Whistleblower Claims Under Federal and Arizona Law

Under Arizona law, a whistleblower is considered an employee “who exposes wrongdoing on the part of his employer and then is discharged.”[1]  The Arizona legislature adopted the Arizona Employment Protection Act (AEPA) as the exclusive protection and legal remedy against wrongful termination.[2] Within the AEPA, the legislature promulgated narrow statutory protections for certain prohibited activities, the majority of which specify an exclusive remedy. The whistleblower provision of the AEPA does not specify a remedy, and thus, a harmed employee must file a lawsuit alleging wrongful termination.[3]

Statute of Limitations. Under Arizona law, an employee must file a wrongful termination lawsuit within one year from the date the cause of action accrues.[4]

Scope of Protection. Only “employees” are protected under the AEPA; independent contractors are not. Moreover, the AEPA only protects an employee from discharge, not other forms of adverse employment actions. Thus, mere in-house retaliation against an employee is insufficient.[7]  However, the AEPA protects an employee who can establish that he was “constructively discharged,” i.e., the work conditions became so intolerable that he was effectively discharged.[8]

Reasonable Belief Standard. The employee’s belief that the company committed, is committing, or is about to commit a state-law violation must be objectively reasonable. If no reasonable person could conclude that the employer was committing illegal conduct, then the employee’s whistleblower claim will be dismissed. Similarly, the “manner” in which the employee discloses the information must be “reasonable.”[9]

Who Must the Disclosure Be Made To? The next requirement is that the disclosure must be made to an individual the employee “reasonably believes” holds a managerial or supervisory position with the authority to take corrective action or a public entity such as a state agency. Disclosures made to media outlets are not protected by the AEPA.

Only Arizona-Law Based Violations. Finally, the AEPA only protects an employee if the disclosure pertains to a past, current, or future Arizona statutory or Arizona constitutional violation. An employee cannot rely on an employer’s violation of a federal statute or regulation as the basis for his whistleblower claim.[10]

Refusal Actions. The AEPA also prohibits an employer from discharging an employee for refusing to engage in conduct the employee reasonably believes violates an Arizona statute or the Arizona Constitution.[11]  Moreover, it appears from other whistleblower case law that an employee’s willingness to follow the employer’s directions that are contrary to the employee’s voiced concerns about the proposed course of action will not preclude the employee from bringing a wrongful termination claim for whistleblowing later.[12]

Federal law provides additional protection for whistleblowers who expose potential or occurring securities-related violations. For employees of privately held companies, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) contains, among other things, provisions designed to encourage whistleblowing and prevent retaliation for whistleblowers who provide certain information to the U.S. Securities and Exchange Commission (“SEC”) or Commodity Futures Trading Commission (CFTC).[13]  Federal law also protects whistleblowers employed by publicly traded companies through the Sarbanes Oxley Act (SOX).[14]

This article focuses on the protections afforded by the Dodd-Frank Act. Protections for each form of employee reporting under the Dodd-Frank Act—to the SEC or CFTC—will be discussed below.

SEC Reporting. The Dodd-Frank Act amended the Securities Exchange Act of 1934 by adding anti-retaliation protections for whistleblowers who report possible securities law violations to the SEC. Specifically,

Procedure. An individual alleging retaliation under this section must file suit in federal district court.[16]

Statute of Limitations. A retaliation action under this section must be filed either within six years after the date when the retaliation occurs or within three years after the date “facts material to the right of action are known or reasonably should have been known by the employee,” but not more than ten years after the date of the violation.[17]

Scope of Protection. A whistleblower is defined by the Dodd-Frank Act as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC].”[18]

Based on the foregoing definition, it would appear that only employees who provide securities related information “to the [SEC]” are protected as whistleblowers. However, the SEC interprets the whistleblower protections afforded by the Dodd-Frank Act by focusing on the broader language of the non-retaliatory provision rather than the narrower definition of “whistleblower.” In its final rule, the SEC states that an individual is protected as a whistleblower if he provides covered information to the SEC or in a disclosure otherwise required or protected under SOX, the Exchange Act, 18 U.S.C. 1513(e), or any other law, rule, or regulation subject to the SEC’s jurisdiction.[19]  Thus, according to the SEC, a whistleblower includes those who report possible securities violations externally to the SEC as well as internally to supervisors or managers and to governmental agencies other than the SEC.

There is a circuit split on this issue, however, with the Second Circuit reasoning in favor of a broad interpretation aligned with the SEC’s rule,[20]  while the Fifth Circuit focuses on the language of the “whistleblower” definition to hold that an individual is not protected by the Dodd-Frank Act unless he discloses the information “to the [SEC]”.[21]  While no binding Ninth Circuit authority on this issue exists,[22]  Judge Roslyn Silver of the U.S. District Court of Arizona held that strict adherence to the language “to the [SEC]” is unduly restrictive and adopted the SEC’s rule which “reads the statute as providing protection to employees who make only internal reports.”[23]  At least one court in California followed the same reasoning.[24]

Consequently, if an Arizona employee discloses to his employer something that is “required or protected” under any “law, rule, or regulation subject to the jurisdiction of the [SEC],” that employee should be protected from retaliation under the Dodd-Frank Act.[25]

Reasonable Belief Standard. To be protected under the Dodd-Frank Act’s anti-retaliation provision, a whistleblower must possess a “reasonable belief” that the information being disclosed relates to a “possible” securities law violation that has occurred, is ongoing, or is about to occur.[26]

The comments to the SEC regulations explain that the reasonable belief standard requires the employee to hold a “subjectively genuine belief” that the information demonstrates a possible violation, and that this belief is one that a similarly situated employee might reasonably possess.[27]  Accordingly, the whistleblower need not provide information about an actual securities law violation to be covered, as it is sufficient for the whistleblower to reasonably believe that there is a possible violation that has occurred, is ongoing, or is about to occur.

Relief. An employee who prevails in a retaliation claim may recover (i) reinstatement with the same seniority status that the individual would have had, but for the discrimination; (ii) two times the amount of back pay otherwise owed to the individual, with interest; and (iii) compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.[28]

Protections for CFTC Reporting. The Dodd-Frank Act also amended the Commodity Exchange Act (“CEA”) to add anti-retaliation protections for whistleblowers[29]  who report violations of the CEA to the CFTC. Specifically,

Procedure. Actions brought pursuant to this section must be filed in federal district court.[31]

Statute of Limitations. Anti-retaliation claims under this section must be filed in federal district court “not more than 2 years” after the alleged retaliation occurs.”[32]

Relief. Much like the relief afforded for retaliatory actions based on disclosure of SEC violations, recovery under this statute includes (i) reinstatement with the same seniority status that the individual would have had, but for the discrimination; (ii) the amount of back pay otherwise owed to the individual, with interest; and (iii) compensation for any special damages sustained as a result of the discharge or discrimination, including litigation costs, expert witness fees, and reasonable attorneys’ fees.[33]