Major Victory for Whistleblowers in Seventh Circuit Says Retaliation is a RICO Violation

In a landmark ruling in favor of corporate whistleblowers, the U.S. Court of Appeals for the Seventh Circuit gave the green light to Michael DeGuelle’s RICO claim of retaliation. The court’s opinion gives life to a provision in the 2002 Sarbanes-Oxley Act (SOX) that makes it a felony to retaliate against whistleblowers who provide information about corporate fraud to law enforcement officers. I reported earlier on the Seventh Circuit’s extraordinary decision last year to appoint a prominent Chicago corporate and pro bono lawyer to represent DeGuelle in this appeal. DeGuelle’s prior lawyer abandoned his case after the district court dismissed it in 2010.

Mike DeGuelle sent me a message about his victory:

This is a giant step in the right direction for protecting the rights of employees who refuse to participate in unlawful conduct at work and then suffer retaliation. I did the right thing by reporting unlawful conduct to law enforcement. Finally, it is safe to do the right thing for no reason other than because it is the right thing to do. In this case, the court put the rights of the American people ahead of the greed of corporate America. This is an outstanding court decision for all workers to celebrate in the ongoing struggle to take back our country from the greed of corporations that have corrupted American values.

DeGuelle blew the whistle on a prolonged tax cheating scheme by S. C. Johnson & Son, Inc. The scheme included taking advantage of IRS audit mistakes, destroying records, and buying a tax shelter from the now-defunct accounting firm of Arthur Anderson.

DeGuelle filed a lawsuit against the company in federal court in Milwaukee. The lawsuit claimed that the company engaged in a pattern of racketeering activities that included the tax fraud, and firing DeGuelle in retaliation for providing the government with information about the fraud. One issue is whether a victim of retaliation can seek damages under the Racketeer Influenced and Corrupt Organizations Act (RICO). The company said the law does not permit such a recovery, and the district court agreed, dismissing DeGuelle’s lawsuit in 2010. DeGuelle appealed, without the representation of his original lawyer.

As part of SOX, Congress made it a crime to:

“knowingly, with intent to retaliate, take[] any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense[.]” 18 U.S.C. 1513(e).

Stephen M. Kohn, Executive Director of the National Whistleblowers Center, wrote about this section after Congress passed SOX.

On page 16, the DeGuelle opinion notes that some courts ignored 18 U.S.C. 1513(e) and adhered to the prior holdings that, “retaliation against an employee in the form of interference with his or her lawful employment was not considered a racketeering act.” Not the Seventh Circuit, though. “The language of § 1513(e) and logic imply that retaliatory actions always occur after a whistleblower reports others’ wrongdoing.” The court rejects the idea that since the disclosure was already made, the retaliation could not be part of a scheme to prevent disclosure. The court explains:

This is troubling when one considers the purposes of the Sarbanes-Oxley Act and its addition of § 1513(e) to RICO’s statutory scheme.

When an employer retaliates against an employee, there is always an underlying motivation. In this case, for example, the motivation was to retaliate against DeGuelle for disclosing the tax scheme. Retaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower.

The court then took a hard look of the factual allegations in DeGuelle’s complaint. It noticed that Mark Eckhardt, Vice President and Chief Information Officer of S.C. Johnson & Son, Inc. (SCJ), participated in both the tax fraud and in the retaliation. DeGuelle alleges that Eckhardt and other SCJ officials offered DeGuelle a raise and reimbusement of his attorney fees if he would sign a release and confidentiality agreement. The court called this offer witness “tampering” because “it was intended to prevent DeGuelle from disclosing the company’s alleged wrongdoing.”

The court also noticed the “temporal relationship” among the acts of fraud and retaliation. The close timing of DeGuelle’s SOX whistleblower complaint, the witness tampering offers, and SCJ’s discharge of DeGuelle made it “reasonable to infer” that since “all attempts to silence DeGuelle had failed,” it was necessary to “resort[] to retaliatory termination[.]” The court made this conclusion even though it recognized that SCJ officials took some actions to investigate DeGuelle’s concerns and protect him from a retaliatory evaluation. Doing some nice things for a whistleblower does not allow an employer to fire that whistleblower with impunity. The court’ conclusion about the inference of retaliation will make it hard for SCJ to prevail at summary judgment and means that they will have to settle with DeGuelle or face a public trial of his RICO claims.

An inference from temporal proximity means that a whistleblower will not have to show that any particular official participated in both the crime and the retaliation. It also means that a whistleblower will not have to prove that any particular deciding official had knowledge of the protected activity. These facts can be inferred from the organization’s knowledge. If a jury can infer retaliation, then it can also infer knowledge of the protected activity by the decision maker. See also, Jones v. Bernanke, 557 F.3d 670, 679 (D.C. Cir. 2009); Raphael v. Okyiri, 740 A.2d 935, 955 (DC 1999) (“common knowledge” on a “grapevine can often travel directly to the boss.”)

As to the RICO requirement that there be an agreement among conspirators, the court noticed how SCJ’s tax counsel (Wenzel) learned about a report DeGuelle made to its HR director (Camilli). “Thus, there must have been some communication between Wenzel and Camilli.” The court concluded that it can be inferred that the retaliatory acts “were part of the original conspirators’ agreement to conceal their fraud.” Although DeGuelle’s allegations were “sparse,” they “will be explored in greater detail throughout the discovery process.” If SCJ reports that it can’t find relevant emails among its officials, DeGuelle could argue to the jury that the officials destroyed or withheld those as part of the same conspiracy.

Still, I am puzzled by two of the court’s statements. On pages 13-14, the court agreed with the lower court that a separate SCJ lawsuit against DeGuelle in Wisconsin courts for conversion of company documents “occurred over a short period of time” and there is not “specific threat of repetition.” However, the court acknowledged that SCJ won its lawsuit and DeGuelle is now appealing a $50,000 order against him. I would not say that the lawsuit is over unless and until the company drops it.

Second, on pages 17-18, in footnote 4, the court says that “there is a danger … that plaintiffs will bring claims which should be handled by state law (i.e., wrongful termination) into federal court under the guise of RICO.” It is difficult to square this statement with the principle that Congress decides which wrongful termination cases deserve federal jurisdiction. Still, it is hard to fault a decision which finally recognizes what Congress said in 2002 as part of SOX: retaliating against whistleblowers is a RICO violation. RICO liability is significant because RICO includes provisions for a forfeiture of ill-gotten gains, treble damages and attorneys fees.

Congratulations to Jerold S. Solovy and Sean P. Tarantino of the Chicago law offices of Jenner & Block LLP for representing Mike DeGuelle in this appeal.

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