You might think the laws of King Edward I of England (1239-1307), George Washington’s whisky distillery, and an 1807 “Treatise on the Law of Idiocy and Lunacy” have little to do with the federal criminal code of 2024. And you might think they have even less to do with contemporary federal regulation of cannabis. But the Supreme Court’s test for the Second Amendment right to keep and bear arms requires litigants and courts to become historians scouring the archives. So, the U.S. Court of Appeals for the Fifth Circuit recently held a federal criminal statute barring unlawful users of controlled substances from possessing firearms and ammunition, 18 U.S.C. § 922(g)(3), was unconstitutional as applied. The government’s prosecution of a “non-violent, marijuana smoking gunowner” was dismissed (United States v. Connelly, — F.4th — (5th Cir. 2024).
Those intrigued by the ins and outs of historical firearms regulations, and the back and forth between the Supreme Court and Fifth Circuit on that issue, can study the court’s opinion. The facts, however, were straightforward and seemingly commonplace. The defendant “would at times smoke marijuana as a sleep aid and for anxiety.” So do countless Americans, in full compliance with applicable state laws allowing just such uses. The defendant owned a firearm. Again, nothing remarkable there. Yet federal officials charged the defendant with violating criminal law. The Fifth Circuit put an end to the prosecution, as it did in a similar case last year, United States v. Daniels, 77 F.4th 337 (5th Cir. 2023), vacated, 144 S. Ct. 2707 (2024) (for reconsideration in the light of United States v. Rahimi, 144 S. Ct. 1889 (2024)), which we discussed last year here.
Three takeaways stand out for the industry:
1. The federal classification of cannabis does not trump constitutional rights.
Noticeably absent from the Fifth Circuit’s reasoning was any deference to the federal scheduling of cannabis as a controlled substance. That may be due to the unique historical test applicable to the Second Amendment. Still, the opinion shows the Constitution has no cannabis exception. Judicial statements like “[m]arijuana user or not,” the defendant “is a member of our political community and thus” has constitutional rights are a welcome change in emphasis. When facing an enforcement challenge, industry participants should evaluate constitutional challenges they may have. The Constitution may just win the day.
2. Analogies to regulation of alcohol carried more weight than analogies to other regulatory schemes.
The government tried to analogize cannabis users to several regulatory schemes, including a tenuous (at best) analogy to mental health. Nothing doing there. The Fifth Circuit instead analogized to alcohol regulation, concluding that both alcohol and cannabis can cause a temporary, potentially “impairing influence.” So, just as the federal government does not charge firearms owners with violating 18 U.S.C. § 922(g)(3) because they occasionally consume alcohol, the government could not prosecute the defendant because she occasionally consumed cannabis.
This decision suggests that future enforcement targets might find success in analogizing cannabis to alcohol. Subject to appropriate regulatory control and responsible personal use, alcohol consumption is an accepted part of American society. Indeed, as the Fifth Circuit took pains to note, American acceptance of alcohol consumption dates to the colonial period. Just ask George Washington. And it’s still going strong today. Manufacturers and distributors of alcoholic beverages can advertise their products widely — watch the Super Bowl — and they benefit from access to the banking system, stock market, and other financial opportunities closed to the cannabis industry. Situating the cannabis industry in that established history may help show that cannabis should follow a similar pattern. And it may call into question differential regulatory treatment of the two industries.
The Fifth Circuit declined the government’s invitations to analogize cannabis users to “dangerous” persons, like political traitors, whom the Constitution might permit disarming. That is, of course, a marked shift from the historical justification for the federal ban on cannabis — a supposed propensity to “incite[] violent crimes,” that modern medicine shows is false.
Rejecting the supposed “dangerousness” of occasional cannabis users furthers questions about whether prohibitions on cannabis serve a legitimate purpose. Recall Justice Clarence Thomas’s 2021 statement questioning the federal approach as a contradictory and unstable “half-in, half-out regime” that “strains basic principles of federalism and conceals traps for the unwary” (Standing Akimbo, LLC v. United States, 594 U.S. 2236 (2021) (Thomas, J., statement respecting denial of certiorari)). As more courts reject federal attempts to treat cannabis users differently from other citizens, future litigants may consider asserting constitutional due process or equal protection challenges to regulations. After all, as Connelly shows, courts stand ready to vindicate constitutional rights, “[m]arijunana user or not.”
In criminal cases, oftentimes the most significant element in dispute is whether the defendant harbored the intent to “knowingly” or “willfully” violate the criminal law at issue. If the defendant denies that he knew what he was doing was illegal, the government must prove beyond a reasonable doubt that the defendant had the required mens rea — or mental state — to violate the law. The government does this by presenting circumstantial evidence that it argues supports a reasonable inference that the defendant had the required mental state to violate the law. And defense lawyers test that evidence largely on cross examination and by presenting counterevidence.
The more complicated the law — think tax, securities, or federal election conduit contribution laws — the riskier it is that a person can be held criminally liable for what seemed like innocent or at least not illegal conduct. In these cases, experts may be called to testify about how a certain industry or regulatory regime is structured or how it operates, and the parties can argue to the jury whether the facts of the case circumstantially prove the reasonable inference that the defendant knowingly or willfully violated a criminal law related to that industry or regulatory regime. But Federal Rule of Evidence 704(b) prohibits an expert from stating an opinion about whether a criminal defendant “did or did not have the mental state or condition that constitutes an element of the crime charged or of a defense. Those matters are for the trier of fact alone.” FRE 704(b) was adopted in response to President Ronald Reagan’s shooter, John Hinkley, being found not guilty by reason of insanity after competing experts offered opinions on the ultimate issue of Hinkley’s sanity. So FRE 704(b) now requires that a jury alone must decide whether the defendant intended to commit a crime. And the answer to this question is often the difference between freedom or years in prison.
In Diaz v. United States, ___ S. Ct. ___, 2024 WL 3056012 (June 20, 2024), the U.S. Supreme Court ruled that FRE 704(b) does not preclude expert testimony about the likelihood that the defendant intended to commit a crime based on the defendant’s membership in a particular group. Diaz was charged with “knowingly” transporting drugs across the U.S.-Mexican border. She argued the “blind mule” defense: she did not know there were drugs in the car, therefore she did not knowingly transport them. The government called as an expert a Homeland Security Investigations Special Agent to testify that “in most circumstances, the driver knows they are hired to take drugs from point A to point B.” The Agent said that drug-trafficking organizations would expose themselves to too much risk by using unknowing couriers. The Agent admitted on cross examination that he was not involved in Diaz’s case, and that drug-trafficking organizations sometimes use unknowing couriers. The jury found Diaz guilty and she was sentenced to 84 months in prison.
Diaz argued that the Agent’s expert testimony violated FRE 704(b)’s proscription of expert’s providing opinions about whether a defendant did or did not have the required state of mind to violate the law. The Court affirmed the Ninth Circuit’s opinion that the Agent’s expert testimony did not violate FRE 704(b) because the expert “did not express an opinion about whether Diaz herself knowingly transported [drugs].” Instead, he testified that “most” drug couriers know they are hired to drive drugs from point A to point B. “That opinion does not necessarily describe Diaz’s mental state. After all, Diaz may or may not be like most drug couriers.” The Court acknowledged that it would have violated Rule 704(b) if the Agent had testified that “all” drug couriers know they are transporting drugs, since Diaz would be included in that drug courier group thus making it an opinion about Diaz’s mental state.
The Court said that FRE 704(b) only proscribes expert opinions “in a criminal case that are about a particular person (‘the defendant’) and a particular ultimate issue (whether the defendant has ‘a mental state or condition’ that is ‘an element of the crime charged or of a defense.’).” Because the Agent “did not give an opinion ‘about whether’ Diaz herself ‘did or did not have a mental state or condition that constitutes an element of the crime charged or of a defense,’ his testimony did not violate Rule 704(b).”
In her concurrence, Justice Ketanji Brown Jackson inferred that “what’s good for the goose is good for the gander” when she wrote that criminal defendants were now free to offer expert testimony “‘on the likelihood’ that the defendant had a particular mental state, ‘based on the defendant’s membership in a particular group.’” For example, “Diaz could have offered expert testimony on the prevalence and characteristics of unknowing drug couriers.” Justice Jackson said that the Diaz opinion will now allow psychiatrists to testify as experts “to tell the jury that when people with schizophrenia as severe as a defendant’s commit acts of violence, it is generally because they do not appreciate the wrongfulness of their conduct.” This would not create a “spectacle of dueling experts on the defendant’s mental state,” Justice Jackson wrote, but instead “could help jurors better understand a defendant’s condition and thereby call into question a mens rea that might otherwise be too easily assumed…given the biases, stereotypes, and uneven knowledge that many people have about mental health conditions.”
Justice Neil Gorsuch wrote a terse dissent that was joined by Justices Sonia Sotomayor and Elena Kagan. The dissent said the Agent’s probabilistic assessment that “most” couriers know they are transporting drugs violated FRE 704(b) because it was a statement “about whether the defendant” had a “mental state . . . that constitutes an element of the crime charged.” The word “about” is defined as “concerning, regarding, with regard to, with reference to; in the matter of.” And according to the dissent, expert testimony about what most drug couriers know was testimony about the likelihood of what Diaz knew. Justice Gorsuch warned of “warring experts” on the issue of a defendant’s intent, which he says will make the criminal justice system less reliable as lawyers may try and find probabilistic expert opinions on intent rather than doing the hard work of gathering circumstantial evidence and arguing about what that evidence reasonably infers about a defendant’s intent.
The 92-page notice of proposed rulemaking primarily summarizes and comments on last year’s recommendations by the Department of Health and Human Services to reschedule marijuana, as well as related legal concerns such as compliance with international treaty obligation. The DOJ emphasizes that if marijuana is transferred to Schedule III, “the manufacture, distribution, dispensing, and possession of marijuana would also remain subject to applicable criminal prohibitions under the CSA [Controlled Substances Act],” and that marijuana would remain subject to applicable provisions of the Food Drug and Cosmetic Act.
With respect to the critical question of impact on the cannabis markets, however, the DOJ is silent and merely states that it is “seeking comment on the practical consequences of rescheduling marijuana.”
By way of explanation, the DOJ offers:
“DOJ recognizes this action may have unique economic impacts. As stated above, marijuana is subject to a number of State laws that have allowed a multibillion dollar industry to develop. DOJ acknowledges that there may be large impacts related to Federal taxes and research and development investment for the pharmaceutical industry, among other things. DOJ is specifically soliciting comments on the economic impact of this proposed rule. DOJ will revise this section at the final rules stage if warranted after consideration of any comments received.” (Emphasis added.)
Robust Public Comments Expected
For an industry that has been eagerly awaiting to hear how the DOJ will approach rules that address the interplay between existing state cannabis laws and the complex web of federal laws around Schedule III drugs, the DOJ’s notice is disappointing and may not bode well for a smooth rulemaking process. DOJ will accept public comments for 60 days once the notice of proposed rulemaking has been published in the Federal Register. We can expect robust commentary from cannabis businesses, state regulators, trade organizations and ancillary industries.
Regardless of the outcome of the final rulemaking, it seems apparent that clarity through congressional action is needed more than ever.
Over the past few decades, modern whistleblower award programs have radically altered the ability of numerous U.S. agencies to crack down on white-collar crime. This year, the Department of Justice (DOJ) may be joining their ranks, if it incorporates the key elements of successful whistleblower programs into the program it is developing.
On March 7, the Deputy Attorney General Lisa Monaco announced that the DOJ was launching a “90-day policy sprint” to develop “a DOJ-run whistleblower rewards program.” According to Monaco, the DOJ has taken note of the successes of the U.S.’s whistleblower award programs, such as those run by the Securities and Exchange Commission (SEC) and Internal Revenue Service (IRS), noting that they “have proven indispensable.”
Monaco understood that the SEC and IRS programs have been so successful because they “encourage individuals to report misconduct” by “rewarding whistleblowers.” But how any award program is administered is the key to whether or not the program will work. There is a nearly 50-year history of what rules need to be implemented to transform these programs into highly effective law enforcement tools. The Justice Department needs to follow these well defined rules.
The key element of all successful whistleblower award programs is very simple: If a whistleblower meets all of the requirements set forth by the government for compensation the awards must be mandatory and based on a percentage of the sanctions collected thanks to the whistleblower. A qualified whistleblower cannot be left out in the cold. Denying qualified whistleblowers compensation will destroy the trust necessary for a whistleblower program to work.
It is not the possibility of money that incentives individuals to report misconduct but the promise of money. Blowing the whistle is an immense risk and individuals are only compelled to take such a risk when there is real guarantee of an award.
This dynamic has been laid clear in recent legislative history. There is a long track record of whistleblower laws and programs failing when awards are discretionary and then becoming immensely successful once awards are made mandatory.
For example, under the 1943 version of the False Claims Act awards to whistleblowers were fully discretionary. After decades of ineffectiveness, in 1986, Congress amended the law to set a mandate that qualified whistleblowers receive awards of 15-30% of the proceeds collected by the government in the action connected with their disclosure.
“The new percentages . . . create a guarantee that relators [i.e., whistleblowers] will receive at least some portion of the award if the litigation proves successful. Hearing witnesses who themselves had exposed fraud in Government contracting, expressed concern that current law fails to offer any security, financial or otherwise, to persons considering publicly exposing fraud.
“If a potential plaintiff reads the present statute and understands that in a successful case the court may arbitrarily decide to award only a tiny fraction of the proceeds to the person who brought the action, the potential plaintiff may decide it is too risky to proceed in the face of a totally unpredictable recovery.”
In the nearly four decades since awards were made mandatory, the False Claims Act has established itself as America’s premier anti-fraud law. The government has recovered over $75 billions of taxpayer money from fraudsters, the vast majority from whistleblower initiated cases based directly on the 1986 amendments making awards mandatory.
Similar transformations occurred at both the IRS and SEC where ineffective discretionary award laws were replaced by laws which mandated that qualified whistleblowers receive a set percentage of the funds collected thanks to their whistleblowing. Since these reforms, the whistleblower programs have revolutionized these agencies’ enforcement efforts, leading directly to billions of dollars in sanctions and creating a massive deterrent effect on corporate wrongdoing.
Most recently, Congress reaffirmed the importance of mandatory whistleblower awards when it reformed the anti-money laundering whistleblower law. The original version of the law, which passed in January 2021, had no set minimum amount for awards, meaning that they were fully discretionary. After the AML Whistleblower Program struggled to take off, Congress listened to the feedback from whistleblower advocates and passed the AML Whistleblower Improvement Act to mandate that qualified money laundering whistleblowers are awarded.
Monaco states that the DOJ has long had the discretionary authority to pay whistleblower awards to individuals who report information leading to civil or criminal forfeitures and has “used this authority here and there — but never as part of a targeted program.”
The most important step in turning an underutilized and ineffective whistleblower award law into an “indispensable” whistleblower award program has been made clear over the past decades. Qualified whistleblowers must be guaranteed an award based on a percentage of the sanctions collected in connection with their disclosure.
By administering its whistleblower program in a way that mandates award payments, the DOJ would go a long way towards creating a whistleblower program which revolutionizes its ability to fight crime. The Justice Department has taken the most important first step – recognizing the importance of whistleblowers in reporting frauds. It now must follow through during its “90-day sprint,” making sure reforming the management of the Asset Forfeiture Fund works in practice. Whistleblowers who risk their jobs and careers need real, enforceable justice.
Copyright Kohn, Kohn & Colapinto, LLP 2024. All Rights Reserved.
The Consumer Protection Branch of the United States Department of Justice (DOJ) is one of the most overlooked and misunderstood parts of the country’s largest law enforcement agency. With a wide field of enforcement, the Branch can pursue civil enforcement actions or even criminal prosecutions against companies based in the United States and even foreign companies doing business in the country.
Here are four things that Dr. Nick Oberheiden, a defense lawyer at Oberheiden P.C., thinks that people and businesses need to know about the DOJ’s Consumer Protection Branch.
The Wide Reach of “Protecting Consumers”
According to the agency itself, the Consumer Protection Branch “leads Department of Justice enforcement efforts to enforce consumer protection laws that protect Americans’ health, safety, economic security, and identity integrity.” While “identity integrity” is relatively tightly confined to issues surrounding identity theft and the unlawful use of personal data and information, “health,” “safety,” and “economic security” are huge and vaguely defined realms of jurisdiction.
Under the Branch’s enforcement focus or interpretation of its law enforcement mandate, it has the power to prosecute fraud and misconduct in the fields of:
Pharmaceuticals and medical devices
Food and dietary supplements
Consumer fraud, including elder fraud and other scams
Deceptive trade practices
Telemarketing
Data privacy
Veterans fraud
Consumer product safety and tampering
Tobacco products
Business owners and executives are often surprised to learn that the Consumer Protection Branch has so many oversight powers. But the Consumer Protection Branch’s wide reach is not limited to the laws that it can invoke and enforce; it also has a wide geographical reach, as well. In order to carry out its objective, the Branch brings both criminal and affirmative civil enforcement cases throughout the country. In one recent case, the Consumer Protection Branch prosecuted a drug manufacturer for violations of the federal Food, Drug, and Cosmetic Act (FDCA) after the drug maker hid and destroyed records before an inspection by the U.S. Food and Drug Administration (FDA). The drug manufacturer, however, was an Indian company that sold several cancer drugs in the U.S. The plant inspection took place in West Bengal, India.
The Branch Has Lots of Laws at Its Disposal
The extremely broad reach of the Consumer Protection Branch comes with a significant implication: There are numerous laws that the Branch can invoke as it regulates and investigates businesses. Many of these are substantive laws that prohibit certain types of conduct, like:
Others, however, are procedural laws, which prohibit using certain means to carry out a crime, like:
Mail fraud (18 U.S.C. § 1341), which is the crime of using the mail system to commit fraud
Wire fraud (18 U.S.C. § 1343), which is the crime of using wire, radio, or television communication devices to commit fraud, including the internet
This can mean that many defendants get hit with multiple criminal charges for the same line of conduct, drastically increasing the severity of a criminal case. For example, in one case, a group of pharmacists fraudulently billed insurers for over $900 million in medications that they knew were not issued under a valid doctor-patient relationship. They were charged with misbranding medication and healthcare fraud, in addition to numerous counts of mail fraud for shipping that medication through the mail.
The Branch Has the Power to Pursue Civil and Criminal Sanctions
Lots of business owners and executives are also unaware of the fact that the DOJ’s Consumer Protection Branch has the power to pursue both civil and criminal cases if the law being enforced allows for it.
This has serious consequences for companies, and not just because the Branch can imprison individuals for putting consumers at risk: It also complicates the strategy for defending against enforcement action.
A good example of how this works in real life is a healthcare fraud allegation that is pursued by the Consumer Protection Branch under the False Claims Act, or FCA, because the alleged fraud implicated money from a government healthcare program, like Medicare or Medicaid. For it to be the crime of healthcare fraud, the Consumer Protection Branch would have to prove that there was an intent to defraud the program. If there is no intent, though, the Branch can still pursue civil penalties.
This complicates the defense strategy because keeping prosecutors from establishing your intent is not the end of the case. It just takes prison time off the table. While this is a big step in protecting your rights and interests, it still leaves you and your company open to civil liability. That liability can be quite substantial, as many anti-fraud laws – including the FCA – impose civil penalties on each violation and impose treble damages, or three times the amount fraudulently obtained.
As Dr. Nick Oberheiden, a consumer protection defense lawyer at the national law firm Oberheiden P.C., explains, “While relying on a lack of intent defense can work with other criminal offenses, it is a poor choice when fighting against allegations of fraud because it tacitly admits to the fraudulent actions. Enforcement agencies like the DOJ’s Consumer Protection Branch can then easily impose civil liability against your company.”
The Branch Works in Tandem With Other Agencies
The Consumer Protection Branch only has about 200 prosecutors, support professionals, embedded law enforcement agents, and investigators. However, between October 2020 and December 2021, the Branch charged at least 96 individuals and corporations with criminal offenses and another 112 with civil enforcement actions, collecting $6.38 billion in judgments and resolutions.
The Branch can do this in large part because it works closely with other federal law enforcement agencies, like the:
By pooling their resources with other agencies like these, the DOJ’s Consumer Protection Branch can bring more weight to its enforcement action against your company.
Prohibits the submission of false or fraudulent claims, false statements material to a false claim, and conspiracy to commit violation
Prohibits concealing or avoiding obligation to repay money to government (failure to return overpayments)
Claims that violate AKS or Stark can also be considered false claims
Common false claims include lack of medical necessity; quality of care; billing/coding issues; off-labeled marketing; retention of overpayments
EXCEPTIONS:
n/a
PENALTIES:
Treble damages and as of May 9, 2022 per claim penalties between $12,537 and $25,076
Regulated by the DOJ
Physician Self-Referral (Stark)
PROHIBITIONS:
Prohibits referrals of designated health services by a physician (or an immediate family member) if the physician has a financial relationship with the entity performing the designated health service
Regulates financial relationships with physicians (and physician’s immediate family members) only
EXCEPTIONS:
The arrangement must completely satisfy an exception or it violates the Stark law
PENALTIES:
No criminal enforcement; CMP enforcement for knowing violations: per violation penalties– 3x claims and/or per circumvention scheme penalties; Nonpayment of claims arising from prohibited arrangement; Recoupment of amounts received; Exclusion from federal health programs; FCA liability
Regulated by CMS
Anti-Kickback Statute (AKS)
PROHIBITIONS:
Prohibits offers of, solicitation of, or payment or receipt of remuneration intended to induce referrals for health care services covered by a government program
Covers provision of anything of value to a person who refers, orders/purchases or recommends
EXCEPTIONS:
Voluntary safe harbors exist, but arrangements are not required to fit within a safe harbors
PENALTIES:
Applies to either party involved in an arrangement that violates AKS; Criminal penalties $100,000 /violation, up to 10 years imprisonment); Civil penalties (CMP3x unlawful remuneration and $100,000/violation); Exclusion from federal health programs; FCA liability
Regulated by the OIG
Providers should also be aware of other enforcement statutes such as the Eliminating Kickbacks in Recovery (“EKRA”), the Civil Monetary Penalties Act (“CMP”), and the Travel Act, to name a few, in addition to being well versed in the relevant state health care fraud and abuse frameworks.
The SEC Whistleblower Program offers monetary awards to qualified whistleblowers whose disclosures contribute to the success of enforcement actions. SEC whistleblower awards are for 10-30% of the funds collected by the government in the relevant enforcement action.
According to the SEC award order, the whistleblower “expeditiously provided detailed information that prompted the opening of the investigation.” Furthermore, the whistleblower “thereafter met with Commission staff in person and provided additional information after submitting the initial TCR.”
In addition to monetary awards, the SEC Whistleblower Program offers anti-retaliation protections to whistleblowers, including confidentiality. Thus, the SEC does not disclose any information that could identify a whistleblower.
Since the whistleblower program was established in 2010, the SEC has awarded more than $1.3 billion to over 280 individual whistleblowers. In August 2021, SEC Chair Gary Gensler stated that the program “has greatly aided the Commission’s work to protect investors” and noted that “the SEC has used whistleblower information to obtain sanctions of over $5 billion from securities law violators” and “return over $1.3 billion to harmed investors.”
According to the allegations, the pharmaceutical company was paying kickbacks to healthcare providers to “induce them to utilize the drugs Trasylol and Avelox, and also marketed these drugs for off-label uses that were not reasonable and necessary.” This lawsuit was filed in the District of New Jersey and alleged that the because of these kickbacks, the pharmaceutical company caused submission of false claims to Medicare and Medicaid. The lawsuit that was transferred to the District of Minnesota entailed the pharmaceutical company knowingly misrepresenting the safety and efficacy of Baycol, a statin drug, and also renewing contracts with the Defense Logistics Agency based on these misrepresentations. To settle these allegations, Bayer paid $38,860,555 to the United States and $1,139,445 to the Medicaid Participating States. The Principal Deputy Assistant Attorney General remarked about this settlement, “Today’s recovery highlights the critical role that whistleblowers play in the effective use of the False Claims Act to combat fraud in federal healthcare programs.”
The False Claims Act incentivizes private citizens to report fraud against the government and holds accountable companies that financially benefit from participation in government contracts and government-sponsored programs. The Department of Justice needs whistleblowers to the be the antidote to pharmaceutical fraud.
NAVEX’s 2022 Risk & Compliance Hotline & Incident Management Benchmark Report reveals an increase in internal reporting about misconduct and an increase in allegations of retaliation. The analysis of data from 3,470 organizations that received more than 1.37 million individual reports identified the following trends (see the full report for a discussion of additional trends and analysis of the data):
“More actual allegations of misconduct, rather than inquiries about policies or possible misconduct. Ninety percent of all reports in 2021 were allegations of misconduct, up from 86 percent last year and hitting an all-time high since our first benchmark report more than ten years ago.”
“Reports about retaliation, harassment and discrimination jumped – especially retaliation. In 2021, reports of retaliation nearly doubled . . . Taken altogether, these findings suggest employees are more attuned to workplace civility issues. That would fit with external trends such as more talk about systemic racism, income inequality and political divisions; as well as increasing protection for whistleblowers and employees’ awareness of those protections.”
“Substantiation rates continue to edge upward. Overall substantiation rates rose from 42 percent in 2020 to 43 percent in 2021, and up from 36 percent a decade ago. The reports substantiated most often were data privacy concerns (63 percent), environmental issues (59 percent), and confidential and proprietary information (54 percent). The reports substantiated least often were about retaliation (24 percent).”
“The substantiation rate for reports of retaliation also went up slightly, from 23 percent in 2020 to 24 percent in 2021 – the highest substantiation rate seen since 2016. While steady, this substantiation rate is significantly below the overall median case substantiation rate of 43 percent in 2021. These cases, though difficult to prove, warrant attention.”
“Reports of harassment exceeded levels from the height of the #MeToo movement.”
Corporate Whistleblower Protections
Whistleblower retaliation remains all too prevalent. A September 14, 2022 Bloomberg article titled Whistleblower retaliation remains all too prevalent discusses how “choosing to be a whistle-blower can also be a lonely, risky road” and identifies many deterrents to speaking up – “[t]hey may be afraid of litigation, ruining their reputations, losing security clearances or facing jail time.”
Fortunately, federal and state laws afford corporate whistleblowers remedies to combat retaliation, and whistleblower reward laws incentivize whistleblowers to take the considerable risks entailed in reporting fraud and other wrongdoing to the government. For example, the
SEC Whistleblower Program offers awards to eligible whistleblowers who provide original information that leads to successful SEC enforcement actions with total monetary sanctions exceeding $1 million. A whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected in actions brought by the SEC and in related actions brought by other regulatory or law enforcement authorities. The SEC Whistleblower Program allows whistleblowers to submit tips anonymously if represented by an attorney in connection with their tip.
What is Whistleblower Retaliation?
Whistleblower retaliation laws prohibit a broad range of retaliatory actions against whistleblowers, including any act that would dissuade a worker from engaging in protected whistleblowing. Examples of actionable whistleblower retaliation include:
Harassing a whistleblower or subjecting the whistleblower to a hostile work environment;
Reassigning a whistleblower to a position with significantly different responsibilities;
Issuing a performance evaluation or performance improvement plan that supplies the necessary foundation for the eventual termination of the whistleblower’s employment, or a written warning or counseling session that is considered discipline by policy or practice and is routinely used as the first step in a progressive discipline policy;
Discriminating against a whistleblower in the terms and conditions of employment because of whistleblowing.
The DOL Administrative Review Board has emphasized that statutory language prohibiting discrimination “in any way” must be broadly construed and therefore a whistleblower need not prove that a retaliatory act had a tangible impact on an employee’s terms and conditions of employment.
What Damages Can a Whistleblower Recover in a Whistleblower Retaliation Case?
Whistleblower retaliation can exact a serious toll, including lost pay and benefits, reputational harm, and emotional distress. Indeed, whistleblower retaliation can derail a career and deprive the whistleblower of millions of dollars in lost future earnings.
Whistleblowers should be rewarded for doing the right thing, but all too often they suffer retaliation and find themselves marginalized and ostracized. Federal and state whistleblower laws provide several remedies to compensate whistleblowers that have suffered retaliation, including:
back pay (lost wages and benefits);
emotional distress damages;
damages for reputational harm;
reinstatement or front pay in lieu thereof;
lost future earnings; and
punitive damages.
Combating Whistleblower Retaliation: How to Maximize Your Recovery
Whistleblower protection laws can provide a potent remedy, but before bringing a retaliation claim, it is crucial to assess the options under federal and state law and develop a strategy to achieve the optimal recovery. Key issues to consider include the scope of protected whistleblowing, the burden of proof, the damages that a prevailing whistleblower can recover, the forum where the claim would be litigated, and the impact of the retaliation claim on a whistleblower rewards claim.
Scope of Protected Whistleblowing
There is no federal statute that provides general protection to corporate whistleblowers. Instead, federal whistleblower protection laws protect specific types of disclosures, such as disclosures of securities fraud, tax fraud, procurement fraud, or consumer financial protection fraud. The main sources of federal protection for corporate whistleblowers include the whistleblower protection provisions of the following:
The False Claims Act (FCA) — protecting disclosures about fraud directed toward the government, including actions taken in furtherance of a qui tam action and efforts to stop a violation of the FCA;
The Defense Contractor Whistleblower Protection Act (DCWPA) — protecting whistleblowing about gross mismanagement of a federal contract or grant; a gross waste of federal funds; an abuse of authority relating to a federal contract or grant or a substantial and specific danger to public health or safety, or a violation of law, rule, or regulation related to a federal contract;
The Sarbanes-Oxley Act (SOX) — protecting disclosures about mail fraud, wire fraud, bank fraud, securities fraud, a violation of any SEC rule, or shareholder fraud;
The Dodd-Frank Act (DFA) — protecting whistleblowing to the SEC about potential violations of federal securities laws;
The Taxpayer First Act (TFA) — protecting disclosures about tax fraud or tax underpayment;
The Consumer Financial Protection Act (CFPA) — protecting disclosures concerning violations of Consumer Financial Protection Bureau rules or federal laws regulating unfair, deceptive, or abusive practices in the provision of consumer financial products or services; and
While most of these anti-retaliation laws protect internal disclosures (e.g., reporting to a supervisor), whistleblower protection under the DFA is predicated on a showing that the whistleblower disclosed a potential violation of federal securities law to the SEC prior to suffering an adverse action.
State law may also provide a remedy, including the anti-retaliation provisions in state FCAs. And approximately 42 states recognize a common law wrongful discharge tort action (a public policy exception to at-will employment), which generally protects refusal to engage in illegal activity and the exercise of a statutory right.
Burden of Proof
To maximize the likelihood of winning a case (or at least getting the case before a jury), it is useful to select a remedy with a favorable causation standard (the level of proof required to link the protected whistleblowing to the adverse employment action). SOX has a favorable “contributing factor” causation standard, i.e., the whistleblower prevails by proving that their protected whistleblowing affected in any way the employer’s decision to take an adverse action. In contrast, the FCA and DFA require the whistleblower to prove “but for” causation, i.e., the adverse action would not have happened “but for” the protected whistleblowing (albeit there is no need to prove that it was the sole factor).
Damages and Remedies in Whistleblower Retaliation Cases
Variations in the remedies available to whistleblowers under federal anti-retaliation laws may warrant bringing more than one claim. For example, the DCWPA authorizes an award of back pay (the value of lost pay and benefits), and the FCA authorizes an award of double back pay. If the whistleblower’s disclosures are protected under both statutes, then the whistleblower should bring both claims.
While a prevailing whistleblower can recover back pay under both the DFA and SOX (double back pay under the former and single back pay under the latter), the DFA does not authorize special damages, i.e., damages for emotional distress and reputational harm. In contrast, SOX authorizes uncapped compensatory damages. Therefore, a whistleblower protected under both statutes should bring the SOX claim within the much shorter SOX statute of limitations (180 days) to recover both double back pay and special damages.
State law may also provide a remedy, and if the whistleblower can pursue both a statutory remedy and a wrongful discharge tort, the latter may offer the opportunity to seek punitive damages.
Forum Selection and Administrative Exhaustion
When selecting the optimal remedy to combat retaliation, a whistleblower should consider the forum where the claim would be tried and determine whether the claim must initially be investigated by a federal agency before the whistleblower can litigate the claim. SOX provides an unequivocal exemption from mandatory arbitration, but Dodd-Frank claims are subject to arbitration. Accordingly, a whistleblower protected both by SOX and Dodd-Frank should file a SOX claim within the 180-day statute of limitations to preserve the option to try the case before a jury.
Several of the corporate whistleblower protection laws require that the whistleblower file the claim initially at a federal agency and permit the agency to investigate the claim before the whistleblower can litigate the claim. This is called administrative exhaustion, and failure to comply with that requirement can waive the claim. In contrast, the FCA and DFA do not require administrative exhaustion.
Impact of Whistleblower Retaliation Claim on Whistleblower Rewards Claim
Another important consideration is the potential impact of a retaliation case on a qui tam or whistleblower rewards case. Filing an FCA retaliation claim while a qui tam suit is under seal poses some risk of violating the seal, which could bar the whistleblower from recovering a relator share. Therefore, counsel should consider filing the FCA retaliation claim under seal along with the qui tam suit.
Further, whistleblowers pursuing rewards claims at federal agencies (e.g., SEC or IRS whistleblower claims) while simultaneously pursuing related retaliation claims (e.g., a SOX or TFA claim) should assess the potential impact of the retaliation claim and the potential discoverability of submissions to the SEC or IRS on the rewards claim(s).
Although the patchwork of whistleblower protection laws fails to protect disclosures about certain forms of fraud, there are important pockets of protection. To effectively combat retaliation, whistleblowers should avail themselves of all appropriate remedies.
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