Federal Court Rules SOX Whistleblower Amendment’s Ban on Predispute Arbitration Agreements Retroactive

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In Pezza v. Investors Capital Corp., Judge Douglas P. Woodlock of the United States District Court for the District of Massachusetts ruled that Section 922(e) of the Dodd-Frank Act, which bans predispute arbitration agreements regarding the Sarbanes-Oxley Act (SOX) whistleblower protection, is retroactive.  The statutory language is as follows:

(e)NONENFORCEABILITY OF CERTAIN PROVISIONS WAIVING RIGHTS AND REMEDIES OR REQUIRING ARBITRATION OF DISPUTES – -

(1) WAIVER OF RIGHTS AND REMEDIES.–The rights and remedies provided for in this section may not be waived by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement.

(2) PREDISPUTE ARBITRATION AGREEMENTS.–No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.
The defendants raised the obligation to arbitrate as an affirmative defense and moved to compel arbitration.  While the defendant’s motion to compel arbitration was under advisement, the Dodd-Frank Act was enacted, raising the issue of whether the ban on predispute arbitration agreements applies to disputes occurring prior to the law’s enactment.  The court applied the following framework from the Supreme Court’s decision in Fernandez-Vargas v. Gonzales, 548 U.S. 30, 37-38 (2006) to this case:

We first look to whether Congress has expressly prescribed the statute’s proper reach, and in the absence of language as helpful as that we try to draw a comparably firm conclusion about the temporal reach specifically intended by applying our normal rules of construction. If that effort fails, we ask whether applying the statute to the person objecting would have a retroactive consequence in the disfavored sense of affecting substantive rights, liabilities, or duties on the basis of conduct arising before its enactment. If the answer is yes, we then apply the presumption against retroactivity by construing the statute as inapplicable to the event or act in question owing to the absence of a clear indication from Congress that it intended such a result.
In applying this framework, the court concluded that congressional intent regarding the temporal reach of the ban was at best unclear.  However, since the ban merely confers jurisdiction and does not affect the parties’ substantive rights, the court held the ban applies to conduct arising prior to its enactment:

The rationale is that this type of statute “takes away no substantive right but simply changes the tribunal that is to hear the case.” In other words, present law governs in such a case because statutes conferring or ousting jurisdiction “speak to the power of the court rather than to the rights or obligations of the parties.”

While Section 922 affects the validity of the arbitration clause, a contractual term agreed upon by the parties, I am of the view that this section principally concerns the type of jurisdictional statute envisioned in Landgraf.  As the Supreme Court held, “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.”

(citations omitted).
Based on that rationale, the court quashed defendants’ motion to compel arbitration and allowed plaintiff’s SOX whistleblower lawsuit to proceed in federal court – a win for employee rights.
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IRS Rewards Enron Whistleblower $1.1 Million

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The Washington Post reported that the IRS awarded $1.1 million to the anonymous whistleblower who reported Enron for bilking the government out of over $200 million in tax revenue before its collapse in 2001.  The whistleblower showed the IRS how Wall Street banks, using business arrangements and entities, provided tax shelters for $600 million of Enron’s income and fraudulently boosted Enron’s earnings by over $300 million.  The whistleblower was employed at a Wall Street investment bank while he educated the IRS on those fraudulent tax shelters.  In 2006, Congress passed legislation implementing the new IRS Whistleblower Reward Program where individuals who expose tax fraud can receive an award ranging from 15% to 30% of the proceeds recovered by the IRS.

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Senator Grassley Introduces Bill to Protect Congressional Whistleblowers

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Senator Chuck Grassley, R-Iowa, introduced bill S. 586 titled the Congressional Whistleblower Protection Act of 2011, which would extend whistleblower protections to congressional employees. In a press release, Grassley stated:

Whistleblowers in the executive branch have helped me do my job of oversight. It’s simply not fair, nor is it good governance, for Congress to enact whistleblower protections on the other branches of government without giving its own employees the same consideration. This effort is about two things: making sure Congress practices what it preaches and making sure Congress values the importance of whistleblowers for increasing accountability in the representative branch of government.

While the bill limits these protections to employees of the Government Accountability Office and the Library of Congress, it is still a step in the right direction. The bill would protect employees who report

  • a violation of any law, rule, or regulation;
  • gross mismanagement, a gross waste of funds, and abuse of authority; or
  • a substantial and specific danger to public health or safety.

If an employer illegally retaliates against a whistleblower, remedies would include those listed under chapter 12 of title 5, which includes:

  • placing the individual in as nearly as possible the position the individual would have been in had the employer not retaliated against them;
  • back pay and benefits, medical costs, travel expenses, and any other reasonably foreseeable damages; and
  • attorneys fees and costs.

The bill follows two years worth of whistleblower legislation that extended protection to employees who speak the truth to authority from government contractors to corporations, to the financial services industry, to those in charge of our food supply.  Hopefully Congress will continue on its course and the future will bring further whistleblower protections for every congressional, executive, and judicial employee.

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FDA Takes Over #Tylenol Plants – Whistleblowers Key to Safer Drugs

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Last week CNN reported that the Food and Drug Administration (FDA) took control of three of Johnson & Johnson’s Tylenol plants located at:

  • Las Piedras, Puerto Rico
  • Fort Washington, Pa
  • Lancaster, Pa
Additionally, the FDA and the U.S. Department of Justice are pursuing criminal charges against two executives for failing to comply with federally-mandated manufacturing practices.

Johnson & Johnson’s reputation has been marred over the past couple years by a history of drug recalls and FDA violations at its manufacturing plants.  The Wall Street Journal provided a detailed list of the recalls in its Health Blog:

  • In January J&J said it would pull 43 million bottles of certain Tylenol, Benadryl, Sinutab and Sudafed products because they were made at the company’s Ft. Washington, Pa., plant at a time when equipment may not have been properly cleaned.
  • In December the company said it was recalling all lots of Rolaids Extra Strength Softchews, Rolaids Extra Strength Plus Gas Softchews and Rolaids Multi-Symptom Plus Anti-Gas Softchews following consumer reports of foreign-particle contamination.
  • In October, there was a recall of 127,000 bottles of Tylenol 8-Hour caplets due to a musty odor.
  • In August, J&J’s DePuy Orthopedics unit pulled two hip implants off the market because of an unusually high rate of replacement surgeries.
  • In late 2009 there were recalls of Tylenol Arthritis Pain Caplets due to that musty odor issue.
The public places its trust in drug companies to provide safe and affordable drugs.  It’s unacceptable for drug companies to betray the public’s trust by delaying a recall when the company has reason to know drugs were not properly manufactured.  The drug company plant worker, quality assurance manager, and executive each have a duty to report unsafe drugs immediately and before those drugs reach the medicine cabinets of the public.

Whistleblowers are the key to detecting unsafe drugs early and forcing the management of drug companies to recall those drugs.  We wrote a post in January about a classic example where the law worked: whistleblower Cheryl Eckard was awarded $96 million under the False Claims Act after reporting that her former employer, GlaxoSmithKline, failed to immediately recall drugs that were contaminated.  It’s impossible to know how many lives may have been affected positively by her prompt reporting.

Eckard was awarded millions, because Congress designed the False Claims Act to reward whistleblowers for the risks they take when reporting companies committing fraud against the federal government.  Since many prescription drugs and some over-the-counter drugs are purchased using government health care programs such as Medicare and Medicaid, drug companies defraud the federal government every time they knowingly sell unsafe drugs to the public.  The whistleblower is in the unique position to detect unsafe drugs early and prevent disaster.

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The Employment Law Group® Prevails in Establishing the Broad Scope of Sarbanes-Oxley Protected Conduct

In Feldman v. Law Enforcement Associates Corp., Judge W. Earl Britt of the U.S. District Court for the Eastern District of North Carolina ruled that plaintiffs Paul Feldman and Martin Perry successfully stated a Sarbanes-Oxley whistleblower claim and could proceed to trial; defendants Law Enforcement Associates Corp. (LEA), John Carrington, et al., had failed to quash all of plaintiffs’ claims with their motion to dismiss.  The court held that the Sarbanes-Oxley Act (SOX) does not require that the fraudulent conduct or violation of federal securities law be committed directly by the employer that takes the retaliatory action.

LEA is a manufacturer of security and surveillance equipment used by local, state, federal and international law enforcement agencies and by public and private companies.  John Carrington is LEA’s founder and former majority shareholder.   Feldman was LEA’s President for almost twenty years, and Perry was LEA’s Director of Sales – both were also directors of the corporation.  Feldman and Perry discovered at LEA what they believed to be business transactions that violated U.S. export controls:

In 2005, Carrington was convicted of felonies relating to the illegal export of evidence collection products to China.  The federal government fined Carrington, placed him on probation for one year, and prohibited him from making exports for five years. . . .  Carrington resigned from LEA’s Board and also ended his management and majority ownership role at LEA.  After Carrington’s departure, LEA entered into multiple contracts with a company called SAFE Source to export receivers and video equipment to police in the Dominican Republic.  In September 2007, Feldman and Perry discovered that Carrington had an ownership interest in SAFE Source.
Because Carrington had been banned from making exports for five years and because he had an ownership interest in SAFE Source, plaintiffs maintain that it was illegal for SAFE Source to engage in the export business.  Feldman and Perry notified LEA’s Board and then federal authorities:

In January 2008, LEA’s counsel, James Jorgensen (“Jorgensen”), and plaintiffs met with federal authorities at the [Department of Commerce] (DOC) to report Carrington’s illegal and undisclosed ownership of SAFE Source and the illegal export business that SAFE Source conducted with LEA.  Approximately one week after plaintiffs reported these activities to the DOC, federal agents raided the headquarters of SAFE Source . . . and began a criminal investigation.
LEA then fired both plaintiffs.  On September, 30 2009, plaintiffs sent an email and a letter to the SEC to report their concerns about the false 8k filing regarding their firings.  Feldman sent a letter to the United States Department of Labor, Occupational Health and Safety Administration (OSHA) regarding LEA’s failure to report information to the SEC, including plaintiffs’ cooperation with investigations by the DOC into export violations by Carrington.  Feldman and Perry also filed complaints with OSHA alleging LEA had violated federal whistleblower protections.  On December 3, 2009, LEA removed plaintiffs from the Board of Directors.

Whistleblower claims under the Sarbanes-Oxley Act of 2002.

In order to make a prima facie showing of a SOX violation, an employee’s complaint must allege that:

  1. the employee engaged in activity protected by SOX;
  2. the employer knew, actually or constructively, of the protected activity;
  3. the employee suffered an unfavorable personnel action; and
  4. the circumstances raise an inference that the protected activity was a contributing factor in the personnel action.

For purpose of the motion to dismiss the court only addressed the first element: whether the plaintiffs have sufficiently pled that they engaged in protected activity under SOX.  They must show that they complained to a “Federal regulatory or law enforcement agency . . . or a person with supervisory authority” over them, and their complaint “definitively and specifically” related to:

  1. mail fraud,
  2. wire fraud,
  3. bank fraud,
  4. securities fraud,
  5. any rule or regulation of the SEC or
  6. any provision of federal law related to fraud against shareholders.

In addition, plaintiffs must show that they had both “a subjective belief and an objectively reasonable belief” that the conduct they complained constituted a violation of federal law.
Adopting a broad scope of SOX protected conduct, the court held that SOX does not require that the fraudulent conduct or violation of federal securities law be committed by the employer that takes the retaliatory action.  Plaintiffs maintain they reasonably believed that LEA’s involvement with SAFE Source caused LEA to engage in illegal exports and jeopardized LEA’s numerous contacts with federal customers that required compliance with export laws and regulations.  Therefore, reporting a third party’s fraudulent behavior to an employer constitutes protected conduct under the whistleblower provisions of SOX.

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