In prior FraudMail Alerts, we pointed out that the new SEC whistleblower program borrowed many elements from the False Claims Act (“FCA”). See FraudMail Alerts Nos. 11-06-27; 10-12-08. Unfortunately, one outdated element borrowed from the FCA was an extraordinarily long statute of limitations that both Congress and the Supreme Court rejected for use in retaliation actions under the FCA. Perhaps without fully considering this provision’s effect and the disparity it created with similar statutes, the SEC whistleblower law included a six- to ten-year statute of limitations provision that implicitly imposes new and unnecessarily long employment document retention requirements on employers. This statute of limitations will be particularly challenging to employers forced to defend the motivations for employment decisions they made up to a decade earlier. Under this new regime, publicly traded companies, financial services institutions, and other covered entities will need to reevaluate their document retention policies so that they are in a position to demonstrate that those prior adverse employment actions did not have a retaliatory motivation. For all of these reasons, Congress should address this issue and amend this provision to adopt a shorter statute of limitations, such as the three-year cut-off for similar actions now found in the FCA.
The SEC’s Statute of Limitations for Retaliation Actions
Under July 21, 2010 amendments in Section 21F of the Securities Exchange Act of 1934, the SEC was required to implement a whistleblower program under which whistleblowers were encouraged to provide information about possible violations of the securities laws to the Commission. Section 21F also prohibited employers from retaliating against whistleblowers who provide this information in accordance with the program’s rules. The statute provides that a retaliation action may be brought in an appropriate U.S. district court, and under the SEC’s rules, Section 21F’s anti-retaliation provisions may also be enforced in actions or proceedings brought by the Commission.
Under Section 21F, these actions may not be brought:
- More than 6 years after the retaliation occurred, or
- More than 3 years from the date when material facts were known or reasonably should have been known by the employee, but in no event more than 10 years after the violation occurred.
See Section 21F(h)(1)(B)(iii). This provision mirrors the FCA’s statute of limitations for substantive violations of the FCA rather than the new three-year statute of limitations for retaliation actions now found in the FCA. It is in sharp contrast to the 90-day limit on retaliation actions by employees of publicly traded companies under the Sarbanes-Oxley Act’s whistleblower provisions, and it allows whistleblowers eligible under the SEC’s program to avoid the statutory framework for retaliation established under Sarbanes-Oxley. See 18 U.S.C. 1514A(b). Not only is the SEC’s statute of limitations extraordinarily long for whistleblowers’ employment disputes, but both the Supreme Court and Congress have rejected arguments for imposing a similarly long statute of limitations on retaliation actions brought under the FCA.
The Supreme Court Rejected the FCA’s Long Statute of Limitations for Retaliation Actions in Graham County I
When a cause of action for retaliation under the FCA was enacted in Section 3730(h), the statute did not include a specific statute of limitations for these claims. Prior to 2010, the FCA’s only statute of limitations was Section 3731(b), which refers to underlying substantive violations, not retaliation. Specifically, Section 3731(b) requires an action to be brought within 6 years of the violation of Section 3729, or within 3 years of the date when the material facts to the right of actions were known or reasonably should be known, but no more than 10 years after the violation occurred. The statute of limitations in Section 21F is nearly identical to this provision.
Because there was no reference to retaliation actions in the FCA’s statute of limitations, a dispute arose as to whether it applied to those actions in addition to actions based on substantive violations of the FCA. The Supreme Court resolved that issue in Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, 545 U.S. 409 (2005) (“Graham County I”). The Court ruled that the reference to a substantive “Section 3729” violation, and the fact that the cause of action for retaliation is based on an act of retaliation rather than on a substantive false claim violation, cast doubt on the application of Section 3731(b) to retaliation claims. Therefore, the Court applied a default rule under which the statute of limitations for a retaliation action under the FCA was to be determined by reference to the most closely analogous state law. The Court provided a list of likely analogous state statutes, most of which had limitations periods of less than three years. Graham County I, 545 U.S. at 419 n.3.
The FCA’s New Three-Year Statute of Limitations for Retaliation Actions
In 2010, in response to the Graham County I decision, Congress amended the FCA’s retaliation provisions, adding a three-year statute of limitations for retaliation actions, which effectively supersedes, on a prospective basis, the Court’s default rule in Graham County I. See FraudMail Alert No. 10-06-29. These FCA amendments were enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 3301, 124 Stat. 1376, 2077 (2010) (“Dodd-Frank Act”) ―the same law that amended Section 21F. The Dodd-Frank Act also imposed a two-year statute of limitations on retaliation actions brought under the Commodity Futures Trading Commission’s whistleblower program. See Dodd-Frank Act §748 (to be codified at 7 U.S.C. §26). Congress did not identify any basis for adopting a longer limitations period for SEC whistleblowers, and there does not otherwise appear to be any rational basis for doing so.
A Final Word
While it is possible that Congress borrowed the FCA’s general statute of limitations for substantive violations and included it in Section 21F by mistake―without an awareness of the provision’s history and effect―an inordinately long statute of limitations now applies to retaliation actions under the SEC’s whistleblower program. Therefore, pending an amendment bringing this provision in line with other federal whistleblower statutes, companies with employment document retention policies that are shorter than six years may have difficulty meeting their burden of proof in retaliation actions under Section 21F, and should consider extending these policies to conform to the new law. Issues of witness availability and stale proof will inevitably arise as parties to retaliation suits seek to locate witnesses to events that may have occurred ten years earlier. In an environment where most states, for these very reasons, require plaintiffs to initiate employment claims promptly following the alleged discrimination or retaliation, the SEC’s lengthy limitations period works a wholesale change in the landscape for employers, and companies must start adapting to the new conditions as soon as possible.