Bernard J. DiMuro, Jonathan R. Mook, and Michael E. Barnsback, Editors
DiMuroGinsberg, P.C.

Vol. 20, No. 4
May 2008

EMPLOYER LIABILITY

Protecting your company from whistleblower claims

Stephen J. Stine

Almost every state provides a certain level of protection for employees who blow the whistle. Whistleblowing employees typically allege that they have observed their employer committing fraud against the federal or state government, or sometimes they report some type of fraud or impropriety committed against a person or private entity. Virginia recently passed legislation permitting whistleblower actions alleging acts of fraud against the Commonwealth. However, Virginia is one of the few states that doesn't offer either explicit statutory protection for whistleblowers who reveal private improprieties rather than public ones or any statutory recognition of a whistleblower's retaliatory discharge claim. Nonetheless, as the following discussion makes clear, you still need to be concerned about whistleblower claims against your company.

Virginia whistleblower statutes

The Virginia Legislature has provided whistleblower protection for employees in two types of situations.

Reporting health and safety violations. The Virginia Code prohibits you from discharging or discriminating against any employee who files a safety or health complaint or who has testified or otherwise acted to exercise rights under the health and safety regulations of Va. Code § 40.1-51.2.1. An employee who believes that he has been discharged or otherwise discriminated against in violation of the statutory requirements may file a complaint with the Virginia Commission of Labor and Industry within 60 days of the alleged violation. If it is unable to resolve the allegations through a voluntary agreement between the parties, the commission can file a court action against the employer. Should the commission decline to file a court action, the employee has the right to do so independently.

Reporting corporate fraud against the Commonwealth. On a much grander scale, Virginia has recently passed legislation that rewards and protects whistleblowers who report corporate fraud taking place against the Commonwealth. Under the 2003 Virginia Fraud Against Taxpayers Act (VFATA), which is modeled after the federal False Claims Act (FCA), private individuals may sue companies or individuals who are defrauding the Commonwealth and recover funds on the state's behalf. A whistleblower is entitled to receive 15 to 25 percent of the amount recovered as a result of a VFATA lawsuit if the Commonwealth joins the case. If the Commonwealth doesn't join the lawsuit, the whistleblower's share of recovery ranges from 25 to 30 percent.

Damages and penalties assessed against the offending company and individuals can be extremely severe. Liable companies or individuals will have to pay $5,000 to $10,000 for each false claim plus three times the Commonwealth's losses. (The statute reduces the amount to two times the Commonwealth's damages if the liable person or company reports the false claims to the state within 30 days of learning of the fraud.) If the whistleblower is able to prove large-scale fraud in a company's contract bid or contract performance with the Commonwealth, the company will pay triple damages to the government as punishment for its fraudulent conduct. The company also may face a $5,000 to $10,000 penalty for each invoice it submitted to the Commonwealth as a separate "false claim."

The VFATA further protects whistleblowers from potential employer retaliation. Any employee who is discharged, demoted, suspended, threatened, harassed, or discriminated against in any other manner in the terms and conditions of his employment by his employer because he has opposed any fraudulent practice against the Commonwealth is entitled to all necessary relief to make him whole (compensate him). An employee also is entitled to similar protections from retaliation if he has initiated, testified, assisted, or participated in any manner in any investigation, action, or hearing.

The available relief includes reinstatement with the same seniority status the employee would have had but for the discrimination. The employee also may recover two times the amount of back pay he is owed and interest on the back pay. Finally, he can receive compensation for any special damages sustained as a result of discrimination, including litigation costs and reasonable attorneys' fees.

No protections for reporting fraud against private parties

Although the Virginia Legislature has protected individuals reporting corporate fraud against the Commonwealth, the Virginia Supreme Court has consistently rejected attempts to create a whistleblower claim for retaliatory discharge for reporting fraud that doesn't involve the Commonwealth. Virginia courts have developed a virtually ironclad employment-at-will doctrine. As a consequence, they are extremely reluctant to overrule the presumption that either an employee or an employer can end the employment relationship at any time and for any reason.

For example, in a 1999 case, Dray v. New Market Poultry Products Inc., a woman claimed she was fired in retaliation for reporting unsanitary conditions at a private chicken-processing plant to an on-site government inspector. Although she claimed that she was terminated in violation of public policy, the Virginia Supreme Court upheld the dismissal of her lawsuit. The court reasoned that she simply sought "to mount a generalized, common-law whistleblower's retaliatory discharge claim," but such a claim "has not been recognized as an exception to Virginia's employment-at-will doctrine, and we refuse to recognize it today."

Likewise, in Lawrence Chrysler Plymouth Corporation v. Brooks, the supreme court rejected an employee's claim that his employer had discharged him in violation of public policy. The employee asserted that he had been fired in retaliation for his refusal to repair an automobile in what he considered an unsafe fashion. The court, however, was unwilling to extend the established exception to the employment-at-will doctrine to encompass discharges that violate only private rights or interests.

Federal whistleblower statutes

Although Virginia recognizes whistleblower claims in only limited situations, broader protection is found under federal law, which provides two major statutory protections for whistleblowers.

False Claims Act. The oldest of federal whistleblower statutes, the FCA, provides substantial monetary compensation and protection from retaliation for a whistleblower who proves corporate fraud against the federal government. As we noted, the provisions of the VFATA are modeled after the FCA. Unlike the VFATA, however, the FCA doesn't reduce damages for a company that reports fraud within 30 days of discovering it. The penalties for each false claim are also slightly higher than under the VFATA, ranging from $5,500 to $11,000.

Sarbanes-Oxley Act. In 2002, Congress extended whistleblower protections for the first time to the large numbers of private-sector employees working for publicly traded companies. A federal statute, the Sarbanes-Oxley Act, was enacted less than a year after Enron Corporation imploded, followed by a series of high- profile corporate scandals. So far, however, employees are having a difficult time establishing retaliation claims under Sarbanes-Oxley.

The U.S. Court of Appeals for the Fourth Circuit, which is the federal appellate court for Virginia, recently looked at the retaliation provisions of Sarbanes-Oxley in one of the few appellate decisions to address the statute. In a split decision, the court affirmed by a 2-1 margin the trial court's dismissal of an employee's retaliation and wrongful discharge claim.

The employee alleged that his employer, Wyeth, Inc., discharged him because of his complaints to management about the company's inability to implement a training program at one of its North Carolina facilities on schedule. He claimed that local employees at the facility misrepresented or covered up deficiencies in the progress of the training program to internal compliance auditors and the Food and Drug Administration (FDA). He further claimed that he reasonably believed the misrepresentations were a violation of federal securities law.

The Fourth Circuit disagreed, ruling that no objectively reasonable basis existed for the employee's belief that Wyeth was violating securities laws. The court found that the FDA had never issued any warning or otherwise commented on Wyeth's training schedule deficiencies at the North Carolina site. Accordingly, the appeals court reasoned that whether or not Wyeth made false statements was immaterial because the FDA wouldn't take any action against the company that would have any financial consequences to its investors. Livingston v. Wyeth, Inc., No. 06-1939 (4th Cir., Mar. 24, 2008).

Tips on preventing whistleblower claims

Virginia isn't a particularly friendly jurisdiction for whistleblowers. But that doesn't mean an employee cannot "blow the whistle" against your company for what he perceives as public or private fraud or otherwise unlawful conduct. The federal Sarbanes-Oxley Act protects employees who blow the whistle on securities fraud by publicly traded companies. Virginia companies that contract with the federal government or the Commonwealth also face the risk of litigation filed under the FCA or VFATA.

To protect your company from legal liability, you can take some practical measures to lessen the risk of potential whistleblower claims:

• First, identify and address disgruntled employees' concerns. A large number of whistleblower allegations and lawsuits are premised on a misunderstanding of the employer's business practices and the applicable laws regulating the company. Before going public with their allegations, many potential whistleblowers will approach company officials to complain internally about what they perceive as unlawful business practices. To the extent possible, corporate management should allay the employee's concerns and explain why his perceptions may be misplaced. Of course, if an employee has identified a real area of concern, your company's genuine efforts to address and correct the problem will greatly reduce the likelihood of whistleblower litigation.
• Second, it goes without saying that your company should monitor its divisions, management, and workforce to ensure that it isn't facilitating fraudulent or otherwise unlawful business practices. Even a smaller company that doesn't maintain a separate compliance department can and should perform regular examinations of its business, accounting, and tax practices to ensure compliance with federal and state law.

Copyright 2008 M. Lee Smith Publishers LLC

VIRGINIA EMPLOYMENT LAW LETTER is a monthly publication provided as an educational service only to assist lay persons in recognizing potential problems in their labor and employment matters. It is not meant to be construed as legal advice. Readers in need of legal assistance should retain the services of competent counsel.