Whistleblowing awards are on the rise, but payouts vary depending on the program or statute utilized

On May 5 the Securities and Exchange Commission (SEC) announced the largest-ever award, almost $279 million, to a whistleblower. This award more than doubled the previous highest award of $114 million issued by the SEC in October of 2020. When commenting on the award, Gurbir S. Grewal, the Director of the SEC's Division of Enforcement, stated that the size of the award "not only incentivizes whistleblowers to come forward with accurate information about potential securities violations, but also reflects the tremendous success of our whistleblower program." Giving context to the program, Mr. Grewal explained that "whistleblower tips have contributed to enforcement actions resulting in orders requiring bad actors to disgorge more than $4 billion in ill-gotten gains and interest." According to the press release, whistleblower's awards generally range from 10% to 30% of the money collected when the monetary sanctions exceed $1 million. (SEC press release, 2023-89, May 5, 2023.) Enacted in 1987, California's False Claims Act, Cal. Gov. Code sections 12650 to 12656, has also been effective, recovering over $2 billion for California. (See Abay, J., California's False Claims Act Has Returned $2 Billion To The Golden State Since 2001, June 1, 2022.) Like the federal statute, the California False Claims Act also allows whistleblowers to recover up to 50% of the amounts obtained by the State Attorney General's Office. Cal. Gov't Code § 12652(g)(2)-(5).

California Labor Code section 1102.5 takes a different approach. The purpose of the statute is the protection of employees reporting corporate malfeasance, not fiscal incentivization. At least since 2013, Section 1102.5(a) has prohibited employers from creating any rule barring an employee from reporting activity that the employee has "reasonable cause to believe" violates a state or federal statute or regulation. Section 1102.5(b) also prohibits employers from retaliating against employees for "disclosing information" concerning suspected violations of law, either internally "to a person with authority over the employee, or to another employee who has the authority to investigate, discover, or correct the violation or noncompliance," or to government or law enforcement agencies. In The People ex. rel. Lilia Garcia-Brower v. Kolla's Inc., 2023 WL 3575254 (filed May 22, 2023), the California Supreme Court made clear that this rule applies to unlawful activities of which the employer and/or the governmental agency are already aware. Section 1102.5(c) also bars employers from retaliating against employees for refusing to participate in an activity that would result in a violation of a state or federal statute or regulation.

While lacking an incentive component, the original amendments to Section 1102.5 were a direct legislative response to the Enron and WorldCom scandals, among others, and "were designed to 'encourage earlier and more frequent reporting of wronging by employees and corporate managers when they have knowledge of specified illegal acts' by 'expanding employee protection against retaliation.'" Lawson v. PPG Architectural Finishes, Inc., 12 Cal. 5th 703, 711 (2022) (quoting Assem. Com on Judiciary, Analysis of Sen. Bill No. 777, (2003-2004 Reg. Sess.) as amended May 29, 2003, p. 1.). Per the Lawson Court, Section 1102.5 "reflects the broad public policy interest in encouraging workplace whistle-blowers to report unlawful acts without fearing retaliation." 12 Cal. 5th at 709.

The Lawson Court made clear that an employee may bring a civil action for a violation of section 1102.5, and that the burden of proof is that set forth in Labor Code section 1102.6, not the burden-shifting framework established by the United States Supreme Court in McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973). Lawson, 12 Cal. 5th at 712. Per section 1102.6, all an employee must establish, by a preponderance of the evidence, is "that an activity proscribed by Section 1102.5 was a contributing factor in the alleged prohibited action against the employee." Once an employee meets this burden, then "the employer shall have the burden of proof to demonstrate by clear and convincing evidence that the alleged action would have occurred for legitimate, independent reasons even if the employee had not engaged in activities protected by Section 1102.5." (Emphasis added.)

Although the Legislature sought to increase reporting of corporate malfeasance through Section 1105.2, unlike other whistleblowing statutes, it decided not to use the carrot of incentivization to achieve this goal. As the wording of the statute makes clear, the purpose of Section 1105.2 is employee protection, not incentivization. Unlike the SEC regulations or the California False Claims Act, that allow a whistleblower to recover a percentage of the amounts recovered, Section 1102.5 does not allow an employee whistleblower to recover portions of any ill-gotten gains. Rather, Section 1102.5(f) allows for a recovery of a civil penalty not to exceed $10,000, for each violation of section 1102.5, and Section 1102.5(j) allows for a recovery of reasonable attorneys' fees. While Labor Code section 1105 makes clear that an injured employee may bring an action and recover damages for violations of section 1102.5, the employee's recovery will be limited to the "injury suffered through a violation of" Section 1102.5. Hence, the amount gained through the corporate malfeasance has no impact on the employee's recovery. Like any retaliation case, the employee's recovery will be comprised of losses directly flowing from the retaliatory act, i.e., if the retaliatory act is a termination, then the damages will be lost wages, emotional distress, attorneys' fees, and potentially punitive damages.

The takeaway from these statutory schemes is that if incentivization is the employee's goal, then he or she should proceed under the statute that allows for recovery of a percentage of the amount recovered. If, as a result of taking this action, the employee suffers retaliation in the workplace, then through Section 1102.5 the employee may bring an action to recover all damages arising from the retaliation.