by Stephen Kohn
Supreme Confusion
In 2006, the Bush Administration’s Department of Justice and the Los Angeles County District Attorney’s Office joined forces in an attempt to narrow the scope of protected whistleblowing under the First Amendment.
In the Garcetti v. Ceballos case, an employee within the Los Angeles District Attorney’s Office, Richard Ceballos, had once again done his job all too well. He disclosed “[i]naccuracies in an affidavit used to obtain a critical search warrant.” The affidavit filed by his office contained “serious misrepresentations,” and Ceballos reported those violations to his supervisors. In retaliation Ceballos was transferred and denied a promotion. He sought protection under the First Amendment.
The Supreme Court initially heard arguments in 2005. However, due to a vacancy in the Court, no decision was rendered. This was an indication that the Court was deeply divided on the issue, perhaps four to four. After Justice John Roberts was installed as the new chief justice, the case was reargued in 2006. The Garcetti decision would be the first major First Amendment case decided by the Roberts Court.
In a five-to-four decision written by Justice Anthony Kennedy and joined by Chief Justice Roberts and Justices Antonin Scalia, Clarence Thomas, and Samuel Alito, the Court reopened the Phillips debate. Ceballos’s case was thrown out of court. The decision, although very narrow in scope, was a remarkable step backward.
Initially, the majority opinion recognized the importance of protecting public employees’ speech under the First Amendment: “The Court has acknowledged the importance of promoting the public’s interest in receiving the well-informed views of government employees.” It realized that there could be “widespread costs” if government-employee whistleblowing was “repressed” and that “exposing governmental inefficiency and misconduct is a matter of considerable significance.” The Court recognized that First Amendment protections could apply to purely internal whistleblowing speech. In other words, public employees “may receive First Amendment protection for expressions made at work.” The Court also stated that public employee speech concerning the subject matter of an employee’s job can, under some circumstances, be protected under the Constitution: “The First Amendment protects some expressions related to the speaker’s job.” So far, so good—if the Court had only stopped here, and simply continued to apply its past precedent, Ceballos would have been protected under the law. Unfortunately that is not what happened.
Instead of continuing to move forward, the Court carved out an exception to the First Amendment based on an employee’s “official duties.” If the whistleblower’s concern was voiced “pursuant to official duties,” a public employee’s report to management would not be protected, the Court ruled: “We hold that when public employees make statements pursuant to their official duties, the employees are not speaking as citizens for First Amendment purposes, and the Constitution does not insulate their communications from employer discipline.”
According to the five-justice majority, the “controlling factor” turned out to be the contents of Ceballos’s job description. If the whistleblower concerns were part of Ceballos’s “official duties,” or were part of the work required under his position description, his memorandum to management was not protected. Despite being disciplined in retaliation for communicating allegations that an illegal or improper search warrant had been issued in violation of law, Ceballos’s case was dismissed.
The dissent immediately picked up on the absurdity of the majority holding. Justice Stevens remarked that it was “senseless” to permit “constitutional protection(s) for exactly the same words to hinge on whether they fall within a job description.”
Justice Stevens also recognized the catch-22 nature of the ruling. If reporting a concern related to “official duties” to a supervisor was not considered a protected activity, employees would be compelled to file official complaints to the news media, the state legislature, or another law enforcement agency or others outside of the internal chain of command, in order to obtain protection. In other words, had Ceballos reported the misconduct to the press, his allegations would have been constitutionally protected. Instead, he was punished and left without legal protection, simply for doing his job too well.
Referring to this outcome as “perverse,” Justice Stevens warned: “Moreover, it seems perverse to fashion a new rule that provides employees with an incentive to voice their concerns publicly before talking frankly to their superiors.”
The Garcetti holding can be interpreted narrowly. The Court’s five-member majority also held that government agencies could not expand the scope of an employee’s “official duties” by drafting overly broad job descriptions. The Court reasoned that descriptions needed to be carefully reviewed in order to prevent “excessively broad job descriptions” from interfering with free speech.
Congress did not ignore the consequences of Garcetti and similarly decided cases. On November 27, 2012, President Obama signed into law the Whistleblower Protection Enhancement Act of 2012, protecting most federal employee whistleblowers. Not one senator or congressman had voted against this law.
The Enhancement Act explicitly rejected the Garcetti line of cases. The Senate Report had harsh words for the court precedents that handcuffed whistleblower disclosures, stating that these decisions had “undermined” Congressional intent and were “wrongly” decided. Congress used the act to “overturn several court decisions that narrowed the scope of protected activities.” The Enhancement Act removed any ambiguity whatsoever as to whether or not internal whistleblowing was protected. The act explicitly protected disclosures “made to a supervisor” or made “during the normal course” of an employee’s “duties.” Just to make sure that the courts did not continue to emasculate the scope of protected disclosures, Congress also stated that an employee’s “motive for making” a “disclosure” was irrelevant, and that both “formal or informal communications” would be protected. Although the Enhancement Act is limited to the scope of protected activities enjoyed by federal employees, it sends a strong message that the hypertechnical approach defining precisely what is a protected whistleblower disclosure should be firmly rejected.
Although the Enhancement Act solved the problem faced by internal whistleblowers working for the federal government, it had no impact on the scope of protected activity for state and local employees. Garcetti is still the law under the First Amendment.
Back to the Future: Internal Whistleblower Protections Under Dodd-Frank
As part of the historic financial reforms enacted after the 2008 financial crisis, Congress added an antiretaliation law to the legal arsenal available to Wall Street whistleblowers. The Securities Exchange Act was amended to provide employees with direct access to federal court and award them double back pay, among other damages. When initially proposed, this law contained a narrow definition of a protected activity, reminiscent of the type of language used in the 1969 Mine Health and Safety Act at issue in the Phillips case. Both the Senate and House bills defined whistleblowing as disclosing information to the Commission (i.e., the government). Neither bill explicitly protected internal whistleblowers.
While Congress was reconciling the House and Senate versions of the Dodd-Frank Act, the Senate Banking Committee became concerned that internal whistleblowers might not be protected under the Act. An eleventh-hour change was made.
Here is the history behind this change. On April 23–24, 2010, while the bill was being finalized in conference, the Senate Banking Committee showed the final (and approved) draft of the Securities and Exchange Act’s whistleblower law to the National Whistleblower Center (NWC). The committee staff wanted to make doubly sure that the whistleblower law would work. On April 24 the NWC staff, fully familiar with the historic disputes over the scope of protected activities under the Mine Health and Safety Act and similar laws, proposed adding a new provision to the Act to ensure that internal whistleblowers were protected.
The NWC recommended expanding the definitio
n to forestall any debate as to the scope of protected activities. As reflected in the e-mail to the Senate Banking Committee by the NWC on April 24, the NWC proposed incorporating by reference two provisions in the 2002 Sarbanes-Oxley Act (SOX). The first provision, Section 301, explicitly protected employees who raised concerns with their managers or compliance officials. The second provision, Section 1107, also protected employees who provided information to the Department of Justice or other federal law enforcement agencies, other than the SEC.
The NWC’s proposal recommended adding a new subsection (iii) to the definition of protected activity, covering “disclosures” that were “required, authorized or protected” under these two sections of SOX, as well as protecting employees who made disclosures under “any other law, rule or regulation subject to the jurisdiction of the Securities and Exchange Commission.” The reason for this recommendation was to make sure that certain disclosures frequently made by employees did not fall through the cracks. Internal disclosures to management through the “audit committee” process were one such “crack.” With this change, Congress could avoid the frustrating judicial debates that had occurred under prior laws and ensure that a common sense approach toward whistleblowing would be followed.
The Senate Banking Committee approved this change, and it was incorporated, nearly word for word, into the final bill.
One might assume that this would end the argument. Not only did congressional and case-law precedent support the “common sense” interpretation given to these types of laws, but statutory langue was added that should have foreclosed any debate. But in whistleblower law, things are never easy.
The very first Court of Appeals case to address whistleblower protections under the Dodd-Frank Act was Asadi v. G.E. Energy. Corporate giant General Electric argued that internal whistleblowers were not protected under the new law, and it prevailed with this argument in federal district court. The employee pleaded his case before the U.S. Court of Appeals for the Fifth Circuit. The Court threw out the whistleblower’s case at the request of G.E., ignoring years of case law protecting internal whistleblowers. The Court held that the law “only” protected “individuals who provide information relating to a violation of securities law to the SEC.”
The argument raised by General Electric (and other corporations), and adopted by the Fifth Circuit Court of Appeals, sent a powerful message to whistleblowers: Beware of blowing the whistle to the boss. Beware of raising concerns to company compliance programs. Regardless of all the glowing praise highlighting the importance of internal compliance, corporate culture was still at war with whistleblowers. Raising concerns inside the company placed employees at risk of being fired, with no remedy under the Dodd-Frank Act’s antiretaliation law.
The second appellate court to weigh whether internal whistleblowing would be protected under Dodd-Frank was the U.S. Court of Appeals for the Second Circuit in Berman v. Neo@Ogilvy. In a 2-1 decision, the Second Circuit sided with the whistleblower and affirmed a common sense reading of the law. The Court rejected the reasoning of the Fifth Circuit and held that employees who report their concerns within the company are protected under the law.
Whistleblowers must be aware of these inconsistent judicial decisions. They are a warning that corporations such as General Electric and their Wall Street supporters will use any trick in the book to make sure whistleblowers lose their case. Regardless of which interpretation eventually prevails, these cases further demonstrate that most companies remain hostile to whistleblowers, even to the detriment of their own internal compliance programs.
Why would companies consistently seek judicial findings that undermine their own internal compliance programs? Perhaps the answer can be found in the comprehensive 2015 study by the Institute of Internal Auditors. After surveying five hundred chief audit executives in North America, the institute found that a majority of auditors were directed to suppress valid complaints, and another 49 percent were directed “not to perform audit work in high-risk areas.” The source of these troubling instructions was the companies’ top management, including the chief executive officer (38 percent of requests) and the chief financial officer (24 percent). Even corporate officials responsible for oversight and accountability of the company, such as the audit committee, legal counsel, board of directors, and chief risk officer, accounted for 30 percent of these improper requests.
Auditors who questioned these demands found themselves in the same position as other whistleblowers. The Institute of Internal Auditors surveyed more than fourteen thousand auditors and found that “internal auditors who resist pressure to change their findings are at times subjected to negative consequences such as pay cuts, involuntary transfers to other positions, or even termination of employment.” This study demonstrates that corporate executives are fully aware that auditors are being pressured to change their findings, and that auditors suffer retaliation when they resist. By arguing that internal whistleblowers, like the auditors surveyed by the institute, should be denied protection, these corporations are promoting bad corporate citizenship and undermining years of effort to create stronger internal controls within major corporations.
Where to Go?
The controversy surrounding Ceballos’s whistleblowing is a harsh reminder that employees should think of themselves as whistleblowers long before they are fired. Only after he or she has accepted the label is an employee in a position to think about precisely to whom he or she is going to blow the whistle, and ensure that this disclosure right is fully protected under the law.
Employees such as Ceballos who want to disclose wrongdoing can go about the process in several ways. Ceballos, like most workers, probably didn’t think that management’s reaction to constructive criticism would be as hostile as it was. Lesson learned. This is why it is so important for employees to understand that their constructive criticisms may be interpreted as disloyalty, and they may be tagged, sooner than they could ever imagine, with the “whistle-blower” label.
Most workers act just like Ceballos or Phillips. The key is to find out whether reporting to the boss is protected—hopefully before raising a concern. But no matter what, employees must figure out whether their act of blowing the whistle is protected at the earliest possible moment—it will make the difference in what law covers them, if any.
PRACTICE TIPS
Leading cases on internal whistleblowing are cited as:
• Phillips v. Interior Board, 500 F.2d 772 (D.C. Cir. 1974) (landmark case explaining why internal whistleblowing must be protected)
• Mackowiak v. University Nuclear Systems, 735 F.2d 1159 (9th Cir. 1984) (following Phillips and protecting internal whistleblowers under nuclear safety law)
• Brown & Root v. Donovan, 747 F.2d 1029 (5th Cir. 1984) (first court to reject Phillips)
• Kansas Gas & Electric v. Brock, 780 F.2d 1505 (10th Cir. 1985) (nuclear safety) (affirming Phillips)
• Passaic Valley v. DOL, 992 F.2d 474 (3rd Cir. 1993) (Clean Air Act) (affirming Phillips)
• Garcetti v. Ceballos, 547 U.S. 410 (2006) (First Amendment)
• Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2nd Cir. 2015) (explaining dispute in courts over scope of protected activity under the Dodd-Frank Act)
In 2011 the SEC issued landmark rules implementing the Dodd-Frank Act’s corporate whistleblower rewards program. As part of those rules, the SEC acknowledged the importance of employee internal reports, and provided financial incentives to employees who utilize internal reporting systems. These rules are fully explained in Checklist 7, Dodd-Frank, Wall Street, and FCPA “Q&As.”
The legislative history of the Whistleblower Protection Enhancement Act is set forth on pages 1-2 and 4-8 of Senate Report No. 112-155. Congress’s explanation of what should be considered a protected disclosure is set forth in § 101 of Public Law 112-199, codified at 5 U.S.C. § 2302(f).
RULE 17Beware of “Hotlines”
Do not blindly trust corporate-sponsored “hotlines” or corporate-sp
onsored compliance programs.
Every major employer—be it a publicly traded corporation or a government agency—must deal with a basic fact: Love them or hate them, employee whistleblowers are the single most important source of information uncovering fraud and abuse in the workplace. If you want to know what is really going on in your company, you need reasonable and effective channels for information to be disclosed and investigated.
As a consequence, there has been a worldwide proliferation of internal reporting programs. They usually start with a “hotline,” for example a toll-free phone number, publicized on a poster, that urges employees who witness misconduct to place a confidential phone call to a responsible company agent. Thereafter, a compliance department supposedly independently investigates the “concern.”
There’s just one hitch. Is the hotline truly independent? Can it keep callers’ identities confidential? Will there be a proper investigation? Is contacting the internal compliance group really the “right thing” to do?
The bottom line on using such programs is not simple. Even poorly run programs can help a would-be whistleblower. First, contacts with hotline programs document the fact that an employee legitimately raised a concern through channels approved by the employer. Second, they can demonstrate that the employer had “knowledge” of the employee’s whistleblowing. Finally, they can create a documentary record related to the company’s investigation of the claim. Demonstrating that a company or government agency covered up a legitimate concern can be important evidence of motive. On the other hand, if the hotline investigation vindicates the employee’s concern, a company may never retaliate against the employee.