Caution on Whistleblowing: Not All Reporting Is Protected – New York Law Journal, August 23, 2010

By: Virginia K. Trunkes and Paul F. Millus

Time and time again, conscientious yet unsuspecting private sector employees fall into the same trap: notify upper management of illegal or unethical activity being committed at the workplace, and be terminated as a result. Maybe New York’s whistleblower statute is to blame for creating a false sense of security. One might think that “blowing the whistle” on unlawful behavior is a civic duty and unassailable. The devil is always in the details, however, as the whistleblower statute protects employees only when the violation of law creates a “danger to the public health or safety or which constitutes health care fraud.” or which constitutes health care fraud.”1

Employees may also feel empowered by the strong protections afforded to whistleblowers in the Sarbanes‑Oxley Act of 2002 (SOX). Yet, SOX applies only to publicly held companies, and protects only employees who provide information in an investigation or assist in a proceeding regarding conduct that the employee reasonably believes constitutes a violation of federal laws and regulations relating to fraud against shareholders.2

Still, employees persist in attempting to obstruct conduct which is illegal or unethical.

Indeed, who could argue that an employee who stood up for what is right in connection with the financial tsunamis of the past decade—like Enron, mutual fund late‑day trading or the Bernie Madoff disaster—could be subject to an adverse employment action because of the disclosure? If only it were so easy.

Employees should know to tread lightly and be cautious lest they risk losing their own paychecks at the end of the week.

After all, this has been no secret since the court in Murphy v. American Home Prods. Corp.3 reiterated the “long‑settled rule that where an employment is for an indefinite term it is presumed to be a hiring at will which may be freely terminated by either party at any time for any reason or even for no reason.”4 In Murphy, the plaintiff, a 22‑year veteran company employee who had been terminated for disclosing accounting improprieties, emphasized the inequities resulting from the law which permits employers to dismiss employees in retaliation for employee conduct that promotes public policy objectives.

In rejecting the plaintiff’s proposition that it was time to recognize a common‑law cause of action for wrongful discharge, the court reasoned that “whether for other compelling reasons employers should, as a matter of policy, be held liable to at‑will employees discharged in circumstances for which no liability has existed at common law, are issues better left to resolution at the hands of the legislature.”5

The Murphy court additionally dismissed the plaintiff’s breach of contract claim, stressing that, without a contract, the “plaintiff’s employment was at will, a relationship in which the law accords the employer an unfettered right to terminate the employment at any time.”6 The court did note, though, that if there were an express limitation on the employer’s right of discharge, it would be given effect even though the employment contract was of indefinite duration.7

Subsequently, it was believed that perhaps a written statement that the employer protects against reprisal for reporting unethical or illegal conduct qualifies as “an express limitation on the employer’s right of discharge.”

To his surprise, a NYNEX employee learned that a general no‑reprisal clause does not by itself suffice in Lobosco v. NYNEX.8 In Lobosco, following his exposure that he was asked to lie at a deposition on behalf of his company, the plaintiff was terminated—despite a “no reprisal” clause in the company’s manual entitled, “Code of Business Conduct.”

The court held that the plaintiff did not state a breach of contract claim despite his reliance on the clause which stated: “NYNEX assures protection against any form of reprisal for reporting actual or suspected violations of our Code of Business Conduct.” The court observed that the disclaimer in that same manual emphasizing that employment was at the will of the employer negated the plaintiff’s alleged reliance on the manual’s suggestion that he would be protected for exposing unethical activity. The court reasoned that an employee seeking to rely on a provision arguably creating a promise not to retaliate must also be held to rely on the conspicuous disclaiming language.9

Certainly it is reasonable to conclude that an employee such as Anthony Lobosco would be confused, if not misled, by the conflicting statements in the company manual. Ideally, the manual should have been clearer, although it is probably poor public relations for an employer to announce: “Beware that notwithstanding our no‑reprisal sentiments, you can be fired for divulging illegal activity.”

Disclaimer Language

Indeed, years later New York employees still have not received the message about the import of “at‑will employment.” For instance, in Bernhardt v. Tradition North America,10 a securities broker, eventually rising to vice president, learned that defendants were engaging in “elaborate securities schemes, involving buy‑backs, parking, and artificial pricing, in violation of the U.S. securities laws,” and his colleagues tried to pressure him to participate in these illegal schemes. Thereafter, the plaintiff notified the Securities and Exchange Commission and later divulged that notification to the senior vice president, the alleged leader of the fraudulent schemes, as well as the company’s legal and compliance departments. Two days later, the plaintiff was suspended for disclosing unspecified proprietary information, stripped ofhis company ID and escorted out of the building, and soon thereafter he was terminated.

In opposing dismissal of his complaint, the plaintiff urged that because he was informed that he would be summarily terminated for violating any company rules or any state or federal laws, he understood the converse to apply: that the company would not fire him for refusing to violate those very rules. Not so, said the court, in light of the company’s clear disclaimer in its same handbook that all employees were employees‑at‑will, and the plaintiff’s failure to point to “an express written policy limiting the employer’s right to discharge.”11

The disclaimer language in Thomas v. Mastercard Advisors, LLC,12 comes closer to clarifying an employee’s status. In Thomas, the employer’s code of conduct provided that “[a]biding by the standards and procedures outlined in the Code and Community’s related policies is a condition of continued employment with the Company. However, this Code is not a contract of employment and is not intended to create any express or implied promises or guarantees of fixed terms of employment.” Accordingly, the court rejected the plaintiff’s claim for wrongful termination based on a breach of the company’s standards.

Possible Leeway

As noted in Murphy, there is leeway for an employee if the handbook provides an express exception to its at‑will policy if the employee “can show that the employer made its employee aware of an express written policy limiting the right of discharge and the employee detrimentally relied on that policy in accepting employment.”13 The key for the employee, however, is that her report of illegal conduct must fall within the precise “exception” stated—no exceptions.

In Candella v. Banco Indus. De Venezuela, C.A.,14 an assistant treasurer reported back‑dating of trades to her supervisor, the treasurer. Per her supervisor’s instruction, she e‑mailed this information to various members of upper management. After she was fired for going outside the chain of command, she pointed to a provision in the Personnel Policies and Practices Manual which stated:

In the event that a staff member suspects a theft, embezzlement, defalcation or any other irregularity, including violations of law or regulation and that he/she believe might require the submission of a Suspicious Activities Report (SAR), he/she should bring such violation to the attention of Agencies’ Internal Auditor. However, staff members might choose to submit a Suspicious Activities Report (SAR) directly to regulatory authorities. Although it is preferable that suspicious activities first be brought to the attention of the Agencies’ Internal Auditor, no director, officer or staff member of Banco Industrial de Venezuela, C.A., or its U.S. Agencies shall take any adverse action against the staff member or in any other way place the staff member in jeopardy for his/her action in filing a Suspicious Activities Report (SAR).15

In support of its motion to dismiss, the company pointed to other language in the same manual which contained several disclaimers that disavowed any intent on the company’s part to accept contract limitations on its rights as an at‑will employer. In granting the company’s motion, the court reasoned that although the manual contained a limitation on the company’s right to terminate an employment at will, it was only in the event an employee files a SAR, which the plaintiff did not. Therefore, the court concluded, the plaintiff did not gain the benefit of that limitation.16 Again, details, details.

Seeking a Balance

It is true that in each of these cases the employers may have had legitimate concerns about the manner in which the plaintiffs reported the activity at issue, and it was that concern, and not malice, which motivated the decision for termination. Murphy and its progeny preserve the employer’s right to make that business decision, which continues the public policy of freedom of contract and enabling an employer to run its operations as it sees fit. But it must come as an awful surprise to employees to learn that an employer can also fire them for spite, despite misleading statements to the contrary, and that compliance with an express exception must be exactly as written.

In the end, maybe the trick is to balance the employer’s legitimate interest in ensuring that proprietary information is not wrongfully disclosed by a disgruntled employee claiming to be a whistleblower against the societal need to protect those who truly bring bad things to light. One suggestion would be to establish the same type of standard that applies to retaliation in a discrimination setting. That is, if the disclosure of the unlawful activity was not in “good faith,” then the employer should not be penalized for terminating the employee.

In any event, in light of the current economic crisis, now might not seem the opportune time for Albany to consider additional laws to protect employees which could perceivably increase costs on companies and impact on new hires. Ironically, however, there would seem to be a positive outcome if the retention of jobs were better guaranteed with the incidental result of promoting compliance with laws and regulations so as to reduce conduct such as institutionalized fraud and accounting improprieties.

Paul F. Millus is a partner at Snitow Kanfer Holtzer & Millus, and Virginia K. Trunkes is an associate at the firm.

1. Labor Law §740.
2. 18 U.S.C. §1514A(a).
3. 58 N.Y.2d 293, 461 N.Y.S.2d 232 (1983)
4. Murphy, at 300 01.
5. Murphy, 300 01.
6. Murphy, 304.
7. Murphy, 305; see Weiner v. McGraw Hill, Inc., 57 N.Y.2d 458, 457 N.Y.S.2d 193 (1982).
8. 96 N.Y.2d 312, 727 N.Y.S.2d 383 (2001).
9. Lobosco, at 317.
10. F.Supp.2d, 2009 WL 5033962 (S.D.N.Y. 2009).
11. Bernhardt, 3.
12. 2009 WL 803415, 2009 N.Y. Slip Op. 30591 (Sup. Ct. NY Co. 2009).
13. Lobosco at 316.
14. 26 Misc.3d 1214(A), 2009 WL 5549211 (Sup. Ct. NY Co. 2009).
15. Candella at 2.
16. Candella at 3.