies are going to see in 2012 is a “more savvy and sophisticated” plaintiffs bar capitalize on those changes, Pearlman adds. “This is going to be, as many predict, an explosive year for whistleblower litigation.”
No comments yet