By Edward J. Buthusiem & Gary F. Miller, Jr.
The enactment of the Dodd–Frank Act was intended to provide the SEC with an important weapon in its mission to seek and vigorously prosecute the commission of securities and other types of frauds domestically and overseas. By providing to whistleblowers monetary incentives ranging between 10 percent and 30 percent of fines assessed, the whistleblower program has gained an element of popularity—some would say notoriety—amongst would-be reporters of putative wrongdoing. Recent Federal Court decisions, however, have created significant roadblocks that could blunt the Dodd–Frank juggernaut.
The SEC has taken an expansive view of Dodd–Frank in terms of its extraterritorial application to confer whistleblower status on overseas employees of U.S. companies, the process a putative whistleblower must follow in order to fall within its ambit, and the type of employee eligible for the program. The recent decisions in Liu v. Siemens AG, Asadi v. GE Energy, and Bussing v. COR Clearing LLC have muddied the waters in these areas, creating a level of uncertainty for companies trying to navigate the tricky Dodd–Frank waters. We explore these below.
Dodd–Frank Whistleblower Provision Does not Apply Extraterritorially
Dodd–Frank prohibits employers from retaliating (including but not limited to discharge, demotion, suspension, or harassment) against a whistleblower employee under the program. But which employees? U.S. employees? Overseas employees? Both?
In a decision that will likely have a profound impact, the Second Circuit recently held in the case Liu v. Siemens AG that the Dodd–Frank Act’s whistleblower retaliation protections do not apply extraterritorially to protect overseas employees of U.S. companies (including foreign companies with U.S. listed securities) from retaliation for reporting wrongdoing that does not occur in or have other relevant contact with the United States. In this case, an employee by the name of Liu, a compliance officer of Siemens China Ltd., claimed Siemens wrongfully terminated his employment in retaliation for reporting that employees were making improper payments to Chinese officials in North Korea and China in violation of the FCPA. In analyzing the anti-retaliation provision, the court held, “There is absolutely nothing in the text of the provision … or in the legislative history of the Dodd–Frank Act, that suggests that Congress intended the anti-retaliation provision to regulate the relationships between foreign employers and their foreign employees working outside the United States.”
Should other Circuits follow this ruling, it may act as a deterrent against overseas employees seeking redress under Dodd–Frank and may drive these employees to look towards local anti-bribery laws, which may provide them protection that Dodd–Frank may not. This could have a chilling impact on rooting out overseas bribery through the whistleblower program. In the absence of this incentive, it becomes even more imperative that companies continue to develop and enhance their global anticorruption and anti-bribery programs to remain knowledgeable of global laws and trends and to have the ability to address concerns no matter whom they involve or where incidents occur.
Are Whistleblowers Required to Disclose Information directly to the SEC in order to Apprise Themselves of the Program’s Retaliation Protections?
A related issue is whether the Dodd–Frank anti-retaliation provisions protect whistleblowers who do not disclose information directly to the SEC, but rather initially report suspicion of wrongdoing internally to their employer via an internal hotline or other means. Currently, federal courts are split in determining this issue. Some courts have held that there is no protection for “in-house” whistleblowers. For example, in Asadi v. GE Energy, the U.S. Court of Appeals for the Fifth Circuit ruled for a narrow interpretation that anti-retaliation protection does not apply to internal whistleblowers (i.e., employees who do not provide information directly to the SEC first). District courts in California, Colorado, and Florida have reached determinations consistent with the Fifth Circuit.
However, many courts have held otherwise, determining that the anti-retaliation protection does apply to and protects in-house whistleblowers. Most recently, the District Court of Nebraska, in Bussing v. COR Clearing LLC, ruled internal disclosure by employees is covered by the anti-retaliation provision. The majority of district courts have ruled similarly. In July, the district court in Bussing granted an interlocutory appeal to the Eighth Circuit. No decision has been made yet whether the Eight Circuit will permit the appeal; however, this may tee up the type of circuit split that may force the U.S. Supreme Court to referee a decision.
Although the Second Circuit in Liu v. Siemens AG decided that case on separate grounds and did not rule on this question, the SEC filed an amicus brief in which it urged the court to confer anti-retaliation protection to in-house whistleblowers. In a further illustration of its support for in-house whistleblowers, the SEC recently awarded $300,000 to a whistleblower who performed audit and compliance functions for his company and reported wrongdoing to the SEC after the company failed to take action when the employee reported it internally. This award is unique: it was the first such award to go to a whistleblower employee who performed a “control function” within a company.
Sean McKessy, chief of the SEC’s Office of the Whistleblower, stated that audit and compliance employees “may be eligible for an SEC whistleblower award if their companies fail to take appropriate, timely action on information they first reported internally.” Presumably, in-house lawyers would be precluded by the attorney–client relationship from availing themselves of the Dodd–Frank whistleblower programs. But what of non-lawyer compliance officers? Based on the ruling in Asadi, they would seem eligible for Dodd–Frank status and anti-retaliation protection. In our opinion, the use of Dodd–Frank to incentivize the very employees responsible for erecting and managing a company’s internal compliance control function signals a potentially troublesome trend.
Interpretation of the use of Dodd–Frank and the scope of its anti-retaliation protections as these cases work their way through the judicial system will have direct, practical implications for employers and employees. Requiring employees to report information directly to the SEC could potentially undermine and weaken a company’s internal compliance efforts. Companies expend considerable time and effort erecting and managing compliance programs in conformity with OIG and DOJ guidance. Requiring employees to first report concerns of wrongdoing directly to the SEC will incentivize whistleblowers to bypass internal compliance hotlines and other controls in order to obtain anti-retaliation protection.
Impact on the Pharmaceutical Industry
SEC and DOJ fraud investigations and enforcement actions will likely continue to grow in terms of both size and scope. To avail themselves of the whistleblower program, pharmaceutical and medical device manufacturers must stay abreast of the evolution of Dodd–Frank and its impact to incentivize both foreign and domestic employees. The SEC’s expansive view of Dodd–Frank applicability is likely to continue, and the SEC will seek new and different avenues to utilize this important risk-reporting incentive. It is more important than ever that compliance programs are more than just “paper tigers.” Companies must remain vigilant to address wrongdoing seriously, investigate thoroughly, and take appropriate action to remediate issues and implement enhancements to mitigate future incidents.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.