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Whistleblowers and Potential Breach of Fiduciary Duty

Mar 12, 2024Employment Law

Whistleblowers are protected under a variety of state and federal laws. In New York, there is New York Labor Law §740, which has been amended in 2020 and 2021 to improve protections for New York whistleblowers. With those amendments, in the healthcare field in particular, a 2020 amendment to the statute expanded the scope of protected activity to include a complaint of “improper quality of workplace safety” where such violation “relates to matters which may present an unsafe work environment or risk of employee safety or a significant threat to the health of the specific employee.” These protections against retaliatory action even cover situations where the employee complains to the press or social media about “improper quality of workplace safety.” In 2021 the New York Whistleblower Law was broadened, protecting employees from retaliatory actions if they engage in protected activity listed in the law. Thus, expanding who is protected under the law, what constitutes protected activity, what constitutes prohibited retaliation and lengthening the statute of limitations and expansion of a right to jury trial with an employee who believes they are being retaliated against for engaging in such protected activity. Under federal law protections are afforded to whistleblowers under other statutes including but not limited to the False Claims Act (“FCA”) as well as under Sarbanes-Oxley to prevent retaliation.

There are a number of cases reported where employers go on the offense in connection with a whistleblower’s complaint asserting counterclaims alleging that, in connection with the whistleblowing, the employee simultaneously breached their fiduciary duty to their employer. As a general rule, courts have long held that public policy prohibits a breach of fiduciary duty asserted against the employee as it would discourage whistleblowers from coming forward and, therefore, undermine the remedial purposes of whistleblower statutes such as the FCA. See e.g., United States ex. rel. Rodriguez v. Wkly Publ’ns, 74 F. Fupp. 763 (S.D.N.Y. 1947). The reasoning behind these prohibitions is self-evident: it would be fundamentally unfair for an employer to essentially seek contribution and/or indemnification from an employee in connection with that employee’s whistleblower claims. See Mortgs., Inc. v. U.S. Dist. Court for Dist. Of Nev. Las Vegas), 934 F.2d 209 (9th Cir. 1990).

This would normally be the end of the discussion as one can see the need for whistleblowers not to be subjected to counterclaims by the employer involved. However, depending on the circumstances, employees do have a duty of loyalty and in some instances actual fiduciary duties owed to their employer, irrespective of their whistleblower claim. For example, there is no question that employees also are often limited in terms of the confidential information that they can communicate to third parties by either contract or applicable law.

So, the question is: Is there an argument that an employee has gone too far, irrespective of the protections afforded under the various whistleblower laws involved and actually breach their fiduciary duty while simultaneously performing an act that the whistleblower laws urge that employee to do?

This brings us to a recent case decided by a Georgia federal district court in the matter of the United States v. Ermi, LLC, 2024 WL 815515 (N.D. Georgia – Atlanta Division) (Feb. 27, 2024). In that case, which involved a qui tam FCA action the plaintiff, also known as a Relator, brought a claim on behalf of the federal government against his employer – Ermi, a manufacturer and lessor of medical equipment. This employee served as Ermi’s Chief Compliance Officer and, as an officer, thus, at the outset, owed a fiduciary duty to the company. Ermi fought back asserting a series of counterclaims against the plaintiff as the Relator. The key to whether the employer’s counterclaims would survive depends on whether “the conduct at issue is distinct from the conduct underlying the FCA case.” Several of the counterclaims were dismissed by the court which found that claims related to the retention of documents for the use in the qui tam action was not independent of the FCA claims and, therefore, any counterclaim was barred by public policy. Likewise, the court held that the employer’s counterclaims that the Relator caused the problems that the Relator now complains of was nothing more than a “dressed up claim for contribution or indemnification.”

However, the court did find that Ermi adequately alleged a breach of fiduciary duty regarding the Relator’s handling of an AHCA renewal application stating that a reasonable jury could find that she misled her employer about how the renewal process was proceeding which could be considered sufficiently negligent to breach the duty of care.

The court also sustained, for now, a breach of fiduciary duty and contract claim based upon the Relator’s retention of confidential information. While noting that, if that information was sufficiently related to the FCA claim, then such a claim would be dismissed. However, Ermi had originally alleged that the nature of the confidential information retained was not explicitly limited to her preparation for and pursuit of the FCA claim finding.

Of course, the litigation will proceed and further information will be exchanged between the parties, thus resulting in additional arguments at some future date as to whether any of the counterclaims can survive scrutiny. However, the point here is that the filing of a whistleblower claim may not provide complete protection to the employee, depending upon a wide range of facts and circumstances attendant to the case.

The key issue: Is what the employer is alleging regarding the employee’s actions directly related to what the whistleblower is complaining about in the whistleblower suit or something else? The answer may provide the employer with some avenue to protect rights that would appear to have otherwise been overlooked or given up for dead.

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Meyer, Suozzi, English & Klein, P.C. provides counsel on a full spectrum of employment law-related issues, engages in all aspects of employment-related litigation before state and federal courts and administrative agencies, and regularly handles mediations and arbitrations.
Paul Millus, Esq. practices in the Business Litigation and Employment Law Departments of Meyer Suozzi’s Garden City, Long Island and New York City office locations.