In the Trenches: Whistleblower or disgruntled employee?

In this edition of In the Trenches, Acme learns not to drag its heels on dealing with poor performers.

Henry Honcho, head of Acme’s medical products division, hired Terry Tellall in 2011 as senior manufacturing engineer. The division produced computerized medical equipment, including its revolutionary Acmeknife, which is used worldwide to treat cancer. Acme had an upgrade program in which overseas customers returned Acmeknife systems to the United States; Acme would upgrade the system parts and software and ship the upgraded system back to the client.

Terry was required to prepare the documentation on Acmeknife upgrades. He was concerned that, while preparing return shipments to overseas customers, Acme was designating equipment with original part numbers rather than new ones. He told Henry that Acme's incorrect numbering protocol could cause regulatory compliance issues with the FDA over traceability and also created a safety risk because it misrepresented the configuration of the Acmeknife systems.

Henry might have been more inclined to listen to Terry if he had even the slightest bit of faith in his senior engineer. But it had become obvious within just a year’s time that Terry’s work wasn’t up to par. His last performance review reflected that fact. He was given two warnings about his performance since that time — shortly before he had come to Henry with his concerns about the numbering protocol, in fact. Henry was certain that the alleged problem was a non-issue, that Terry was still smarting about the performance warnings and simply looking to find fault elsewhere. As a result, Henry brushed off Terry’s concerns. However, they continued to spar over the procedure for documenting part numbers on the outgoing Acmeknife systems.

Finally, last September, when preparing documentation on an upgrade being reshipped to Japan, Terry simply refused to follow the established numbering protocol. Henry was enraged by Terry’s insubordination. Accompanied by Stan Straightlace, Acme’s regulatory affairs manager, Henry met with Terry and threatened to fire him if he did not put the old part number on the system. Terry grudgingly complied. However, he filed a complaint with HR that same day, alleging that Henry had created a “hostile work environment” and asking whether “whistleblowers get fired around here.”

Shortly thereafter, Henry stripped Terry of any duties related to the Acmeknife system upgrade program. In October, Terry received a final written notice, and, in November, Acme made the decision to cut its losses and discharge Terry. However, Henry didn’t actually pull the trigger until mid-December. In the interim, Terry had quietly filed a complaint with the SEC, alleging now that Acme was taking returned Acmeknife parts and putting them back in rotation as newly manufactured components, resulting in millions of dollars of inflated assets on Acme's books. Terry did not inform Henry, Stan, or any other Acme official of his complaint. But he had nothing to lose, he figured — his days at Acme were numbered. Contending that he was ultimately fired for reporting Acme’s questionable practices, Terry filed suit.

A labor and employment analyst’s response:

Acme’s first mistake was to let a poor performer hold a critical position for so long. It’s essential that Henry can trust his senior manufacturing engineer when he comes to him to report problems, including potential compliance issues or regulatory risks. Once Terry lost Henry’s trust, it was time for Terry to go. And by waiting so long before finally discharging him, Acme gave Terry plenty of time to engage in a bit of self-preservation by reporting alleged violations and thereby create an impression that his discharge was in retaliation for his reports of alleged misconduct.

Henry also was wrong to brush off Terry’s concerns out of hand. Any internal reports of potential violations of the law should be given fair consideration. The fact that Stan got involved down the road might suggest that the legal team eventually got involved, reviewed the allegations and found them meritless. Explaining those findings to the employee that raised the issue lets him know that his concerns were taken seriously and may serve to avert unwarranted external complaints.

In Terry’s position, it’s his job to report compliance issues to higher-ups, and so under most state laws, his internal complaints would not be a basis for a retaliation or wrongful discharge suit. In theory, as a publicly owned company, Acme could be liable for whistleblower retaliation under the Sarbanes Oxley Act. Still, it’s doubtful that Terry would have a viable whistleblower claim. His complaints to the federal agency would not likely give rise to liability for Acme. To have a viable cause of action, Terry would have to establish that he had a “reasonable belief” that Acme’s documentation system violated a law or regulation, and the evidence suggests that, at most, he disapproved of an internal procedure.

Moreover, given the stated facts, it would be difficult for Terry to prove that Acme officials knew that he contacted the SEC, so he would be hard-pressed to convince a court that his external complaint was the real reason for his discharge, particularly in light of his well-documented lousy performance. Terry was on the termination track well before he engaged in the protected activity of making a complaint to the government agency. The decision to terminate him was made several weeks before he filed his SEC complaint, so he would not be able to prove causation.

Still, even if Acme were ultimately to prevail, who needs the considerable costs and headaches of litigation or to run the PR risk of false allegations of wrongdoing?

Lisa Milam-Perez, J.D., Labor and Employment Analyst
Wolters Kluwer Law and Business, (773) 866-3908, lisa.milam-perez@wolterskluwer.com

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