14 Oct Does Dodd-Frank Protect Internal Whistleblowers? Best Business Practices Should Resolve the Circuit Split

Posted at 21:46h in Securities Litigation & Regulation by

The current pace of Dodd-Frank Act whistleblower awards should sound a clarion call to employers to do all they can to promote good corporate behavior and welcome employee concerns when raised. Doing so would reduce employees’ motivation to blow the whistle outside the company to regulators, government agencies and civil lawyers to have their concerns addressed. Yet the parade of retaliation cases in this area suggests the opposite is true: not only are employees who come forward with news of wrongdoing not being welcomed, but employers too often appear willing to shoot the messenger. Now the topic may reach the Supreme Court: the Second and Fifth Circuits recently reached opposite results on the question of whether whistleblowers who report problems internally first are protected from retaliation. Compare Berman v. Neo@Oglivy LLC, No. 14-4626 2015 WL 5254916 (2nd Cir. Sept. 10, 2015) with Asadi v. G.E. Energy, LLC, 720 F.3d 630 (5th Cir. 2013). A “no” answer – meaning employers can freely retaliate against internal whistleblowers, and only employees who run straight to the SEC are protected under Dodd-Frank — would be an unfortunate outcome. It would deprive employers of something they lobbied hard for Dodd-Frank to give them: the opportunity to self-correct before government gets involved. Does this issue really need Supreme Court consideration? Isn’t the right course of action – the smart business answer – pretty obvious?

Under Dodd-Frank, employers who retaliate against whistleblowers expose themselves to double back-pay damages. They also invite a cascade of collateral effects, all of them bad. First, and most damaging, is the serious decline in workplace morale when management refuses to hear the truth, or get to the bottom of an issue, or demotes or dismisses a reporting person. Such a response to unwanted news sends the chilling message that the company does not accept its own fallibility and would rather ignore and dismiss (figuratively if not literally) the altruistic whistleblower than admit that it has bad or deficient practices. This perception can alienate employees and cause a loss of respect for management. From there, it’s a short distance to reduced employee enthusiasm, indifference to the company’s mission and a desire to seek other employment, not only by the reporting employee, but also by workplace friends and supporters.

When a reporting employee’s concerns are not meaningfully addressed she, or others aware of such concerns, may seek external validation and redress through a whistleblower complaint or a civil lawsuit. Neither is good for the company, as both draw unwelcome attention from three powerful constituencies: regulators, auditors and shareholders. Even if a whistleblower’s claims ultimately yield no evidence of wrongdoing, there will be some level of inquiry if a regulator, auditor or major shareholder becomes aware of them. Each of these constituents will demand it. Once a regulator or government agency is in the house, there is no telling or controlling where they might go, or what they might find. Because of this, auditors and shareholders will be keenly interested in what the regulators are looking into, how management responds, and the likely impact on the business. Thus, pushing an employee to become a whistleblower could cause a company to face deflated morale, a disruptive regulatory inquiry and anxious auditors and shareholders, factors that in turn can lead to marketplace whispers, shrinking sales and even class- and derivative actions; a perfect storm of negative events — all because management refused properly to address the reporting employee’s concerns.

These prospects should be sufficient reason to motivate employers actually to encourage employees to bring forward their concerns. An employee who speaks up allows the company first crack at learning what has happened, and at righting any possible wrongs, rather than running the risk that outside forces will seize that opportunity. But, if the employee perceives that the result to her of doing so is possible retaliation (as the Fifth Circuit’s interpretation seems to allow) it is unlikely the current whistleblower trend will abate anytime soon.

For these reasons, the better course for employers is to thank the reporting employee and quickly address the concerns to determine whether there is any “there there,” while properly managing the whistleblower’s environment to prevent any potential or actual retaliation. This will have a cascading positive effect, where the employee is recognized for bringing a potential problem to management’s attention before it repeats or metastasizes. Such recognition would not only boost morale, and faith in the company, but would also validate the employer’s commitment to an ethical business environment, adhering to law and sound practices; values with which most employees desire to be associated. The net result of this approach is a more engaged and committed workforce that places great confidence in management

Ron Wood

Ron Wood

Ron Wood is a partner with Brown White & Osborn LLP. A former Assistant Director in the SEC's Division of Enforcement, Executive Director in the Law Division at Morgan Stanley, and litigation partner with Proskauer LLP, he practices securities law with a focus on regulatory and enforcement matters. He also conducts internal investigations and complex commercial litigation.
Ron Wood

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