"Employment-at-Will and Sarbanes-Oxley"

CHAPTER 2 TheDuty of Loyalty Whistleblowing

The woods were filled with smart people at Enron, but there were really no wise people, or people who could say “this is enough.”

— JOHN OLSON, Energy Industry Analyst

What matters…is not what a person is, but how closely his many personae mesh with the organizational ideal; not his willingness to stand by his actions, but his agility in avoiding blame; not what he stands for, but whom he stands with in the labyrinths of his organization.

— ROBERT JACKALL, Moral Mazes: Bureaucracy and Managerial Work

This chapter is about people who feel morally driven to call attention to problems they see at work—often at the risk of disturbing the status quo, alienating others, and bringing damaging repercussions upon themselves and their families. It is about being caught between conflicting loyalties—to one’s employer, and to one’s conscience—the dilemma faced by a person who must decide whether to become a “whistleblower.”

Whistleblowers are people who decide to report unethical or illegal activities, usually activities under the control of their employers. They may be working for private companies, nonprofit organizations, or for the government. They may disclose information inside or outside their organizations—to supervisors, regulators, or to the media. What unites all whistleblowing is the urge to bring a disturbing situation to light, the urge to bring about some corrective change. The motivating issues range from airline, nuclear, and environmental safety to the kinds of investment practices that led the Securities and Exchange Commission to go after Goldman Sachs for its role in the financial crisis that began in 2007.

This chapter explains the legal doctrine known as employment-at-will, which gives employers broad discretion to fire employees “for a good reason, a bad reason, or no reason at all.” Although twentieth-century exceptions to this rule have blunted its harshness, the cases demonstrate that whistleblowers often experience retaliation and have little recourse under the common law. Statutes passed in all 50 states provide some protection for employees, but wide variation exists among them; we will look at one of them. We will consider the cultural significance of having a job, and the harsh effects of employment-at-will during tough economic times. We then turn to the Sarbanes-Oxley Act of 2002, passed in the wake of financial and accounting scandals, to assess the degree to which it protects corporate whistleblowers. We consider how First Amendment freedom

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of speech has been interpreted by the Supreme Court to limit the right of public employees to blow the whistle. We introduce the False Claims Act, which provides financial incentives to report fraud against the government, and we learn about the personal experiences of so-called qui tam whistleblowers under that law.

Finally, widening our enquiry to a global perspective, we ask whether multinational corporations with clear and appropriate reporting procedures might positively impact the societies of other countries in which they do business.

Whistleblowing can wreak havoc. Those who insist that bad news must be heard may damage the reputations of their employers, and risk having their own careers destroyed. In this chapter we see that in spite of the costs, we may yet appreciate the role of the dissenters in serving the public interest when the checkpoints of our systems fail us.

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In 1993, Dr. Donn Milton was hired by a nonprofit scientific research organization, IIT Research Institute (IITRI), to oversee a contract with the federal government. By 1995, his responsibilities widened as he was promoted to vice president of IITRI’s Advanced Technology Group. Like other nonprofits, IITRI had been established with a public mission and was classified as tax exempt. As Dr. Milton discovered, however, the organization was “abusing its tax-exempt status by failing to report … taxable income generated by the substantial portion of … business that did not constitute scientific research in the public interest.”

DONN MILTON, DR., v. IIT RESEARCH INSTITUTE

Fourth Circuit Court of Appeals, 1998 138 F.3d 519

WILKINSON, Chief Judge

Milton voiced his concerns to IITRI management, to no avail. In 1995, after similar allega- tions by a competitor, IITRI initiated an internal examination of the issue. In connection with this inquiry, IITRI received an outside opinion letter concluding that the IRS could well deem some of IITRI’s projects unrelated business activities and that the income from these activities was likely taxable. Milton urged the President of IITRI, John Scott, to take action in response to the letter, but Scott refused. Milton raised the issue with IITRI’s Treasurer, who agreed that IITRI was improperly claiming unrelated business income as exempt income and promised to remedy the problem after Scott’s then- imminent retirement. However, this retirement did not come to pass [and the treasurer took no action]. Finally, in November 1996, when Scott falsely indicated to IITRI’s board of governors that IITRI had no problem with unrelated business income, Milton reported the falsity of these statements to Lew Collens, Chairman of the Board of IITRI, and informed Collens of the opinion letter.

On January 1, 1997, Scott called Milton at home and informed him that he had been relieved of his Group Vice President title and demoted to his previous position as supervisor of TSMI. On February 12, 1997, Milton’s attorney contacted IITRI about the demotion, alleging that it was unlawful retaliation for informing management of IITRI’s unlawful practices. Two days later…Milton received a letter from Collens terminating his employment with IITRI.

[The general legal rule is that employees can be fired with or without cause, but there is an exception: Under the tort of “wrongful discharge,” an employee can argue that the firing clearly conflicts with “public policy.”]

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Milton filed suit against IITRI for wrongful discharge.… Maryland has recognized a “narrow exception” to the general rule of at-will employ-

ment: “discharge may not contravene a clear mandate of public policy.” Maryland courts have found such a mandate only in limited circumstances: (1) “where an employee has been fired for refusing to violate the law…”and (2) “where [an] employee has been termi- nated for exercising a specific legal right or duty.…”

Milton makes no claim that he was asked to break the law. He had no role in prepar- ing IITRI’s submissions to the IRS and no responsibility for their content. Instead, Milton claims he was fired for fulfilling his fiduciary duty as a corporate officer to inform IITRI’s Board of activities injurious to the corporation’s long-term interests.…

Maryland law does provide a wrongful discharge cause of action for employees who are terminated because they perform their “statutorily prescribed duty.” However, this exception to the norm of at-will employment has been construed narrowly by the Mary- land courts and is not available in Milton’s case.… [I]n Thompson v. Memorial Hospital (D. Md. 1996), the court … held that, because a hospital employee was not chargeable with the hospital’s regulatory duty to report misadministration of radiation, he did not state a claim for wrongful discharge when he was fired for making such a report. By con- trast, in Bleich v. Florence Crittenden Services (Md. 1993), the court recognized that an educator terminated for filing a report of child abuse and neglect, as she was explicitly required to do by Maryland law, did state a claim for wrongful discharge. These cases indi- cate that, for Milton to recover, it is not enough that someone at IITRI was responsible for correcting its tax filings or that the corporation may have been liable for tax fraud. This responsibility was never Milton’s, nor did he face any potential liability for failing to dis- charge it, so his claim fails.

Milton argues that his fiduciary obligations as an officer of IITRI supply the legal duty that was missing in Thompson and that supported the cause of action in Bleich. But in fact Milton labored under no “specific legal duty,” to report IITRI’s tax fraud to the Board. He points to no statute or other legal source that imposes on him a specific duty to report, and the broad fiduciary obligations of “care and loyalty” he alleges are simply too general to qualify as a specific legal duty that will support the claim that his discharge violates a “clear mandate of public policy.” Recognizing whistleblower protection for every corporate officer fired in the wake of a disagreement over an employer’s business practices would transform this “narrow exception” into a broad one indeed.

This search for a specific legal duty is no mere formality. Rather it limits judicial forays into the wilderness of discerning “public policy” without clear direction from a legislative or regulatory source.

[Judgment of dismissal affirmed.]

QUESTIONS 1. In legal terms, why did Milton lose?

2. The court here expresses concern that, if Dr. Milton were permitted to win, it would open a “Pandora’s box,” with “every corporate officer fired in the wake of a disagree- ment over an employer’s business practices” a potential successful plaintiff. Reframe this argument. What is at stake here for employers?

3. This case is about conflicting loyalties. Make a list of the stakeholders (those primarily affected by the situation). Now describe the various links of loyalty—who felt responsi- ble to whom? Analyze the situation using the ethical theories and the information about corporate governance in Chapter 1. Did Milton do the right thing?

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48 CHAPTER 2

Employment-at-Will

The right of an employee to quit the services of the employer, for whatever reason, is the same as the right of the employer, for whatever reason, to dispense with the services of such employee.

— JUSTICE HARLAN IN Adair v. U.S., 208 U.S. 161 (1908).

The Law, in its majestic equality, forbids the rich, as well as the poor, to sleep under the bridges, to beg in the streets, and to steal bread.

— ANATOLE FRANCE

Employment-at-will is a legal rule that developed in the nineteenth century, giving employers unfettered power to “dismiss their employees at will for good cause, for no cause, or even for cause morally wrong, without being thereby guilty of a legal wrong.”1 The economic philoso- phy of laissez-faire provided theoretical support for employment-at-will. Its legal underpin- nings consisted mainly of “freedom of contract,” the idea that individuals are free to choose how to dispose of what they own, including their labor, as they see fit, and that the voluntary contractual promises they make are legitimately enforceable.

Exceptions to the Rule The earliest adjustments to the doctrine of employment-at-will were made as workers fought for the right to organize and form unions. In 1935, they were guaranteed these rights, and not long after, the U.S. Supreme Court announced that an employer could not use employment- at-will as a means of “intimidat[ing] or coerc[ing] its employees with respect to their self organization.”2 In other words, employees could not be fired as punishment for attempting to organize themselves into unions. Although at this writing only a fairly narrow slice of the U.S. workforce is unionized,3 collective bargaining agreements typically cut against employment-at-will, protecting workers from being fired except for “good cause.”

Beginning in the 1960s, federal civil rights laws created remedies against employers who fire workers because of their race, national origin, color, religion, sex, age, or disability.4 In the 1970s and 1980s, federal and state statutes included protection from retaliation for employees who report violations of environmental or workplace safety laws, for example.5

In the wake of the wave of scandals and the implosion of major firms such as Enron and

1Payne v. Webster & Atlantic R.R. Co., 81 Tenn. 507, 519–20 (1884). 2NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 45–46 (1937). 3 According to the Bureau of Labor Standards, the union membership rate in 2009 was 12.3%, with some 15.3 million wage and salary workers belonging to unions. If we look at only nongovernmental workers, we see they represent 8 percent of the workforce today, compared with 35 percent in 1950. 4 For example, Civil Rights Act of 1964, 42 U.S.C. Sec. 2000e-2a (1976); Age Discrimination in Employment Act of 1967, 29 U.S.C. Sec. 623(a) (1976); Americans with Disabilities Act, 42 U.S.C. Sec. 12112(b)(5)(A). Civil rights laws are discussed more fully in Chapter 4. Most states have similar laws, and some of these go further than the federal statutes, protecting employees against discrimination on the basis of family status or sexual orientation, for example. 5 Federal laws include the Toxic Substances Control Act, 15 U.S.C. Sec. 2622(a) (1988); Occupational Safety and Health Act, Sec. 660(c)(1) (1988); Water Pollution Control Act, 33 U.S.C. Sec. 1367(a) (1988); Safe Drinking Water Act, 42 U.S.C.A. Sec. 300j-9(i)(1); Energy Reorganization Act, 42 U.S.C. Sec. 5851(a)(3) (1982); Solid Waste Disposal Act, 42 U.S.C. Sec. 6971(a) (1982); Comprehensive Environmental Response, Compensation, and Liability Act, Sec. 99610(a); Clean Air Act Sec. 7622(a).

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Worldcom, in 2002 Congress passed corporate fraud reform legislation with whistleblower provisions protecting those who report financial misconduct in publicly traded companies. This law is known as Sarbanes-Oxley, or SOX. As of mid-2010, in response to the housing crisis and the economic meltdown of 2007-2009, another piece of reform legislation appears to be on the verge of passage; it too is likely to contain whistleblower protections related to the financial services sector.

FEDERAL WHISTLEBLOWER PROTECTION LAWS

The Occupational Safety and Health Administration (OSHA) is responsible for enforcing some seventeen whistleblower protection laws, including provisions of the following:

• Clean Air Act • Occupational Safety and Health Act • Safe Drinking Water Act • Sarbanes Oxley Act • Super Fund

The Equal Employment Opportunity Commission (EEOC) handles retaliation against those who blow the whistle on violations of the civil rights laws, including:

• Age Discrimination in Employment Act • Americans with Disabilities Act • Civil Rights Act of 1964 (“Title VII”)

The Department of Labor is charged with protecting against whistleblowing or retaliation under various laws, including:

• Fair Labor Standards Act (wage & hour, child labor, minimum wage, overtime) • National Labor Relations Act • Patient Protection & Affordable Care Act (new health care reform protects hospi-

tal and medical providers) • Sarbanes Oxley Act

The Whistleblower Protection Act covers federal employees who disclose illegal or improper government activities.

The common law has also evolved to create exceptions to the employment-at-will rule. In some states, courts have set limits by means of contract law. There are two main approaches: 1) to imply a promise of “good faith and fair dealing” in the contract of employment, or (2) to imply contractual terms (not to dismiss except for good cause, for instance) from an employer’s handbook, policy statement, or behavior. However, fewer than a dozen states use the first approach. And, although the second approach has been recognized by most states, employers are on notice, and unlikely to make any express or implied promises that might be interpreted to cut against employment-at-will. In fact, they are more likely to promise the reverse, as in the following paragraph, recom- mended for inclusion in employment handbooks for law firms:

Your employment with the Firm is voluntarily entered into and you are free to resign at any time. Similarly, the Firm is free to conclude an employment

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relationship with you where it believes it is in the Firm’s best interest at any time. It should be recognized that neither you, nor we, have entered into any contract of employment, express or implied. Our relationship is and will be always one of vol- untary employment “at will.” 6

Tort law has also made inroads into employment-at-will, offering a plaintiff the chance to convince a jury to award substantial money damages. For almost four decades, most U.S. state courts have been shaping the tort of “wrongful discharge,” a firing that contradicts “public policy”—in other words, a dismissal that undermines what is benefi- cial to society in general.

The problem has been how to define public policy.7 As with contract law, this exception to employment-at-will developed simultaneously in several states, producing a crazy quilt of varying rules. Most state courts are comfortable looking to the legisla- ture—to laws that have already been passed—for guidance. For instance, they will pro- tect from retaliation employees who have simply exercised their legal rights to file a worker’s compensation or a sexual harassment claim,8 or who have merely performed their legal duty to serve on a jury.9 And, if employers put their employees “between a rock and a hard place,” expecting them to participate in breaking the law or be fired, most courts would again see a violation of public policy, triggering the tort of wrongful discharge.10 For example, suppose you were an employee of BP in Louisiana, and your supervisor told you to delete safety and engineering files related to the government investigation of the 2010 oil spill in the Gulf of Mexico. Once subpoenas were issued, destroying those files would amount to obstruction of justice. So, if you refused to destroy them and were fired for that, you would succeed in a suit for wrongful discharge.

But some states still do not recognize the tort at all. In New York, for instance, while an employer could be fined for refusing to allow an employee time for jury service, the employee could not then sue for wrongful discharge.11 As we have seen, other jurisdic- tions, such as Maryland, are conservative in identifying violations of public policy.

Inconsistencies like these complicate the risk for whistleblowers. They have noticed a troubling situation at work. It may be illegal; it may be “merely” unethical; it may be one they are expected to participate in; it may be one they are expected to ignore; it may involve a statute that carries protection for whistleblowers; it may not. Whistleblowers react first and must worry about the reach of “public policy” later. Characteristically unable to remain passive in the face of what they believe is wrong, they speak out. Research reveals that whistleblowers are typically long-term, highly loyal employees who feel strongly that their companies should do the right thing, and who tend to

6Victor Schachter, “The Promise of Partnership,” National Law Journal, October 8, 1984, p. 15. 7 Public policy is generally understood to mean that which benefits society as a whole. But this is a fuzzy con- cept indeed and very likely to mirror the personal and political beliefs of individual judges. As one commen- tator put it, “Public policy is the unruly horse of the law.” 8 Frampton v. Central Indiana Gas Co., 297 N.E.2d 425 (Indiana 1973). Plaintiff fired for filing a worker’s compensation claim. 9Reuther v. Fowler & Williams, 386 A.2d 119 (Pa. 1978). Plaintiff fired for jury service. 10 For example, in Petermann v. Int’l. Brotherhood of Teamsters, 344 P.2d 25 (1969), plaintiff was instructed by his employer to lie when testifying before a legislative investigatory committee. He refused and was fired. The court allowed his suit for wrongful discharge, describing public policy as “that principle of law which holds that no citizen can lawfully do that which has a tendency to be injurious to the public or against the public good.” Id. at 27. 11Di Blasi v. Traffax Traffic Network, 681 N.Y.S.2d 147 (N.Y. App. Div 1998).

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disclose to outsiders only after trying to make headway internally.12 The whistleblower profile is such that, if nothing is done to respond to their internal complaints, they often feel compelled to disclose to authorities outside the company—even to the media. In any case, they are taking the chance that they will not be covered under the wrongful discharge exception to employment-at-will. As one commentator put it, effec- tively, those who blow the whistle “very often must choose between silence and driving over a cliff.”13

Conflicting Loyalties: Whistleblowing and Professional Ethics

THE MAYOR: We shall expect you, on further investigation, to come to the con- clusion that the situation is not nearly as pressing or as dangerous as you had at first imagined.

DR. STOCKMANN: Oh! You expect that of me, do you?

THE MAYOR: Furthermore we will expect you to make a public statement expres- sing your faith in the management’s integrity and in their intention to take thorough and conscientious steps to remedy any possible defects.

DR. STOCKMANN: But that’s out of the question, Peter. No amount of patching or tinkering can put this matter right; I tell you I know! It is my firm and unalterable conviction—

THE MAYOR: As a member of the staff you have no right to personal convictions.

DR. STOCKMANN: (With a start) No right to—?

THE MAYOR: Not as a member of the staff—no! As a private individual—that’s of course another matter. But as a subordinate in the employ of the Baths you have no right to openly express convictions opposed to those of your superiors.

DR. STOCKMANN: This is too much! Do you mean to tell me that as a doctor—a scientific man—I have no right to—!

THE MAYOR: But this is not purely a scientific matter; there are other questions involved—technical and economic questions.

DR. STOCKMANN: To hell with all that! I insist that I am free to speak my mind on any and all questions!14

In the next case, the plaintiff is a doctor caught in a conflict between what her employer expects her to do, and what she feels is in line with her professional ethical responsibilities.

12Marlene Winfield, “Whistleblowers as Corporate Safety Net,” in Whistleblowing: Subversion or Corporate Citizenship? 21, 22 (New York: St. Martin’s Press: 1994). 13 Joseph Henkert, “Management’s Hat Trick: Misuse of ‘Engineering Judgment’ in the Challenger Incident,” 10 J. Bus. Ethics 617, 619 (1991). 14 Henrik Ibsen, An Enemy of the People.

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PIERCE v. ORTHO PHARMACEUTICAL CORP.

Supreme Court of New Jersey, 1980 417 A.2d 505

Pollock, J.

This case presents the question whether an employee-at-will has a cause of action against her employer to recover damages for the termination of her employment following her refusal to continue a project she viewed as medically unethical.…

Ortho specializes in the development and manufacture of therapeutic and reproduc- tive drugs. Dr. Pierce is a medical doctor who was first employed by Ortho in 1971 as an Associate Director of Medical Research. She signed no contract except a secrecy agree- ment, and her employment was not for a fixed term. She was an employee-at-will. In 1973, she became the Director of Medical Research/Therapeutics, one of three major sec- tions of the Medical Research Department. Her primary responsibilities were to oversee development of therapeutic drugs and to establish procedures for testing those drugs for safety, effectiveness, and marketability. Her immediate supervisor was Dr. Samuel Pas- quale, Executive Medical Director.

In the spring of 1975, Dr. Pierce was the only medical doctor on a project team devel- oping loperamide, a liquid drug for treatment of diarrhea in infants, children, and elderly. The proposed formulation contained saccharin. Although the concentration was consistent with the formula for loperamide marketed in Europe, the project team agreed that the for- mula was unsuitable for use in the United States.15 An alternative formulation containing less saccharin might have been developed within approximately three months.

By March 28, however, the project team, except for Dr. Pierce, decided to continue with the development of loperamide [without reducing the amount of saccharin]. That decision was made apparently in response to a directive from the Marketing Division of Ortho. This decision meant that Ortho would file an investigational new drug application (IND) with the Federal Food and Drug Administration (FDA), continuing laboratory studies on loperamide, and begin work on a formulation.…

Dr. Pierce continued to oppose the work being done on loperamide at Ortho. On April 21, 1975, she sent a memorandum to the project team expressing her disagreement with its decision to proceed.… In her opinion, there was no justification for seeking FDA per- mission to use the drug in light of medical controversy over the safety of saccharin.

Dr. Pierce met with Dr. Pasquale on May 9 and informed him that she disagreed with the decision to file an IND with the FDA.… She concluded that the risk that saccharin might be harmful should preclude testing the formula on children or elderly persons, espe- cially when an alternative formulation might soon be available.…

After their meeting on May 9, Dr. Pasquale informed Dr. Pierce that she would no longer be assigned to the loperamide project. On May 14, Dr. Pasquale asked Dr. Pierce to choose other projects…. She felt she was being demoted, even though her salary would not be decreased. Dr. Pierce [submitted a] letter of resignation.… [This is called “constructive discharge,” the legal equivalent of being fired.]

Dr. Pierce claimed damages for the termination of her employment. Her complaint alleged: “The Defendant, its agents, servants and employees requested and demanded Plaintiff follow a course of action and behavior which was impossible for Plaintiff to follow

15 The group’s toxicologist, for instance, noted that saccharin was a “slow carcinogen”; it had produced benign and malignant tumors in test animals after 17 years. The harm it might cause would be obvious only after a long period of time, and “any intentional exposure of any segment of the human population to a potential carcinogen is not in the best interest of public health of the Ortho Pharmaceutical Corporation.”

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because of the Hippocratic oath she had taken, because of the ethical standards by which she was governed as a physician, and because of the regulatory schemes, both federal and state, statutory and case law, for the protection of the public in the field of health and human well-being, which schemes Plaintiff believed she should honor.”

…Under the common law, in the absence of an employment contract, employers or employees have been free to terminate the employment relationship with or without cause.…

Commentators have questioned the compatibility of the traditional at-will doctrine with the realities of modern economics and employment practices.… The common law rule has been modified by the enactment of labor relations legislation [prohibiting employ- ers from firing workers because they organize or join a union].…

Recently [many] states have recognized a common law cause of action for employees-at-will who were discharged for reasons that were in some way “wrongful.” The courts in those jurisdictions have taken varied approaches, some recognizing the action in tort, some in contract. Nearly all jurisdictions link the success of the wrongful dis- charged employee’s action to proof that the discharge violated public policy.…

In recognizing a cause of action to provide a remedy for employees who are wrongfully discharged, we must balance the interests of the employee, the employer, and the public. Employees have an interest in knowing they will not be discharged for exercising their legal rights. Employers have an interest in knowing they can run their businesses as they see fit as long as their conduct is consistent with public policy. The public has an interest in employment stability and in discouraging frivolous lawsuits by dissatisfied employees.

Although the contours of an exception are important to all employees-at-will, this case focuses on the special considerations arising out of the right to fire an employee-at-will who is a member of a recognized profession. One writer has described the predicament that may confront a professional employed by a large corporation: Consider, for example, the plight of an engineer who is told that he will lose his job unless he falsifies his data or con- clusions, or unless he approves a product which does not conform to specifications or meet minimum standards…and the predicament of an accountant who is told to falsify his employer’s profit and loss statement in order to enable the employer to obtain credit.

Employees who are professionals owe a special duty to abide not only by federal and state law, but also by the recognized codes of ethics of their professions. That dutymay oblige them to decline to perform acts required by their employers. However, an employee should not have the right to prevent his or her employer from pursuing its business because the employee perceives that a particular business decision violates the employee’s personal mor- als, as distinguished from the recognized code of ethics of the employee’s profession.

We hold that an employee has a cause of action for wrongful discharge when the dis- charge is contrary to a clear mandate of public policy. The sources of public policy include leg- islation; administrative rules, regulations or decisions; and judicial decisions. In certain instances, a professional code of ethics may contain an expression of public policy. However, not all such sources express a clear mandate of public policy. For example, a code of ethics designed to serve only the interests of a profession or an administrative regulation concerned with technical matters probably would not be sufficient. Absent legislation, the judiciary must define the cause of action in case-by-case determinations.… [U]nless an employee-at-will identifies a specific expression of public policy, he may be discharged with or without cause.

[B]efore loperamide could be tested on humans, an IND had to be submitted to the FDA to obtain approval for such testing. The IND must contain complete manufacturing specifications, details of pre-clinical studies [testing on animals] which demonstrate the safe use of the drug, and a description of proposed clinical studies. The FDA then has 30 days to withhold approval of testing. Since no IND had been filed here, and even giving Dr. Pierce the benefit of all doubt regarding her allegations, it is clear that clinical testing of loperamide on humans was not imminent.

Dr. Pierce argues that by continuing to perform research on loperamide she would have been forced to violate professional medical ethics expressed in the Hippocratic oath.

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She cites the part of the oath that reads: “I will prescribe regimen for the good of my patients according to my ability and my judgment and never do harm to anyone.” Clearly, the general language of the oath does not prohibit specifically research that does not involve tests on humans and that cannot lead to such tests without governmental approval.

We note that Dr. Pierce did not rely on or allege violation of any other standards, including the “codes of professional ethics” advanced by the dissent. Similarly, she did not allege that continuing her research would constitute an act of medical malpractice or violate any statute.…

The case would be far different if Ortho had filed the IND, the FDA had disapproved it, and Ortho insisted on testing the drug on humans.…

[I]mplicit in Dr. Pierce’s position is the contention that Dr. Pasquale and Ortho were obliged to accept her opinion. Dr. Pierce contends, in effect, that Ortho should have stopped research on loperamide because of her opinion about the controversial nature of the drug.

Dr. Pierce espouses a doctrine that would lead to disorder in drug research.… Chaos would result if a single doctor engaged in research were allowed to determine, according to his or her individual conscience, whether a project should continue. An employee does not have a right to continued employment when he or she refuses to conduct research simply because it would contravene his or her personal morals. An employee-at-will who refuses to work for an employer in answer to a call of conscience should recognize that other employees and their employer might heed a different call. However, nothing in this opinion should be construed to restrict the right of an employee-at-will to refuse to work on a project that he or she believes is unethical.…

Under these circumstances, we conclude that the Hippocratic oath does not contain a clear mandate of public policy that prevented Dr. Pierce from continuing her research on loperamide. To hold otherwise would seriously impair the ability of drug manufacturers to develop new drugs according to their best judgment.

The legislative and regulatory framework pertaining to drug development reflects a public policy that research involving testing on humans may proceed with FDA approval. The public has an interest in the development of drugs, subject to the approval of a responsible management and the FDA, to protect and promote the health of mankind.…

[Appellate division judgment for the plaintiff is reversed and the case is remanded.]

Pashman, J., Dissenting

The majority’s analysis recognizes that the ethical goals of professional conduct are of inesti- mable social value. By maintaining informed standards of conduct, licensed professions bring to the problems of their public responsibilities the same expertise that marks their calling. The integrity of codes of professional conduct that result from this regulation deserves judicial pro- tection from undue economic pressure. Employers are a potential source of this pressure, for they can provide or withhold until today, at their whim, job security and the means of enhanc- ing a professional’s reputation. Thus, I completely agree with the majority’s ruling that “an employee has a cause of action for wrongful discharge when the discharge is contrary to a clear mandate of public policy” as expressed in a “professional code of ethics.”

The Court pronounces this rule for the first time today. One would think that it would therefore afford plaintiff an opportunity to seek relief within the confines of this newly announced cause of action. By ordering the grant of summary judgment for defendant, how- ever, the majority apparently believes that such an opportunity would be an exercise in futil- ity. I fail to see how the majority reaches this conclusion. There are a number of detailed, recognized codes of medical ethics that proscribe participation in clinical experimentation when a doctor perceives an unreasonable threat to human health. Any one of these codes could provide the “clear mandate of public policy” that the majority requires.

Three other points made by the majority require discussion.… The first is the majority’s characterization of the effect of plaintiff’s ethical position. It appears to believe that Dr. Pierce had the power to determine whether defendant’s proposed development program would

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continue at all. This is not the case, nor is plaintiff claiming the right to halt defendant’s devel- opmental efforts. [P]laintiff claims only the right to her professional autonomy. She contends that she may not be discharged for expressing her view that the clinical program is unethical or for refusing to continue her participation in the project. She has done nothing else to impede continued development of defendant’s proposal; moreover, it is undisputed that defendant was able to continue its program by reassigning personnel. Thus, the majority’s view that granting doctors a right to be free from abusive discharges would confer on any one of them complete veto power over desirable drug development, is ill-conceived.

The second point concerns the role of governmental approval of the proposed experi- mental program. In apparent ignorance of the past failures of official regulation to safeguard against pharmaceutical horrors, the majority implies that the necessity for administrative approval for human testing eliminates the need for active, ethical professionals within the drug industry. But we do not know whether the United States Food and Drug Administra- tion (FDA) would be aware of the safer alternative to the proposed drug when it would pass upon defendant’s application for the more hazardous formula. The majority professes no such knowledge. We must therefore assume the FDA would have been left in igno- rance. This highlights the need for ethically autonomous professionals within the pharma- ceutical industry.…

The final point to which I must respond is the majority’s observation that plaintiff expressed her opposition prematurely, before the FDA had approved clinical experimenta- tion. Essentially, the majority holds that a professional employee may not express a refusal to engage in illegal or clearly unethical conduct until his actual participation and the resulting harm is imminent. This principle grants little protection to the ethical auton- omy of professionals that the majority proclaims. Would the majority have Dr. Pierce wait until the first infant was placed before her, ready to receive the first dose of a drug con- taining 44 times the concentration of saccharin permitted in 12 ounces of soda?

I respectfully dissent.

QUESTIONS 1. The Pierce majority announces a new “cause of action in New Jersey for wrongful dis-

charge when the discharge is contrary to a clear mandate of public policy.” Such a mandate, it goes on to say, could be found in a professional code of ethics, yet Dr. Pierce had failed to identify one in her complaint with enough specificity. How does the dissenting judge respond to this point?

2. What is the procedure for obtaining FDA approval of a new drug? Do you agree with the majority that when Dr. Pierce stopped working on the loperamide project, the risk to human test subjects was not “imminent”?

3. Surveying the interests at stake in the case, the Pierce majority states:

[W]e must balance the interests of the employee, the employer, and the public. Employees have an interest in knowing they will not be discharged for exercising their legal rights. Employers have an interest in knowing they can run their busi- nesses as they see fit as long as their conduct is consistent with public policy. The public has an interest in employment stability and in discouraging frivolous lawsuits by dissatisfied employees.

Are there any important stakeholder interests not mentioned here?

4. The dissent mentions “past failures of official regulation to safeguard against pharma- ceutical horrors.” There have been more recent failures. Since 2000, the diet drug Fen-Phen led to lung and heart disorders, the antidepressant Paxil caused birth defects in children whose mothers took Paxil while pregnant, and the painkiller Vioxx was found to double the risk of heart attack. In each instance, there was evidence that the pharmaceutical firms had evidence suggesting serious problems with drugs that were

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in development or had already been brought to market. By the time Merck recalled Vioxx in late 2004, there were congressional hearings underway. A doctor in the FDA’s Office of Drug Safety, David Graham, told Congress that Vioxx may have caused as many as 55,000 deaths. Graham charged his agency with being “incapable of pro- tecting America” against dangerous drugs. A study led by Dr. Graham that looked at the cardiovascular risks of taking Vioxx was supposed to be published in a prestigious medical journal, but was pulled at the last minute after Dr. Graham received a warning from his supervisor. FDA management then began a smear campaign, with anony- mous claims that his study could reflect scientific misconduct, and that Graham “bul- lied” his staff.

Research: Fearing his job was at risk, Graham sought help from the whistleblower support organization, the Government Accountability Project. Find out what happened. What accusations did Graham make against the FDA in 2010, regarding the diabetes drug, Avandia?

5. Agencies such as the FDA (Food and Drug Administration), the FAA (Federal Aviation Administration) or the EPA (Environmental Protection Administration) depend on cor- porations to generate accurate data to use in analyzing safety risks. Because govern- ment resources are limited, it must rely on companies to do their own tests, and to share all relevant results. Business decisions to hold back adverse information from regulators can be both fatal and expensive. Consider the Bridgestone/Ford debacle of 2000. In 1999, both Bridgestone and Ford knew the Wilderness tire on a Ford Explorer was dangerous; there had been dozens of tread separations and SUV rollover deaths abroad, particularly in hot climates. The two companies planned a recall in Saudi Arabia, but then made a joint decision not to alert NHTSA, fearing this would lead to a recall in the United States. By late 2000, after SUV rollovers caused more than 100 fatalities in the United States, Bridgestone was forced to recall more than 6 million tires, and both companies faced countless lawsuits. A similar scenario unfolded in 2009, when Toyota apparently learned of problems with sticking accelerators and dangerous floor mats months before it was forced to recall more than 2.3 million cars and was hit with the largest fine in the history of the NHTSA. Again, action was taken in Europe and Canada before the problem was acknowledged in the United States.

The dissent in Pierce mentions the need to protect “professional autonomy.” What does this phrase mean? What connection might professional autonomy have with the U.S. safety regulatory scheme?

6. In 1986, responding to the Pierce decision of its supreme court, the New Jersey legis- lature adopted The Conscientious Employee Protection Act,16 shielding from retaliation employees who object to, or refuse to participate in, “any activity, policy or practice which the employee reasonably believes to be incompatible with a clear mandate of public policy concerning the public health, safety or welfare.” What would have been the likely outcome had Dr. Pierce sued under this new law?

7. Research: By 2000, every state in the United States had adopted whistleblower pro- tection statutes of some type. Locate one such law from your home state. Under what circumstances are whistleblowers protected? Are private sector as well as gov- ernment employees covered? Does coverage under the statute exclude the possibility of suing in tort?

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16N.J.S.A. 34:19-1 et. seq.

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MONTANA: WRONGFUL DISCHARGE FROM EMPLOYMENT ACT17

Purpose

This part sets forth certain rights and remedies with respect to wrongful discharge. Except as limited in this part, employment having no specified term may be terminated at the will of either the employer or the employee on notice to the other for any reason considered sufficient by the terminating party.

Definitions

In this part, the following definitions apply:

(2)“Discharge” includes a constructive discharge…and any other termination of employ- ment, including resignation, elimination of the job, layoff for lack of work, failure to recall or rehire, and any other cutback in the number of employees for a legitimate business reason.

(3) “Employee” means a person who works for another for hire. The term does not include a person who is an independent contractor.…

(5)“Good cause” means reasonable job-related grounds for dismissal based on a fail- ure to satisfactorily perform job duties, disruption of the employer’s operation, or other legitimate business reason. The legal use of a lawful product by an individual on the employer’s premises during nonworking hours is not a legitimate business reason.…

(7)“Public policy” means a policy in effect at the time of the discharge concerning the public health, safety, or welfare established by constitutional provision, statute, or admin- istrative rule.

Elements of Wrongful Discharge

A discharge is wrongful only if:

1. it was in retaliation for the employee’s refusal to violate public policy or for reporting a violation of public policy;

2. the discharge was not for good cause and the employee had completed the employer’s probationary period of employment; or

3. the employer violated the express provisions of its own written personnel policy.

Remedies

1. If an employer has committed a wrongful discharge, the employee may be awarded lost wages and fringe benefits for a period not to exceed four years from the date of discharge, together with interest thereon.…

2. The employee may recover punitive damages otherwise allowed by law if it is estab- lished by clear and convincing evidence that the employer engaged in actual fraud or actual malice in the discharge of the employee [for refusing to violate public policy or for reporting a violation of public policy].

Exemptions

This part does not apply to a discharge:

1. that is subject to any other state or federal statute that provides a procedure or rem- edy for contesting the dispute. Such statutes include those that prohibit discharge for filing complaints, charges, or claims with administrative bodies or that prohibit

17 39 Montana Code Annotated Chapter 2, Part 9. Puerto Rico has been the only other U.S. jurisdiction that has passed equivalent legislation.

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unlawful discrimination based on race, national origin, sex, age, handicap, creed, reli- gion, political belief, color, marital status, and other similar grounds.

2. of an employee covered by a written collective bargaining agreement or a written contract of employment for a specific term.

Preemption of Common-Law Remedies

Except as provided in this part, no claim for discharge may arise from tort or express or implied contract.

QUESTIONS 1. How would the Milton case have been decided had this law been in effect in Mary-

land? How would Dr. Pierce have fared under it?

2. What parts of this law seem to benefit employees? Employers?

3. The state laws protecting whistleblowers vary enormously, but none of them protect whistleblowers who turn to the media first. Why do you think that is so? Does that seem like sound policy to you? Does it encourage or discourage ethical behavior?

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Valuing Work As Marion Crain, law professor and Director of the Center for the Interdisciplinary Study of Work and Social Capital at Washington University, reminds us in the next reading, “Work lies at the core of the American Dream: our cultural belief is that if you are willing to work hard, your family will be secure.” She points out that, while for some of us “work is a calling—a labor of love,” for most, “work is the means for achieving a better social and eco- nomic condition, for ensuring that our children have a better life and more opportunities than we had.” In the U.S., she writes, work also has an important ethical dimension. It is a “duty and a demonstration of the virtue of industriousness. Most importantly, work means self-sufficiency and independence.” This recognition of the profound economic and cultural significance of work provides a context for Crain’s analysis of employment-at-will in a time of recession. She begins by pointing to the effects of the recent economic downturn, with unemployment rates nearly doubling from November 2007 to October 2009. She also notes that the impact was strikingly different either side of the social class divide: “[T]hose at the bottom of the income strata suffered unemployment rates that rivaled or exceeded Depression-era rates, while those at the top of the strata emerged relatively unscathed.”

WORK MATTERS Marion Crain18

In the United States, work is mostly defined as having a job (or being self-employed). Jobs are the entry tickets to provision—health insurance, pension benefits, and social security. As feminists and critical race theorists have explained, work also includes homemaking, childcare work, unwaged work, and invisible work. Despite these multiple understandings of work, our political system, our cultural values, and our law are still largely predicated on the assumption that full citizens contribute to the country through waged work. As many scholars have explained, work confers

18Marion Crain, “Work Matters,” Kansas Journal of Law & Public Policy 19(3), Spring 2010. Reprinted by permission.

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not only self-sufficiency, then, but also dignity, standing in society, and membership in the social structure.…

To work means, then, to participate in the public conversation about democracy, to belong. Senator Robert Wagner, the major proponent of the National Labor Relations Act (articulating the nation’s commitment to protecting the right to organize a union and to collectively bargain with one’s employer) argued persuasively that collective bargaining promotes democracy by providing an outlet for voice in the context where workers are most likely to learn the positive effects of democratic participation. He believed that work is the bedrock of our democracy. He believed, in short, that work matters.…

Work is far more than a market exchange of labor for dollars.… Other than in family relationships, nowhere in life do people invest so much of their time, their pas- sion, and their imagination.

[Yet] U.S. law treats the employment relation as if it were nothing more than a mar- ket transaction, as if labor were nothing more than a commodity.… Since the early 1900s, American courts have applied a default rule of employment-at-will to employment relationships of undefined duration. Pursuant to the at-will doctrine, either the employer or the employeemay terminate the employment relationship at any time and for any rea- son without notice.… The rationale behind this doctrine is the policy favoring business flexibility—to maximize the ability of firms to shrink and enlarge their workforces in response to market fluctuations. The rule is further justified by the notion that employees are free to quit at any time to pursue more desirable market alternatives. The law envi- sions employees as free agents, bargaining at arm’s length for the most advantageous terms and moving on to greener pastures as opportunities beckon.…

The acceptance of a relatively high unemployment rate in the United States as business-as-usual is philosophically linked to our commitment to the doctrine of employment-at-will. Other countries with lower unemployment rates are not only more committed to job-saving measures in the event of financial downturns, but also have erected a legal architecture that imposes more checks on discharge to begin with.… Most countries outside the United States require just cause for dis- charge, although they typically permit layoffs for economic reasons as well, usually requiring notice and severance packages, at least for mass layoffs.… Some countries adhere to an even more rigorous standard, limiting employer discretion to discharge. Germany, for example, prohibits discharge except for cause or “urgent social need,” reflecting the country’s view that job security is a legal entitlement.

Other countries also provide more support for dislocated workers than we do. While the United States provides for benefits covering 35-40 percent of a worker’s pay for up to six months, Germany provides for benefits covering 68 percent of a worker’s net pay for up to a year; Sweden provides for 80 percent of pay for up to 300 days, or 450 days for workers over age 55; and Japan provides for 60-80 percent of employee wages in unemployment compensation associated with permanent layoffs.

[Crain goes on to describe some of the legal strategies other countries have developed that ease the effects on workers of economic downturns.]

Work-Spreading, Job-Saving Measures

If work is important to social engagement and a healthy democracy, wouldn’t it make sense when the economy falters to incentivize work-spreading and work-saving mea- sures instead of layoffs? Other countries have responded to economic downturns by cushioning workers against unemployment, eschewing layoffs in favor of work- sharing, reduced hours, and furloughs. The Netherlands, Germany, and Austria rely on such “labor-hoarding” policies to preserve jobs and keep unemployment low. The Dutch have been particularly successful: their unemployment rate of 3.7 percent near the end of 2009 was one of the lowest among developed nations.

In the Netherlands, “short work” programs allow firms that can demonstrate a 30 percent reduction in revenue over a two-month period to claim a government subsidy

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for wages lost byworkers due to reductions in hours.Workers reduce their hours and are paid at a lower (subsidized) rate for the hours not worked. The subsidy is limited to a six- month period. Many European countries provide for work-sharing or have established relief work programs that allowworkers who have exhausted their unemployment bene- fits to work part-time, yet receive full compensation through government subsidies.

The Center for Law and Social Policy (CLASP) recently surveyed a short-hours compensation system successfully deployed in seventeen states and recommended creation of a federal program based upon it. In states that have adopted “short-time work sharing” programs, employers develop a plan, consult with the union repre- senting their workforce (if any), and submit the plan to the state unemployment insurance agency for approval. If the plan is approved, workers can collect unemploy- ment insurance benefits to compensate them for lost work hours caused by a finan- cial downturn. Thus, workers might work four days out of five and collect unemployment benefits for the fifth day in partial compensation for the lost pay. Such programs encourage job-saving measures by firms, who can choose to cut all workers’ hours by 20 percent, rather than laying off 20 percent of the workforce. Employers benefit by maintaining a skilled workforce, avoiding training and hiring costs when the economy recovers, and retain the ability to respond immediately to a change in product markets. Workers benefit by keeping their jobs and maintaining health and pension benefits, as well as continuing to build their skills while working.

The programs are not a panacea in recessionary times: they are available only for relatively short-term reductions in hours, not for permanent reductions; the employer must still bear disproportionate costs of maintaining health and pension insurance; and they tend to benefit more junior employees disproportionately since they might have more likely lost jobs in the event of a layoff along seniority lines. The downside risk of “labor-hoarding” policies is a slow recovery, since job preserva- tion tends to stifle the reallocation of labor from industries that are declining to those that may be growing, and even within industries, it can be difficult to separate the firms that are worth saving from those that should be allowed to fold.…

Nevertheless, there is no doubt that work-sparing programs such as short-time compensation achieve significant social gains. Workers displaced during a recession sustain greater income losses even after they find new jobs than workers who are laid-off during good economic times.

Imagine finally how the law might intervene to reshape termination processes: … [T]he law might provide for notice periods, severance pay, and transitional assis- tance and retraining, either through government subsidies or a tax on employers who choose layoffs over furloughs.

Investments in Human Capital

Worker training and investment in human capital are perhaps the most important sorts of programs for countries that hope to compete effectively in a global market, and the United States lags far behind its European neighbors in such investments.… European Union countries were most likely to respond to the crisis in labor markets with job-saving measures, particularly work sharing, increased investment in worker re-training programs…and national re-employment centers that assist workers in locat- ing new jobs. The European Union has also embraced “Flexicurity,” which couples unemployment benefits with retraining and transitional assistance to help displaced workers adapt to labor market restructuring. Flexicurity reflects a commitment to fos- ter career development and upward mobility for workers, while at the same time serv- ing economic development goals by allowing employers flexibility in employment to maintain productivity and compete effectively in the market. Employers have discretion to hire and fire as necessary to respond to business cycles, but workers enjoy gener- ous unemployment benefits and a commitment to worker training. Flexicurity aban- dons the older model of rigid protection of job security in a particular position (the

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German model) and replaces it with a commitment to employment security—the right to be assured of work, but not necessarily a particular job.

A Matter of Values and Priorities

In countries that see work as a fundamental right, it follows logically that both gov- ernment and employers owe a responsibility to workers when the right is withdrawn or compromised by market events. By contrast, the American system places respon- sibility predominantly on the shoulders of individual workers, with only peripheral and short-term support through the unemployment insurance system provided for those who, through no fault of their own, lose jobs.

Countries that conceptualize work as a fundamental right recognize a species of property interest held by the worker in his or her job. Thus, employers must justify interference with the right, and notice and severance pay obligations are triggered where infringement is unavoidable. The U.S. rule clashes with the lived experience of workers, who believe that the jobs in which they have invested blood, sweat, and tears, often over a lengthy period of time, belong to them.…

Why does the law treat work as if it does not matter? Because in U.S. work law, property rights trump labor. Capital investment matters; work does not. The human costs of that policy choice have never been clearer.

QUESTIONS 1. Elsewhere in this article, Crain points out that other countries have enshrined in

their constitutions the right to work. Research: Find one of these provisions. How is it worded? Can you find any litigation under it?

2. When writer and historian Studs Terkel graduated from University of Chicago Law School in 1934, he announced that he wanted to become a concierge in a hotel. Then he joined an acting troupe, and during a stint with the Depression-era Fed- eral Writers Project, became a radio broadcaster. But Terkel is best known for his oral histories of ordinary Americans, including a compilation of interviews of men and women talking about their work. In the introduction to this book, Working, Terkel describes how often people were searching for “daily meaning as well as daily bread, for recognition as well as cash, for astonishment rather than torpor … for a sort of life rather than a Monday through Friday sort of dying.” Can you draw connections between this attitude about the meaning of work and ethical theory?

Sarbanes-Oxley and the Corporate Whistleblower

Ms. Watkins is no whistleblower in the conventional sense. She was and is a loyal employee.

— JAMES GREENWOOD (R., PA.) Chairman of Congressional Committee Investigating the Collapse of Enron

At the crux of the whistleblower’s decision is the question of loyalty, and of divided loyal- ties. An employee such as Dr. Pierce who blows the whistle experiences opposite pulls— allegiance to the employer and allegiance to a professional code of values. In the next reading, law professor Leonard Baynes takes up the example of Sherron Watkins, the best-known whistleblower associated with the fall of Enron Corporation in 2001. Watkins, a certified public accountant, worked directly with Enron’s CFO, and from that vantage

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point discovered accounting improprieties. Fearing retaliation, she did not report these to her immediate boss, but went straight to the president of the company, warning that Enron might “implode in a wave of accounting scandals.” She was ignored, Enron col- lapsed, and Watkins would later appear on the cover of Time Magazine as “Person of the Week.” But in the way she tried to communicate concerns up the hierarchy, the author views her as the prototypical corporate whistleblower: reporting to her superiors instead of to the government or the media. He uses her story as a means of discussing the difficult position of the corporate insider who chooses to blow the whistle, and asks whether the 2002 Sarbanes-Oxley Act (SOX), the federal law designed to prevent future Enrons, adequately addresses the quandary of employees like Sherron Watkins.

JUST PUCKER AND BLOW: AN ANALYSIS OF CORPORATE WHISTLEBLOWERS Leonard M. Baynes19

You know how to whistle, don’t you, Steve? You just put your lips together—and blow. — LAUREN BACALL TO HUMPHREY BOGART IN TO HAVE AND TO HAVE NOT

The Sarbanes-Oxley Act prohibits any public company from discriminating against any employee who lawfully provides information or otherwise assists in an investigation of conduct that the employee “reasonably believes” constitutes a violation of the federal securities laws. This provision was designed from the lessons learned from Sherron Watkins’s testimony. As Senator Patrick Leahy stated, “We learned from Sherron Wat- kins of Enron that these corporate insiders are the key witnesses that need to be encour- aged to report fraud and help prove it in court.” The legislation protects an employee from retaliation by an employer for testifying before Congress or a federal regulatory agency or giving evidence to law enforcement of possible securities fraud violations.…

[Baynes now asks whether the antiretaliation provision of the new law ade- quately addresses the dilemma of the corporate whistleblower, caught in the “vor- tex” of the duty of loyalty and the duty of care.]

Undoubtedly, the Sarbanes-Oxley Act provides an extra level of protection for employees. Despite this,… we must be cognizant that federal whistleblowers have low success rates in their suits before government agencies.… Under the Act, the corporate senior executive or employee is likely … also [to] have a low rate of suc- cess under its whistleblowing provisions. First, the statute only affords protection against retaliations based on securities fraud. Whistleblowing of other kinds of wrongdoing remain unprotected under this Act. In these cases, the whistleblower then must rely on the vagaries of state law, which generally give preference to those allegations dealing with public safety. For example, a senior executive may overhear a high-ranking executive make disparaging remarks about a particular racial group and state that he would never hire or promote members of that group. The corporation employs very few members of this particular group and has none in senior management. The senior executive believes that the corporation is engaged in race discrimination. The senior executive has a fiduciary obligation to hold certain corporate information like employee demographics in confidence but has an obliga- tion to resign or object from his position when confronting corporate wrongdoing. The Act provides protection only for those matters that involve security fraud. If this

19 Source: Leonard M. Baynes, “Just Pucker and Blow: An Analysis of Corporate Whistleblowers,” 76 St. John’s L. Rev. 875, Fall 2002.

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senior manager discloses, she would have to rely on the protections of the state laws.

Second, low-level employees are also relatively unprotected. They probably are unaware of these new protections. They may feel particularly oppressed by the many layers of management that may exist in some corporations. Some may be unsophisticated and may not know whether certain actions violate the law. Many of the wrongful or illegal activities that they observe may not rise to the level of securi- ties fraud. For example, an employee at McDonald’s may notice that large numbers of pre-packaged hamburgers disappear shortly after delivery. The disappearance may be the result of conversion [stealing] by the store manager. The McDonald’s employee might be in the best position to ascertain whether this wrongdoing is occurring, but she is unprotected by the Sarbanes-Oxley Act because this conversion does not involve securities fraudIn addition, many of these employees rely very heavily on their paychecks; a high turnover rate exists in these jobs. Students and those re-entering the workforce hold many of these jobs. These individuals may be particularly reluctant to “rock the boat” and report wrongdoing unless they are guaranteed that their job is protected. The Act does nothing to address this popula- tion of whistleblowers.

Third, for both senior executives and low-level employees, the Sarbanes-Oxley Act gives little guidance as to the circumstances under which an employee is to dis- close allegations of wrongdoing to her supervisor as opposed to law enforcement authorities. Senior executives also have an obligation to use “reasonable efforts” to disclose to the principal information which is “relevant to affairs entrusted to [the agent]” and which the principal would desire to have… . In some instances, how- ever, the whistleblowing employee who reports wrongdoing to her supervisor might not be doing enough to stem the wrongdoing behavior. For instance, once she has made the report, the wrongdoing supervisor might exclude the employee from access to information that would allow her to continue to observe the wrongful behavior. In those cases, the reporting employee may have breached her duty of care to the corporation by using insufficient actions to stop the wrongdoing…. Con- versely, if the whistleblowing employee reports the evidence of wrongdoing immedi- ately to law enforcement authorities, she may be violating her duty of loyalty to the corporation…. She has an obligation to protect certain proprietary and confidential corporate information. Also by going to the law enforcement authorities right away, she may be depriving the corporation of the opportunity to resolve the matter or, in the case of wrongdoing, get the best deal for the corporation. In addition, the employee who jumps the gun and goes to law enforcement authorities may be put- ting herself in a difficult political situation at her corporation. Even though the terms of her position and employment may remain the same, she will always, to her detri- ment, be remembered for making that report.

Fourth, the Sarbanes-Oxley Act gives no guidance concerning whether the whis- tleblowing employee should disclose the information to her direct supervisor or her supervisor’s supervisor. Who is the principal of senior executives? Is it the corpora- tion? Is it the board of directors? Is it the senior executive’s boss?

Fifth, the legislative history of the Sarbanes-Oxley Act states that the employ- ee’s actions have to be reasonable in making reports… .Most cases may not be as clear-cut as the one involving Sherron Watkins. Because she was an accountant, she had a very good idea that Enron’s accounting policies were illegal. For most other whistleblowers, they may have only a slight inkling that something might be amiss. In those circumstances, what are they supposed to do?…

Sixth, the Sarbanes-Oxley Act prohibits a corporation from “discharg[ing], demot [ing], suspend[ing], threaten[ing], harass[ing], or in any other manner discriminat[ing] against an employee in the terms and conditions of employment” because she blew the whistle. Senator Leahy conceded, however, that “most corporate

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employers, with help from their lawyers, know exactly what they can do to a whistle- blowing employee under the law.” The types of retaliation that can occur include: (1) “attacking the [whistleblower’s] motives, credibility, [or] professional competence”; (2) “build[ing] a damaging record against [the whistleblower]”; (3) threatening the employee with “reprisals for whistleblowing”; (4) “reassign[ing]” the employee to an isolated work location; (5) “publicly humiliat[ing]” the employee; (6) “set[ting] … up [the whistleblower] for failure” by putting them in impossible assignments; (7) “pro- secut[ing the employee] for unauthorized disclosures [of information]”; (8) “reorganiz [ing]” the company so that the whistleblower’s job is eliminated”; and (9) “blacklist [ing]” the whistleblower so she will be unable to work in the industry. Of course some methods on this list would clearly violate the Act. A deft supervisor, however, could “set up” the whistleblowing employee for failure. For instance, the employer may place the whistleblower in a job unsuitable to her skill level to ensure her failure. The employer could then document the employee’s poor performance. The Act pro- vides protections for whistleblowing employees except in cases where valid busi- ness reasons exist for their termination like inferior work performance. In addition, even if the employer refrains from discriminating against the whistleblowing employee in the terms and conditions of her employment, the employer is unlikely to give that employee any opportunities for advancement. By blowing the whistle, she may have “tapped out” her career trajectory….

QUESTIONS 1. Describe the conflict faced by corporate insiders who discover unethical or illegal

activities within their organizations.

2. Would the SOX law have protected Dr. Donn Milton? Dr. Grace Pierce? Why, or why not? What kinds of corporate wrongdoing might a senior executive discover that would not be covered by SOX?

3. Suppose Sherron Watkins had been fired by Enron before SOX went into effect. How would she have fared under Maryland law? New Jersey? Montana? Does SOX provide her any basis for a lawsuit?

4. Baynes identifies these weaknesses in the SOX law: (a) “non-securities fraud matters are not covered; (b) low-level employees may not be aware of the protections; (c) no guidance is given as to when to report wrongdoing to outside authorities

or to a supervisor; (d) no guidance is given as to when the whistleblower should go over his or her

supervisor’s head to senior management; and (e) no protection is given to undercover retaliations that do not quite manifest

themselves as a ‘discharge, demotion, suspension, threat, or other manner of discrimination.’” Working with a group of classmates, tackle each of these issues. How would

you amend the law to respond to them? Might some of these concerns be more effectively addressed by changes in corporate policy or culture? If so, what changes would your group recommend?

5. Research: In 2010 Congress passed legislation in response to the financial crisis that began in 2007. Find this law. Does it contain whistleblower protections? Does it answer any of the concerns outlined by Baynes in this article?

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GROUP THINK

Seven months after the U.S. space shuttle Columbia crashed in August 2003, a report on the causes of the disaster was released. It had been a gargantuan effort. Some 25,000 workers had gathered more than 84,000 pieces of debris evidence by walking slowly across eastern Texas and western Louisiana. According to the final report, the “broken safety culture” inside NASA was at least as much to blame for the crash as the chunk of foam tile that blew a hole in the wing of Columbia just after liftoff. Engi- neers, hoping a high-risk rescue might be possible, had asked management for outside assistance in getting photos of the damage, but these requests were rejected:

As much as the foam, what helped to doom the shuttle and its crew, even after liftoff, was not a lack of technology or ability…but missed opportunities and a lack of leadership and open-mindedness in management. The accident “was probably not an anomalous, random event, but rather likely rooted to some degree in NASA’s history and the human spacelight program’s culture.”20

Similar problems appear to have affected the CIA in the months leading up to the U.S. invasion of Iraq. According to a scathing Congressional report released in July 2004, key assessments used to justify the war were not supported by the govern- ment’s own evidence:

Among the central findings, endorsed by all nine Republicans and eight Demo- crats on the committee, were that a culture of “group think” in intelligence agen- cies left unchallenged an institutional belief that Iraq had illicit weapons; …and that intelligence agencies too often failed to acknowledge the limited, ambiguous and even contradictory nature of their information about Iraq and illicit arms.21

Studies have shown that, within large organizations, there is a tendency to go along with the majority. Most people are not likely to challenge the worthiness of the task at hand, or the way in which the task at hand is being accomplished. This reality, combined with the pressures that affect an organization from the outside— time and money pressures in the case of NASA’s Columbia shuttle, political pres- sures in the case of the United States in Iraq—can obscure good judgment.

Public Employees and Freedom of Speech

What I was surprised at was the silence, the collective silence by so many people that had to be involved, that had to have seen something or heard something.

— SGT. SAMUEL PROVANCE, Key Witness in Government Investigation of Abu Ghraib Prison Abuse

People who work for the government or for any of its branches—such as police officers, air traffic controllers, and those employed by government-supported institutions such as

20 John Schwartz and Matthew Wald, “Report on Loss of Shuttle Focuses on NASA Blunders,” New York Times, August 27, 2003. 21 Douglas Jehl, “Senators Assail C.I.A. Judgments on Iraq’s Arms as Deeply Flawed, New York Times, July 10, 2004.

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hospitals or schools—are called public employees. For almost 200 years, public employ- ees were thought to have no greater speech rights than those who worked in the private sector. The leading case, which dates back to the nineteenth century, involved a police officer who was fired for publicly criticizing the management of his department. He sued to get his job back, relying on his free speech rights. Judge Oliver Wendell Holmes refused his claim, stating, “The petitioner may have a constitutional right to talk politics, but he has no constitutional right to be a policeman.”22

Then, in 1968, the Supreme Court reinterpreted the First Amendment of the U.S. Constitution to give public employees limited speech protections. Marvin Pickering, a public school teacher, was fired for publishing a letter in the local paper critical of the Board of Education’s allocation of funds to its athletic program. He sued, losing in the lower courts. On appeal, however, the Court ruled in his favor. In Pickering v. Board of Education,23 the Court weighed “the interests of the teacher, as a citizen, in commenting upon matters of public concern” against the “interest of the State, as an employer, in promoting the efficiency of the public services it performs through its employees.” On balance, Pickering’s free speech interests were greater. The Court noted that a public employee could not be punished for speaking out on matters of public concern unless the employer could demonstrate that the employee’s statements caused substantial inter- ference with the performance of his own duties or with the functioning of the workplace.

In 1983, in Connick v. Myers,24 the Supreme Court clarified and reinterpreted Picker- ing. Sheila Myers had distributed at her place of employment a questionnaire that inquired not only about internal matters, such as an office transfer policy, but also about matters of public concern, including pressure put on employees to work on certain political cam- paigns. Before applying the Pickering balancing test, the Court ruled that it would first have to determine whether a public employee’s speech was related to matters of public concern, thus creating a new obstacle for plaintiffs in these cases. Ms. Myers’ questionnaire was tinged with just enough public interest to be examined under the Pickering test, although a statement limited to internal matters would not be. She lost, however, because the government demonstrated that her questionnaire interfered with working relationships by causing a “mini-insurrection” that could have disrupted the office.

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In 2006, the Supreme Court revisited the Pickering rule, making it even more difficult for public employees to successfully argue their free speech rights had been violated. The facts of the case were as follows: Richard Ceballos began working as a deputy district attorney in Los Angeles County in 1989. By 2000, he was a “calendar” attorney, supervising other lawyers in the DA’s office. In February of that year, a defense attorney contacted Ceballos to tell him he would be challenging a search warrant because it was based on “inaccuracies” in the support- ing affidavit. Ceballos agreed to investigate. When he went to the location described in the warrant as a “long driveway,” he found a separate road. Although the affidavit described tire tracks that led from a stripped-down truck to the premises to be searched, Ceballos found a road surface that would make it difficult or impossible to leave visible tire tracks.

After a telephone conversation with the affiant—a deputy sheriff—Ceballos told his supervisors that the case should be dismissed because there were serious misrepresenta- tions in the affidavit supporting the search warrant. He repeated the same concerns in a

22McAuliffe v. Mayor of New Bedford, 29 N.E. 517 (1892). 23 391 U.S. 563 (1968). 24Connick v. Myers, 461 U.S. 138 (1983).

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memorandum. Then, at heated meeting with his supervisors and with the sheriff who had made the statements in the warrant, Ceballos was sharply reprimanded. Later, he claims, he experienced a series of retaliations, including being reassigned, transferred, and denied promotion.

He sued, claiming those actions violated his First Amendment rights.

GARCETTI v. CEBALLOS U.S. Supreme Court, 2006

547 U.S. 410

Justice KENNEDY Delivered the Opinion of the Court

Pickering and the cases decided in its wake identify two inquiries to guide interpretation of the constitutional protections accorded to public employee speech. The first requires determining whether the employee spoke as a citizen on a matter of public concern. If the answer is no, the employee has no First Amendment cause of action.… If the answer is yes, then the possibility of a First Amendment claim arises. The question becomes whether the relevant government entity had an adequate justification for treating the employee differently from any other member of the general public….

When a citizen enters government service, the citizen by necessity must accept cer- tain limitations on his or her freedom… Government employers, like private employers, need a significant degree of control over their employees’ words and actions; without it, there would be little chance for the efficient provision of public services.…

At the same time, the Court has recognized that a citizen who works for the govern- ment is nonetheless a citizen. The First Amendment limits the ability of a public employer to leverage the employment relationship to restrict, incidentally or intentionally, the liber- ties employees enjoy in their capacities as private citizens. So long as employees are speaking as citizens about matters of public concern, they must face only those speech restrictions that are necessary for their employers to operate efficiently and effectively…

[T]he First Amendment interests at stake extend beyond the individual speaker… [to include] the public’s interest in receiving the well-informed views of government employ- ees engaging in civic discussion… [and] the necessity for informed, vibrant dialogue in a democratic society.…

With these principles in mind we turn to the instant case…. The controlling factor in Ceballos’ case is that his expressions were made pursuant to

his duties as a calendar deputy. That consideration—the fact that Ceballos spoke as a prosecutor fulfilling a responsibility to advise his supervisor about how best to proceed with a pending case—distinguishes Ceballos’ case…We hold that when public employees make statements pursuant to their official duties, the employees are not speaking as citi- zens for First Amendment purposes, and the Constitution does not insulate their commu- nications from employer discipline.

The significant point is that the memo was written pursuant to Ceballos’ official duties…. Contrast, for example, the expressions made by the speaker in Pickering, whose letter to the newspaper had no official significance and bore similarities to letters submitted by numerous citizens every day.

Ceballos did not act as a citizen when he went about conducting his daily profes- sional activities, such as supervising attorneys, investigating charges, and preparing fil- ings. In the same way he did not speak as a citizen by writing a memo that addressed the proper disposition of a pending criminal case. When he went to work and performed the tasks he was paid to perform, Ceballos acted as a government employee. The fact that his duties sometimes required him to speak or write does not mean his supervisors were prohibited from evaluating his performance.

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This result is consistent with our precedents’ attention to the potential societal value of employee speech.… First Amendment claims based on government employees’ work product does not prevent them from participating in public debate. The employees retain the prospect of constitutional protection for their contributions to the civic discourse.… This prospect of protection, however, does not invest them with a right to perform their jobs however they see fit.

Our holding likewise is supported by the emphasis of our precedents on affording gov- ernment employers sufficient discretion to manage their operations. Employers have height- ened interests in controlling speech made by an employee in his or her professional capacity.… Supervisors must ensure that their employees’ official communications are accurate, demonstrate sound judgment, and promote the employer’s mission. Ceballos’ memo is illustrative. It demanded the attention of his supervisors and led to a heated meet- ing with employees from the sheriff’s department. If Ceballos’ superiors thought his memo was inflammatory or misguided, they had the authority to take proper corrective action….

Proper application of our precedents thus leads to the conclusion that the First Amendment does not prohibit managerial discipline based on an employee’s expressions made pursuant to official responsibilities. Because Ceballos’ memo falls into this category, his allegation of unconstitutional retaliation must fail….

Justice STEVENS, Dissenting

The proper answer to the question “whether the First Amendment protects a government employee from discipline based on speech made pursuant to the employee’s official duties,” is “Sometimes,” not “Never.” Of course a supervisor may take corrective action when such speech is “inflammatory or misguided,” But what if it is just unwelcome speech because it reveals facts that the supervisor would rather not have anyone else discover?

[P]ublic employees are still citizens while they are in the office. The notion that there is a categorical difference between speaking as a citizen and speaking in the course of one’s employment is quite wrong. Over a quarter of a century has passed since then- Justice Rehnquist, writing for a unanimous Court, rejected “the conclusion that a public employee forfeits his protection against governmental abridgment of freedom of speech if he decides to express his views privately rather than publicly.” … [It] is senseless to let constitutional protection…hinge on whether [words] fall within a job description. More- over, 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.

Justice SOUTER, Justice STEVENS and Justice GINSBURG Dissenting

Open speech by a private citizen on a matter of public importance lies at the heart of expression subject to protection by the First Amendment…. At the other extreme, a state- ment by a government employee complaining about nothing beyond treatment under per- sonnel rules raises no greater claim to constitutional protection against retaliatory response than the remarks of a private employee…. In between these points lies a public employee’s speech unwelcome to the government but on a significant public issue. Such an employee speaking as a citizen, that is, with a citizen’s interest, is pro- tected from reprisal unless the statements are too damaging to the government’s capac- ity to conduct public business to be justified by any individual or public benefit thought to flow from the statements. Pickering v. Board of Ed. of Township High School Dist. (1968).…

This significant, albeit qualified, protection of public employees who irritate the gov- ernment is understood to flow from the First Amendment, in part, because a government paycheck does nothing to eliminate the value to an individual of speaking on public mat- ters, and there is no good reason for categorically discounting a speaker’s interest in com- menting on a matter of public concern just because the government employs him.… [in

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part on] the value to the public of receiving the opinions and information that a public employee may disclose. “Government employees are often in the best position to know what ails the agencies for which they work.” Waters v. Churchill, (U.S. 1994).

The reason that protection of employee speech is qualified is that it can distract cow- orkers and supervisors from their tasks at hand and thwart the implementation of legiti- mate policy, the risks of which grow greater the closer the employee’s speech gets to commenting on his own workplace and responsibilities. It is one thing for an office clerk to say there is waste in government and quite another to charge that his own department pays full-time salaries to part-time workers.…

…[I]t stands to reason that a citizen may well place a very high value on a right to speak on the public issues he decides to make the subject of his work day after day. Would anyone doubt that a school principal evaluating the performance of teachers for promotion or pay adjustment retains a citizen’s interest in addressing the quality of teach- ing in the schools?…Would anyone deny that a prosecutor like Richard Ceballos may claim the interest of any citizen in speaking out against a rogue law enforcement officer, simply because his job requires him to express a judgment about the officer’s perfor- mance? (But the majority says the First Amendment gives Ceballos no protection, even if his judgment in this case was sound and appropriately expressed.)

Indeed, the very idea of categorically separating the citizen’s interest from the employee’s interest ignores the fact that the ranks of public service include those who share the poet’s “object … to unite [m]y avocation and my vocation.” These citizen servants are the ones whose civic interest rises highest when they speak pursuant to their duties, and these are exactly the ones government employers most want to attract.…

The interest at stake is as much the public’s interest in receiving informed opinion as it is the employee’s own right to disseminate it. This is…true when an employee’s job duties require him to speak about such things: when, for example, a public auditor speaks on his discovery of embezzlement of public funds, when a building inspector makes an obligatory report of an attempt to bribe him, or when a law enforcement officer expressly balks at a superior’s order to violate constitutional rights he is sworn to protect. (The majority, however, places all these speakers beyond the reach of First Amendment pro- tection against retaliation.)…

Justice BREYER, Dissenting

The facts present two special circumstances that together justify First Amendment review. First, the speech at issue is professional speech—the speech of a lawyer. Such

speech is subject to independent regulation with Those canons provide an obligation to speak in certain instances.…

Second, the Constitution itself here imposes speech obligations upon the government’s professional employee. A prosecutor has a constitutional obligation to learn of, to preserve, and to communicate with the defense about exculpatory and impeach- ment evidence in the government’s possession. [Exculpatory evidence is evidence that proves innocence. Ceballos believed that what he learned about the affidavit was exculpatory.]

I would apply the Pickering balancing test here. With respect, I dissent.

QUESTIONS 1. Dissenting Justices Souter, Stevens, and Ginsburg write: “When constitutionally signif-

icant interests clash, resist the demand for winner-take-all; try to make adjustments that serve all of the values at stake.” Think about the values that underlie each portion of this opinion. Which values are most prominent for Justice Kennedy with the major- ity? For Justice Stevens in dissent? Which values are framed in the dissent led by Souter? What value does Breyer mention?

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2. The majority adds a threshold requirement to the analysis of First Amendment claims for public employees. According to Pickering and its progeny (cases interpreting Picker- ing), the first determination was whether the employee spoke as a citizen on a matter of public concern. If no, then the employee would have no First Amendment protec- tion. If yes, the balancing test would be applied to the facts. Here in Garcetti, the Court sets up an additional threshold barrier for plaintiffs: Where public employee speech is found to be pursuant to official duties, it lacks First Amendment protection. How does the majority argue in favor of this new requirement? What arguments do the dissenters make for alternative methods of analysis?

3. In a part of Garcetti not included in this text, Justice Kennedy writes that government employees can turn to “the powerful network of legislative enactments—such as whistleblower protection laws and labor codes—available to those who seek to expose wrongdoing “Dissenting Justice Souter counters that these laws are not uniform and do not exist in all states. Where they do exist, do they tend to protect employees? In Mississippi, police officers were fired for reporting that a fellow officer had beaten a “restrained prisoner.” They sued under federal constitutional and state whistleblower law. The court ruled that, because they had reported through the chain of command as their job duties required, they were doing so pursuant to their official duties and their speech was not protected under Garcetti. And because they were reporting through the chain of command, the Mississippi state whistleblower statute too did not protect them. State law would have protected the officers had they reported the misconduct through an investigative agency such as the district attorney instead of to their commanding officers. Williams v. Riley, 481 F. Supp. 2d 582 (N.D. Miss. 2007). (a) Research: Find a public employee whistleblower case that made claims both

under Garcetti and under state whistleblower law. What were the facts? Was the federal constitutional claim successful? The state law claim?

(b) If the police officers who were fired after reporting to their supervisors that some of their co-workers were physically beating restrained prison inmates had instead gone straight to the media, their actions would not have been pursuant to their offi- cial duties. Does Garcetti create a perverse incentive to go public with workplace grievances and concerns?

4. Consider the following scenarios drawn from the news. If these whistleblowers sued, would they succeed in their federal constitutional free speech claims? Why or why not?

a. The April 5, 2010 explosion at the Massey Energy’s Upper Big Branch Mine in West Virginia was the worst coal mining disaster in 40 years. Fellow coal miners and family members of the 29 miners killed described the deadly conditions in the mine during the months leading up to the blast at a House of Representatives Committee on Edu- cation and Labor hearing in May 2010. Gary Quarles, a coal miner for 34 years and father of a miner killed in the blast, testified about the role of federal government inspectors at Upper Big Branch, stating that “MSHA [Mine Safety and Health Admin- istration] inspections at Massey did little to protect miners. We absolutely looked to MSHA for leadership, particularly on safety issues, but MSHA has let us down many times.” Quarles blamed MSHA for only conducting inspections during the day shift, ignoring safety during evenings, nights and weekends. A federal mine inspector com- plained about this to her supervisors and was fired.

b. Gregory Williams was the football coach and athletic director at DISD’s Pinkston High School. Coach Williams began asking questions about irregular budgetary pro- cedures and confusing balance statements in his athletic budget. Unsatisfied with the answers he got from the principal and office manager, Williams sent a memo to the principal protesting the unorthodox way funds were being managed and spent at the school. Four days later, the principal removed Williams as athletic director. His contract for the next year was not renewed.

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c. Adis M. Vila was the Vice President for External and Legal Affairs at Miami Dade Community College (MDCC). She told MDCC administrators (who had authority to investigate and take corrective action) about concerns regarding three potentially illegal/unethical projects at the college: (1) an advertising contract between MDCC and a vendor that was not bid competitively as required by Florida law, (2) a pro- posal for MDCC to purchase the Freedom Tower for $10 million, and (3) the pro- posed use of college funds to illustrate a poetry book for the daughter of a college trustee. Vila received notice that she would not be renewed.

d. Chief of Police proposed to change the staffing of the police department. While the supervisors were still together, Sgt. Mills voiced her objections to the plan to reduce the number of crime prevention officers under her command. Mills was on duty and in uniform at the time. She was later admonished for failure to work through the chain of command, removed from her supervisory position, and assigned to patrol duties.

e. Jennifer Green, a technician and detention officer, worked in the drug lab of a juvenile detention center. She suspected that a certain drug test was producing false positives. On her own initiative, without consulting with her superiors, she arranged a confirmation test at a nearby hospital. She also notified the Department of Human Services about her concerns. The confirmation test results showed that the test was indeed flawed, and Green then informed her supervisor. The deten- tion center adopted a new policy requiring confirmation tests, but soon after that Green herself received a transfer and a demotion. When she failed to come to work, she was fired.

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False Claims Act Qui Tam Whistleblowers

Physical courage is remarkably widespread in [the U.S.] population…. Moral and intellectual courage are not in nearly so flourishing a state, even though the risks they entail—financial or professional disadvantage, ridicule, ostracism—are comparatively minor…. These forms of courage suffer from the disadvantage of requiring new definitions continually, which must be generated out of individual perception and judgment. They threaten or violate loyalty, group identity…. They are, intrinsically, outside the range of consensus.

— MARILYNNE ROBINSON, Novelist and Essayist

We have seen to what extent the law might—or might not—protect whistleblowers from retaliation by their employers. But another legal approach is to give individuals an incen- tive to become whistleblowers in the first place, rewarding them for speaking out against wrongdoing. This is the premise of the federal False Claims Act, a more than 150- year-old response to fraud against the government. It was first enacted in 1863 during the Civil War, when profiteers were selling rancid food rations and artillery shells filled with sawdust to the Union army. Private citizens who came forward to report such abuses and successfully filed suit were eligible for fifty percent of damages.

Plaintiffs who initiate cases under the False Claims Act are called qui tam, an abbre- viation of a Latin phrase meaning “who sues on behalf of the king as well as for himself.” The law has been amended several times, including in 1986 when it was brought to light that up to ten percent of the federal budget was being drained by fraud, particularly in defense and health care contracts. Under the 1986 amendments, qui tam cases are mutu- ally advantageous to the Justice Department, which can receive triple damages, and to

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whistleblowers, who can be awarded from 15 to 25 percent of the amount recovered, depending on the value of the evidence they provide.

Qui Tam and Fraud in Health Care According to the Kaiser Family Foundation, in 2009 the U.S. spent 17.6 percent of its gross domestic product on health care, more than double the percentages spent by Spain, Italy, Australia, Britain, or Japan. American health care costs continue to sky- rocket, and fraud in the health care industry contributes as much as 10 percent of these costs.

Since 1986, more than $15 billion has been recovered by the government in False Claims Act cases—nearly 75 percent of this amount from health care entities. Here are the facts of one such case: In the 1990s, protease inhibitors became available to treat HIV/AIDS and were markedly helpful in alleviating the severe wasting symptoms which beforehand had been treated with Serono Laboratories’ drug Serostim. Foreseeing a drop-off in sales, the company began promoting Serostim with a medical device that produced false diagnoses of the wasting syndrome. This device, not approved by the FDA, was rigged to indicate a loss of cell mass and what the company called “hidden AIDS wasting.” It came into widespread use by AIDS patients because of an aggressive marketing campaign, part of which involved all-expense-paid trips to the South of France for a “conference” for prominent physicians who agreed within six days to pre- scribe more than $6 million in Serostim. Serono employee Christine Driscoll filed a qui tam case alleging fraud, conspiracy, and false marketing. The case resulted in a $704 mil- lion settlement. Another example: In September 2009, a $2.3 billion settlement was reached with Pfizer, in a case involving illegal marketing to doctors leading to govern- ment overpayments. Former Pfizer sales representative John Kopchinski, the qui tam plaintiff in this case, drew attention to the way in which the company, which had already been fined for pushing off-label uses of another drug, went on to similar illegal practices with Bextra. FDA-approved for arthritis and menstrual cramps, Bextra was being pro- moted for treatment of acute and surgical pain at doses well above those approved, in spite of risks to the kidney, skin, and heart. “The whole culture of Pfizer is driven by sales, and if you didn’t sell drugs illegally, you were not seen as a team player,” said Mr. Kopchinski. His qui tam share of the Pfizer settlement will exceed $50 million.

EXPERIENCES OFQUI TAM WHISTLEBLOWERS AGAINST THE PHARMACEUTICAL INDUSTRY

In May 2010 three academics in public health25 wrote an article26 summarizing their investigation of the motivations and experiences of health care industry whistle- blowers under the False Claims Act. Focusing on successful prosecutions taken up by the Department of Justice against pharmaceutical companies, they analyzed data gleaned from 40-minute interviews with 26 individuals who became qui tam

25 Aaron Kesselheim, M.D., J.D., M.P.H., instructor at Harvard Medical School and faculty member in the Department of Medicine at Brigham and Women’s Hospital, David Studdert LL.B., Sc.D., M.P.H with a joint appointment at Melbourne Law School and the Melbourne School of Population Health, and Michelle Mello, J.D., Ph.D., M.Phil Associate Director of the Program in Law and Public Health at Harvard University. 26 “Whistleblowers’ Experiences in Fraud Litigation against Pharmaceutical Companies,” 362 N.E. J. Med. 19, 1832–39 (May 13, 2010).

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plaintiffs between January 2001 and March 2009. Their study yields valuable insights about whistleblowers, more nuanced than the common stereotypes depicting them as either “heroes struggling against corporate greed, [enduring] hardships and retali- ation,” or people with questionable motives who reap excessive rewards for disloyal behavior.

Here are some of the findings: Virtually all of the “insiders”—those who worked for the company against whom they eventually became qui tam plaintiffs— attempted to fix the situation first from within, “talking to their superiors, filing an internal complaint, or both.” These individuals were either told the behavior was legal, or had their complaints dismissed “with accompanying demands that [they] do what they were told.”

As for the motivations of these whistleblowers, only six of the 26 said they had intended from the start to use the qui tam process; the rest were advised to do so as they considered bringing suit for other reasons—unfair employment practices, for example. None stated that financial reward was what motivated them to get involved. Instead, they reported being driven by a mix of these factors: integrity, altruism, public safety and self-preservation—with integrity the most frequently- mentioned reason. Potential risks to public health was a concern for about one third of the respondents.

The majority described the process of working with the government to gather evidence for a qui tam case as grueling. More than half were actively involved in these efforts, wearing wires to covertly record conversations, and secretly copying files. One respondent described spending “thousands of hours” on the case over five years; another said the first few years demanded “probably 30 hours a week.”

For nearly all of the qui tam plaintiffs in this study, the personal toll was “sub- stantial and long-lasting.” Of those who worked for the company at the time of the investigation, 82 percent experienced retaliation with devastating effects on their careers. After settlement, only two of the 22 “inside” plaintiffs continued to work in the pharmaceutical industry. And there were harsh effects on their personal lives. Six of the respondents experienced divorce, marital stress or other family diffi- culties while they while going through the qui tam process. About half reported health disorders, including panic attacks, asthma, insomnia and generalized anxiety.

All of the respondents received a share of the damages recovered by the govern- ment. Their rewards ranged from $100,000 to $42 million; the median was $3 mil- lion. Yet for the majority, the financial payoff was not worth it “relative to the time they spent on the case and the disruption and damage to their careers.”

Despite all of this, most of the respondents—22 of the 26—remained convinced that “what they did was important for ethical…psychological or spiritual reasons.”

Global Norms and Internal Corporate Communication

In the next reading, Terry Morehead Dworkin, a leading authority on employment- at-will, makes intriguing connections among commercial activity, protection for whistle- blowers, and world peace. Assuming the preconditions for a peaceful society are “justice, good governance, transparency, and giving individuals voice,” whistleblowing protections developed by multiational corporations (MNCs) in response to legal pressures in the

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United States can become valuable tools when implemented in other countries. Dworkin writes: “Whistleblowing is a procedural way to reinforce the transparency necessary to free trapped capital, encourage foreign investment, and move economies, especially tran- sitional ones, away from reliance on personal relationships and bribes.” Noting that countries rife with cronyism tend also to be plagued by violence, Dworkin argues that by protecting whistleblowing worldwide, MNCs support democratic institutions and “help deliver on the promise of peace through commerce.”

WHISTLEBLOWING, MNCS, AND PEACE Terry Morehead Dworkin27

Work organizations, both governmental and civil, are growing in size and complexity, and individuals are often little more than “cogs” in the organization in which they work. Individual jobs have also grown in complexity, and as a result have become more specialized and expertise-based. This, in turn, makes the detection of wrongful conduct more difficult due to both lack of knowledge and access to information. At the same time, the information and technology revolutions have increased the oppor- tunities for significant fraud and other harmful and illegal activities. Whistleblowing is one way to obtain—or regain—societal control over the large organizations that increasingly dominate society.

The premise behind recent governmental promotion of whistleblowing is that people of conscience work within these large, complex organizations, and would nor- mally take action against wrongdoing except for fear of losing their jobs or other forms of retaliation…

Thus, if adequately protected from retaliation, they will come forward with evi- dence of wrongdoing before external detection is possible. Harms from the wrongdo- ing could be reduced, wrongful behavior stopped, and the expense of public oversight and investigation would be reduced if such reporting occurs. Also, if whistleblowing proved a relatively common occurrence, wrongdoing would decrease because poten- tial wrongdoers would be aware that their activities were not truly secret.

[Dworkin describes the evolution of the law related to whistleblowing in the United States, noting how catastrophes such as the 1981 Space Shuttle Challenger explosion spurred protective measures across all three branches of both state and federal government. Importantly, she points to “a shift toward encouraging internal whistleblowing and away from the almost exclusive legislative emphasis on reporting outside the organization.” An organization can save litigation costs and avoid reputa- tional damage by adopting effective internal mechanisms for reporting wrongdoing. And unlike punishment that is meted out after public exposure, internal reporting can prevent losses—of resources and even lives. Laws like the 1991 U.S. Sentenc- ing Guidelines that allow reduced fines for wrongdoing if a company has an appropri- ate deterrence program in place—an ethical code supported by “a meaningful reporting system and protection of whistleblowers from reprisals”—have driven this trend to set up internal reporting systems.

The question now becomes: Is whistleblowing protection exportable?]

The Cultural Dimension

…[M]odern, non-political whistleblowing is a Western phenomenon. The countries that have adopted it have common law-based legal systems and societies that prize

27 Terry Morehead Dworkin, “Whistleblowers, MNCs and Peace,” Vanderbilt Journal of Transnational Law 35(2), March 2002, pp. 457–486. Reprinted by permission.

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individualism. While “snitching” is not generally condoned, the idea of citizen law enforcement has long roots in the United Kingdom and the United States, and whis- tleblowing has been advocated as a way to control large organizations for over thirty years. In some Western countries such as France, Greece, and Luxembourg, how- ever, whistleblowing is seen as little different from informing the government about a neighbor’s dissident views. This, in turn, is frowned on at least in part because it is considered an attribute of totalitarian or Communist states.…

The idea of reporting the wrongdoing of one’s group is alien to many other cultures in which group membership, rather than individualism, is the norm. In Japan, for exam- ple, the traditions of consensus, company mentality, and lifetime employment make whistleblowing almost unheard of and highly risky. One employee who defied this tradi- tion, an ex-Honda engineer who allegedly quit in a dispute over safety issues, is now a plaintiff’s expert witness in the United States in suits against Honda. His testimony pro- vides an income that he could no longer earn in Japan because of his dissent.

An explanation for these differences can be drawn from [one of] several studies that show basic differences in value systems between national cultures.28… [It] iden- tifies five dimensions on which cultures vary: power distance, individualism, uncer- tainty avoidance, masculinity, and Confucian dynamism.… Of these five, power distance, individualism, and Confucian dynamism are most relevant to examining whistleblowing among cultures. Cultures with a high power distance are more willing to accept that power is unequally distributed among individuals and are therefore more willing to accept inequality, autocratic leadership, and centralization of authority. Cultures high in individualism have a loosely knit social framework in which people believe they are responsible for themselves and their immediate family instead of believing that they are members of an in-group which will look out for them. A soci- ety which scores high in Confucian dynamism is a dynamic, future-oriented society, while a society low in this dimension tends to be tradition bound and static.

These classifications are, of course, only tools of analysis, and countries may vary along a continuum in each dimension. Nonetheless, they may help explain why the United States, Australia, and the United Kingdom are some of the first countries with whistleblower legislation, and other countries are more reluctant to accept the idea. Japan is a low-scoring country on individualism, relatively low-scoring on dynamism, and high-scoring on power distance. People living in a low individualistic, high power distance country are less likely to challenge authority, and those in authority are less likely to tolerate challenges. Additionally, loyalty to the group will be stronger in this cli- mate, thus making reporting on someone within the group less likely. Finally, going against societal norms to blow the whistle is less likely in a low-dynamic society.

The United States, Australia, and the United Kingdom, by contrast, are countries which score at the high end on the individualism and dynamism dimensions, and low on power distance. Thus, people in these societies are more likely to challenge authority, and doing so is more likely to be socially acceptable.…

This analysis does not imply that whistleblowing procedures cannot be success- fully implemented in countries like Japan. It does indicate that it will be more difficult, and MNCs will have to carefully consider and structure what they ask their employ- ees to do if internal reporting is to be used as an ethical control mechanism. This may be easier now than it would have been even a decade ago for two reasons. First, the societies studied are dynamic. Japan, for example, is slowly moving away from lifetime employment…and independent thinking and challenges to authority are becoming more common. Second, whistleblowing is increasingly being dis- cussed and considered on an international scale, so it is not as radical an idea as it once may have appeared.…

28 Gert Hofstede, Culture’s Consequences: International Differences in Work-Related Values (abridged ed. 1984).

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[Given these cultural differences, Dworkin next suggests how standards and reporting mechanisms might work.]

Reporting Procedures

A large number of studies have been conducted on whistleblowers, particularly on what distinguishes observers of wrongdoing who blow the whistle from those who do not. The most important predictor is whether there is a clear reporting procedure that is seen as effective.…

In situations where great emphasis is placed on organizational conformity and loyalty to co-workers and the organization, the organization must convince employ- ees that whistleblowing is normative and desired.… Reporting requirements, if implemented and seriously followed, will help achieve this “normative” behavior.

To have an effective compliance program, an organization should: • Establish a written compliance program. Written compliance programs should

be clearly written, easily understood, relatively brief, and lack legal verbiage. To the extent feasible, employees from all sectors of the organization should participate in the formation of the requirements.…

• Train employees regarding compliance.… Policies should stress that employees can be held personally liable for failure to comply and that the organization may be legally liable for compliance failure. Corporations should stress that nonretalia- tion is an integral part of the policy.

• Establish a simple reporting procedure.… Establishing a special person [to receive reports] sends the message that the organization takes the issues seriously and is open to dissent. Having someone like an ombudsperson, independent of management, reinforces this message.

• Investigate and respond quickly. To the extent possible, the privacy of the parties involved should be maintained during the investigation. The response should include a report back to the whistleblower to demonstrate that the company has listened and has taken action.…

Appropriate Ethical Norms and Cultural Adaptability

To foster participation, the code should concern relatively few issues that can garner wide acceptance or understanding.…

The easiest norm for employees to understand is compliance with the law. Other norms on which a company could get broad agreement are fair treatment of employees, protection of the environment, and rules against bribery.

[Using the example of sexual harassment, Dworkin discusses the problem of culturally divergent attitudes. Pointing to Wharton professors Donaldson and Dun- fee’s notion of “hypernorms,”29 she argues that there are ways of identifying glob- ally shared values.]

A hypernorm is a [principle] “so fundamental to human existence that [it serves] as a guide in evaluating lower level moral norms.” Because of its importance, the hypernorm is likely to be reflected in global principles that are generally recognized.…

An examination of numerous global and regional declarations and other docu- ments, such as the 1948 Universal Declaration of Human Rights, the UN Convention on the Elimination of All Forms of Discrimination Against Women, OECD Guidelines for Multinational Enterprises, the Council of Europe’s 1996 Social Charter, EC Direc- tives and Codes of Practice, as well as the laws and philosophies of particular coun- tries, suggest there are three hypernorms relevant to harassment: personal security, respect for human dignity, and nondiscrimination. At a minimum, these hypernorms

29 Thomas Donaldson and Thomas W. Dunfee, Ties that Bind: A Social Contracts Approach to Business Ethics, 49–81 (1999).

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support global rules against…[b]eing forced to trade sexual favors for the right to employment [because this] threatens personal security, undermines human dignity, and is generally acknowledged to be discriminatory.…

MNC implementation of global equal treatment standards that are reinforced by reporting procedures is not only feasible, but can help reduce conflict. Some studies indicate there is a positive correlation between gender equality and nonviolence. Cre- ating an atmosphere where inter-group interactions are fostered under conditions of equal treatment helps reduce conflict. It can help defuse resentment and limit disrup- tive behavior by contributing to a feeling of psychological security and increased physical security.…

[Dworkin next looks at another example, bribery.] Despite the lack of uniformity, it is feasible for an MNC to ban bribery. Every coun-

try in the world prohibits bribery of its officials. This would be the starting point of such a code, along with compliance with local laws. However, allowance for legitimate gift- giving can be made on a [local] basis with appropriate discussion and training.…

[B]ribery can cause conflict. One important reason is that it undermines free trade, and free trade helps foster peace. Corporations that adopt bribery bans and enforce them through reporting procedures potentially contribute to peace by allow- ing better utilization of resources. This, in turn, frees up more resources for those at the bottom of the economic rungs, and will have an increased impact in the emerg- ing economies that are most harmed by bribery.…

Contributions of Open Reporting to the Corporation and to Peace

Internal whistleblowing procedures and codes of ethics will operate more effectively when organizations operate as mediating institutions. Mediating institutions are rela- tively small organizations where moral identity and behavior are formed. Studies indi- cate that as the size of an organization increases, individual ethical decision-making behavior decreases. Thus, for large multinational corporations, the need for training in relatively small groups at the local level is heightened.…

There are benefits to the organization that adopts these policies and procedures. Global strategic alliances represent a type of competitive weapon. In order to take the best advantage of the alliance, organizations must listen to multicultural perspec- tives. Additionally, firm-specific fairness norms promote efficiency.

Organizations that foster internal reporting and open discussion are likely to find that external reporting will be virtually nonexistent. Problems can be raised and resolved earlier if employees feel free to engage in discussion and dissent.…

Conclusion

MNCs can help in the evolution of a normative global village. They can create condi- tions that socialize and empower individuals and give them the tools to interact more successfully in their society. To the extent that ideas such as fairness and responsi- bility for compliance are learned within the company and are then taken externally, organizations have the ability to have an impact far beyond their individual realm. At the same time, exporting the idea of whistleblowing helps promote transparency and good government in larger society. Organizational norms matter most when law is the weakest.

As countries shift in their commercial institutions from a “relational orientation” to a more Western “formal orientation” based on the rule of law, whistleblowing could be a helpful procedure in that transition. It is designed to allow individuals to enforce the rules despite the individual connections of those in power. In the words of Alan Watson, “In most places at most times, borrowing is the most fruitful source of legal change.” Borrowing from MNCs which set the bar higher is also a fruitful source of change.

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QUESTIONS 1. Dworkin builds on the notion that MNCs can best function in societies in which

honest, open transactions can occur, and in which conflicts are resolved through free exchange of opinions rather than by violence. How does she link this to MNC policies and procedures on whistleblowing?

2. According to Dworkin, how might the cultural setting where an MNC operates affect its compliance policies and reporting procedures? And how might an MNC’s procedures affect the society in which it operates?

3. Hold up an ethical lens to Dworkin’s argument. Which ethical framework is most clearly reflected here? Begin by thinking about stakeholders. Which seem most sharply in focus?

4. Cultural imperialism, according to Wikipedia, is a pejorative phrase for “the prac- tice of promoting, distinguishing, separating, or artificially injecting the culture or language of one nation into another. It is usually the case that the former is a large, economically or militarily powerful nation, and the latter is a smaller, less affluent one.” Do Dworkin’s recommendations amount to cultural imperialism? Why or why not?

5. In line with Dworkin’s remarks about Japan as a “low-scoring country on individu- alism,” is the Japanese aphorism: “The nail that sticks up gets hammered.” Yet Dworkin also notes that Japan is becoming more “dynamic,” and suggests change is on the way.

Research: What can you find out about this? Has any whistleblowing legisla- tion been passed in Japan? Any cases won? Any other signs that a cultural shift is underway around workplace norms? Look into the activities of MNCs in Japan. Is there any indication that they have been instrumental in driving change?

6. Dworkin writes: “Rules reinforced by whistleblowing can help to deliver transparency.”

Research: What is meant by “transparency” in the context of global busi- ness? Check the Web site of Transparency International. Compare corruption indi- ces across countries. Do the countries with lower transparency rates also have weaker whistleblowing protections, reinforcing Dworkin’s analysis?

Chapter Problems 1. Kenneth Abbott, a former contractor who worked for British Petroleum, claims the

company violated state and federal laws and its own internal policy by failing to main- tain crucial safety documents related to one of its deepwater production facilities in the Gulf of Mexico. The project, called BP Atlantis, is one of the largest and deepest underwater oil and gas platforms in the world. Abbott, who had been hired to oversee BP databases, discovered Atlantis had been operating without the majority of the engineer-certified documents required by law and by BP’s own procedures, and that the platform was at risk for a catastrophic disaster even more massive than the spill that was triggered by the deadly Deepwater Horizon explosion in early 2010. Abbott reported his concerns BP management. His contract was abruptly terminated. He later made reports to a former federal judge who was serving as an ombudsman to take complaints about BP operations following a ruptured pipeline incident in Prudhoe Bay. BP has issued this statement in response to Abbott’s allegations:

As CEO Tony Hayward constantly makes clear, safe and reliable operations are his number 1 priority for BP and the company has a very strong record of safe and

The Duty of Loyalty 79

reliable operations in the Gulf of Mexico.… The Atlantis field has been in service since October 2007 and has safely produced many millions of barrels of oil. The platform was successfully maintained through the course of two major hurricanes in 2008. Its safety, operation, and performance record is excellent.

Assume Kenneth Abbott sues. How would he fare under the law in Maryland? New Jersey? Montana? Assume a whistleblower in the federal Minerals Management Service (MMS) reported these concerns to his supervisor. How would she fare under Garcetti?

2. What would you do if you were the supervisor in the following situation: Your com- pany has a rule forbidding armored truck drivers from leaving the truck unattended. Even if pulled over by someone who appears to be a police officer, drivers are to show a card explaining that the driver will follow the police to the stationhouse. Kevin Gardner is one of your drivers. At a scheduled stop at a bank, he waited in the vehicle while his coworker was in the bank. Suddenly he spotted a woman, whom he recognized as the manager, running out of the bank screaming, “Help me!” Chasing her was a man with a knife. Seeing nobody coming to help the man- ager, Gardner got out of the truck, locking the door behind him. Gardner lost sight of the manager, but walked toward the suspect who had already grabbed another employee, Kathy Martin, who Gardner recognized. The suspect put the knife to Martin’s throat and dragged her back into the bank. Gardner followed them into the bank where he observed his partner with his gun drawn and aimed at the sus- pect. While his partner distracted the suspect, Gardner and a bank customer tackled the suspect and disarmed him. The police arrived immediately thereafter and took custody of the suspect. Ms. Martin was unharmed. Find out what happened in the case on which this is based: Gardner v. Loomis Armored Inc., 913 P.2d 377 (Washington 1996).

3. Jane Akre and her husband, Steve Wilson, award-winning broadcast journalists, were recruited by Fox News to do investigative reports. With a deep voice in its pro- motional commercial, Fox promoted the two as the Mod Squad, “The Investigators, uncovering the truth, getting results, protecting you!” Akre and Wilson were prom- ised that Fox would support them in their work, never caving into advertisers’ pres- sure or altering a disturbing news story. In 1997 the team began investigating the use of bovine growth hormone (BGH) in the dairy farming industry. BGH, a Mon- santo product, is used to enhance production; it is controversial because it is linked to cancer. In a four-part series, Akre and Wilson uncovered information about BGH health risks and unethical marketing practices. Having learned of the series, Mon- santo’s legal department sent a series of threatening letters to Fox, casting aspersions of the journalists’ integrity: “Consider thoroughly what is at stake and the enormous damage that can be done by the reckless presentation of unsupported speculation as fact and the equally reckless publication of unsupported accusations…” Fox had Akre re-write the BGH story 83 times over nine months, and finally fired the “Mod Squad.” They sued under Florida whistleblower law, which protects employees who experience retaliation for refusing to participate in or reporting illegal activity. A jury awarded Akre and Wilson $425,000. How would they have fared under Mary- land law? New Jersey? Montana? What are the ethical issues in this case? What hap- pened on appeal? See New World Communications of Tampa, Inc. v. Akre, 866 So. 2d 1231 (Florida 2003).

4. Born in Mexico, Jose Castro illegally entered the United States in 1988 and got a job with Hoffman Plastic by showing false identification. In December 1988, the

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United Rubber, Cork, Linoleum, and Plastic Workers of America AFL-CIO started a union-organizing campaign at his production plant, and Castro supported the effort, distributing authorization cards. In January 1989, Castro and others who had been involved in the organizing were laid off. The National Labor Relations Board (NLRB) found that Castro’s layoff violated the law because Hoffman was attempting to “rid itself of known union supporters.” In 2002, the Supreme Court ruled that as an undoc- umented “alien,” Castro was not entitled to the monetary remedy (back pay) otherwise available under the National Labor Relations Act. Who are the stakeholders in this case? What impact does the ruling have on each of them? Suppose Castro had been fired after reporting health or safety violations in the workplace. Would a similar out- come—no whistleblower protection for an undocumented alien—apply?

5. What do the findings below suggest about the best way to craft a whistleblower pol- icy for a private company? • A 2007 PricewaterhouseCoopers (PWC) survey of CEOs, CFOs, and executives

responsible for compliance from over 5,400 firms in 40 countries found that “Fraud remains one of the most problematic issues for business worldwide,” but in order to detect and combat fraud, corporations “cannot” simply “rely on” internal “controls” to “detect and deter economic crimes.” The study found that “43 percent of corporate fraud was uncovered by whistleblowing related activi- ties:” “[I]n virtually every region of the world, whistleblowing is playing a role in uncovering the activities of wrongdoers.”

• In 2008, the Association of Certified Fraud Examiners (ACFE) released a study of nearly 1,000 cases of fraud related to American firms. The findings: “One of the primary characteristics of fraud is that it is clandestine, or hidden; almost all fraud involves the attempted concealment of the crime.” Like PWC, the ACFE concluded that tipsters were more effective at uncovering fraud than internal cor- porate controls: “Despite increased focus on antifraud controls in the wake of Sarbanes-Oxley…our data shows that occupational frauds are much more likely to be detected by a tip then by audits, controls, or any other means.”

• Nearly 3,000 employees from the for-profit sector participated in the Ethics Resource Center’s 2009 National Business Ethics Survey. Although results indi- cated that most key measures had improved since 2007, retaliation against those who reported misconduct had increased. The most common form of retaliation experienced as a result of reporting misconduct was “your supervisor or manage- ment actively excluded you from decisions and work” (62 percent) and “other employees gave you the cold shoulder” (60 percent). Fifty-five percent experienced “verbal abuse by a supervisor or someone else in management” and almost half reported almost losing their jobs (48 percent). 49 percent of employees reported witnessing some type of misconduct occurring in the workplace, such as company resource abuse, abusive behavior, lying to employees, e-mail or Internet abuse, conflicts of interest, and discrimination.

6. Research: Founded in 1977, the Government Accountability Project promotes “gov- ernment and corporate accountability through advancing occupational free speech and ethical conduct, defending whistleblowers, and empowering citizen activists.” What tips do they offer a would-be whistleblower? See www.whistleblower.org.

7. The Web site www.wikileaks.org describes itself as “a multi-jurisdictional public ser- vice designed to protect whistleblowers, journalists, and activists who have sensitive materials to communicate to the public.” (a) How does WikiLeaks work? (b) Find

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out what happened to Bradley Manning, an army intelligence analyst arrested in 2010 for allegedly passing classified information—including a video of a U.S. mili- tary helicopter firing on civilians in Baghdad—to WikiLeaks. (c) What are the cur- rent postings on WikiLeaks?

CHAPTER PROJECT

Stakeholder Ethics Role Play

Guidelines: Appendix D Name the stakeholders in this business ethics dilemma. Discuss possible choices for Nash in the light of law and ethical theory.

Desperate Air30

Desperate Air Corporation (DAC) flies routes along the U.S. East Coast. DAC acquired a number of hotels and undeveloped properties five years ago as part of a short-lived diversification strategy. DAC has recently experienced substantial losses, has a negative cash flow. Bankruptcy looms as a possibility unless high labor costs can be reduced and consumer confidence restored.

Benton Williams has just been brought in as CEO to revitalize DAC. Williams began by cutting back on middle management and by placing a one-year morato- rium on hiring MBAs. Middle managers terminated by DAC and other airlines are having a tough time finding equivalent jobs.

DAC owns a large, undeveloped oceanfront property on the east coast of Florida. Williams directs George Nash, DAC’s vice president of real estate, to find a buyer for the property to generate badly needed cash. After some effort, Nash identifies Fledgling Industries, a relatively new developer of retirement villas, as a good pros- pect. Fledgling is interested in finding a property on which it could build a complex of high-rise retirement condos featuring elaborate walking trails and outside recrea- tional facilities.

DAC had conducted a full environmental audit of the property six months earlier and had discovered no problems. A copy of this report was given to the Fledgling representative, who also walked over the property and discovered no problems. The representative asked, “Anything I should know about?” Nash replied, “No problems.”

As the negotiations progressed with Fledgling, Nash was approached by a long- time friend at DAC, Laura Devitt, who told him that there was now some highly toxic waste on the property. She said she heard this might be true through the rumor mill at the firm and that she had been curious enough to check things out. Walking around on the property one day, she had found several partially buried metal containers marked DANGER/BIOHAZARD. RADIOACTIVE MEDICAL WASTE. The containers were rusted where they were exposed; two were cracked, and their liquid contents were seeping onto the ground. Laura told Nash she wanted him to know about this because she was worried that innocent people could be hurt if the sale went through.

30 This case was written by the late and much-beloved Professor Thomas Dunfee of the Wharton School at the University of Pennsylvania and is reprinted with his permission.

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Nash contacted Williams, but before he could mention the containers to him, Williams interrupted and told him it was vital that the sale closed and that it be done as soon as possible. Nash consulted with a DAC lawyer who told him that under Florida law it is not necessary to disclose the existence of hazardous waste on commercial property as long as there hasn’t been a fraudulent misstatement about the condition of the property.

Nash was troubled. Should he mention the hazardous materials to the Fledgling representative before he closed the sale? He knew Fledgling had been considering some other similar properties, and Nash thought that if he mentioned the toxic spill problem Fledgling would probably not go through with the sale. At the least, disclosure could delay the sale for months while the spill was investigated and potential liability problems considered. Nash figured that he would be unlikely ever to deal with Fledgling again regarding future real estate deals because DAC did not own any other properties that fit Fledgling’s business needs.

The question of whether to close the sale immediately bothered Nash enough that he talked to his wife about it, and then prayed about what to do.

The Duty of Loyalty 83