Recommended Reading: United States ex rel. Rodriguez v. Hughes, et al., Relators Version

US ex rel Rodriguez v Hughes et alby Paul J. Zwier, Reuben Guttman, Matthew J. McCoyd, Alexander G. Barney

The three case files of United States ex rel. Rodriguez v. Hughes, et al.… explore the suit brought by Juan Rodriguez, a prominent engineer, who acted as a whistleblower against his employer, Hughes Aircraft, for violations of the False Claims Act.

Richard Hughes (CEO of Hughes Aircraft) learned that the United States Department of Defense (DOD) was looking for a new helicopter to provide to the Mexican government as part of the United States’ Mérida Initiative, which provided Mexico resources to help it fight its war against the drug cartels. Hughes, on behalf of Hughes Aircraft, entered into a sole source contract with the DOD. Hughes was favorably positioned to do so as it was the sole manufacturer of the Screaming Eagle helicopter S-70, the model the DOD was seeking to purchase.

Rodriguez’s employment background put him in a position to ascertain whether his employer, Hughes Aircraft, was making false claims to the DOD. Initially, Rodriguez had been employed at Sikorsky Aircraft Inc., a predecessor of Hughes, working in the design and manufacture of the first Screaming Eagle helicopters. Later Sikorsky Aircraft was bought by Hughes Aircraft. During his tenure at Hughes, Rodriguez had designed and retrofitted early versions of the Screaming Eagle helicopter. When retrofitted with heavy missiles, one of the first versions, the UH-A, suffered cracks on landing. Accordingly, metals intended to help crash-proof the helicopter were added to the design. Hughes also started to employ Magnaflux testing to ensure that later versions of the Screaming Eagle did not have subsurface cracks.

Rodriguez claims that he saw cracks in the cabin of one of the Screaming Eagles Mexico helicopters, and that he also saw workers welding over the cracks. Rodriguez claimed that he considered the welding over of cracks in the cabin of the Screaming Eagle a “cover up” of the failure to conduct testing and thus an act of fraud—passing on defective helicopters to the governments of the United States and Mexico.

Available on line at Barnes & Noble.

Reaching Into Mud Puddles

Dan Guttman on the Tibet side of the approach to Mount Everest. Photo by Nancy Brockman

Dan Guttman has spent decades using discovery and dogged research to peer into government and industry secrets. He has found out how the U.S. environmental operating system really works, and achieved real improvements. Now he is helping students in China and the United States learn how to translate between — and improve — their respective OSs

It’s hard to define Dan Guttman. “He is part lawyer, part historian, part gumshoe investigator,” according to Government Executive magazine. He can’t really define himself. “I never decided that environment would be the backbone of my career,” Guttman emailed me, briefly in between flights from China to Washington and back. Since 2004, when he began a two-year Fulbright scholarship in Shanghai, he has been working with colleagues in China and the United States in the development of educational programs on the environment, law, and public policy management.

Guttman continued his biographical selfie: “If there has been a theme to my work, it has been learning about how people with limited means can use knowledge and law to effect change and to account for those in power.” For more than three decades, he did just that, exposing corruption, malfeasance, and danger to American workers and citizens from the legal and environmental externalities of industrialization and from the evolving obscurity of related governmental actions. Now he uses that experience while teaching at and working with colleagues in universities in China.

Asked to describe his environmental awakening, Guttman told a story. “During a walking safari along the Luangwa River in Zambia, we came across a dry river bed. But there was a puddle in the mud, maybe four feet wide. Our local guides stuck their hands in, and came out with a huge fish — which seemed to be as big as the puddle.” Life is everywhere, surviving where it seems impossible, Guttman realized. However, the event also is a metaphor for his career, which has been an ever-evolving exploration of what can be found in the muddy puddles left behind by business decisionmaking and governmental policymaking.

A poor student in high school, Guttman had political awakenings in college amidst the anti-Vietnam war and civil rights movements. “As editor of the student paper I found my candy store: the license to go out and ask questions of people at the top, as well as at the bottom and in between. When my tenure was up, as student body president I found myself in the middle of a successful student strike.” The university president was compelled to reinstate students expelled following a sit-in to protest recruiters from Dow Chemical, the maker of napalm. “This was a first experience in the unexpectedness, swiftness, and, for better or worse, power of group action.”

Starting law school at Yale in 1968, amid student protests and following the two assassinations the previous spring, Guttman found himself asking how the people in power were doing so poorly. “This was what I wanted to find out about — how did the so-called best and brightest, the social science experts schooled at fancy places, use their knowledge in the service of power?” Then he was electrified by a speech Ralph Nader gave to the law students. Guttman became a Nader’s Raider and began an analysis of that power with fellow Raider Barry Willner. What started as a study of think tanks turned into the discovery that since the mid 20th century much of the core work of the U.S. government was being done by private contractors — management consultants like McKinsey and Booz Allen, think tanks like the Rand Corporation and Mitre Corporation, and other self-professed experts.

“The Constitution and all these statutes are directed at protecting us against the abuse of power by government actors,” Guttman once told a reporter. “Well, what happens when private contractors, who aren’t covered by these laws, do much of the government’s work?” When the study was published as a book in 1976, The Shadow Government was called “pioneering research” and an “important study of a national scandal” in two different New York Times reviews.

At the start of his career, “My questions focused on how things work and not the environment as such,” Guttman says today. “But, at each step, a portion of the world of environmental governance came into view.” In 1974, he went to work at Spiegel & McDiarmid, a young law firm founded by George Spiegel, “an American original who, with a band of colleagues, local officials, and citizens, and help from the Department of Justice, were taking on the electric power industry,” Guttman says. “If there is such a thing in law, George was a genius. George’s teachings included the small — ‘If you want to hide something from a lawyer, put it in a statute’ — to the fundamental. Knowing the law and the facts are essential, but not enough.”

Opposing electric utilities and oil companies, Guttman had to learn how to deal with opponents who are powerful, have money, and question your ethics — indeed threaten sanctions for proceeding with a case. “Law school did not teach the psychology and ethics of being on the opposite side from power,” he says. “These were things I learned, often as a fly on the wall, listening to Spiegel & McDiarmid mentors debate and address what seemed like career-threatening intimidation from companies, law firms, and, sometimes, judges.”

As Guttman explains it, in the late 20th century, hundreds of small, municipally owned electric systems were dying on the vine because of inability to engage in economies through coordinated electric power supply. Large investor-owned utilities denied the cities access to their transmission grids, on the premise that they (as regulated monopolies) were immune from antitrust laws. “George saw this was not so. Representing groups of municipal electric systems throughout the U.S., we intervened in federal agency proceedings where utilities sought rate increases or other benefits. George pointed out that ‘public interest’ tests in relevant statutes compelled agencies to consider evidence of anticompetitive conduct. When the agencies ignored the cities, we went to appeals courts and the Supreme Court, winning decisions that provided a bill of rights for electric industry competition.”

As rights were obtained, the firm worked with cities to push for entrance into transmission and power pooling that had been the investor-utility preserves. “As I look back, in fighting monopoly power on behalf of citizens, and in the name of efficiencies, George and colleagues pioneered in pushing into law and practice concepts of power pooling and open transmission that are the pediments of today’s smart grid.”

Through this litigation, “I came to see the right to court discovery as a distinguishing feature of our system — an equalizer through which citizens learn things unknown to government, CEOs, and the media.” The mud-puddle metaphor holds here. Representing Florida municipalities during the 1978 nationwide natural gas shortage, he found himself doing his first ever cross examination. The witness was Ken Lay, then a Florida Gas official who would use the company as a springboard for what later became Enron.

“Lay’s testimony was flatly contrary to discovery documents showing that the alleged Florida shortage was the result of conspiracy among the gas company and oil companies, through which gas contractually obligated to the cities was sold at higher and unregulated prices on the intrastate markets.” The discovery documents led to the Federal Power Commission’s consideration of referral to the Department of Justice. The gas company (and Amoco) quickly settled the case.

In 1979, Guttman took a leave of absence from the firm to follow his muse in government service. Newly elected Senator David Pryor (D-Arkansas) became interested in contractors who do the work of agencies and soon found out that Guttman, as an author of The Shadow Government, was the leading expert. Pryor asked him to serve as special counsel in oversight investigations and hearings. “We studied the Department of Energy and the Environmental Protection Agency,” Guttman says today. “We saw that much of their activities were delegated to invisible private contractors, too often with conflicts of interest unexamined by officials.” To Guttman, the experience demonstrated the usefulness and power of congressional oversight. It was just a few years after the OPEC oil embargo that had brought America to its knees. “We discovered that in planning for another embargo, DOE called on a contractor that, unbeknownst to DOE, was doing oil planning for OPEC countries.”

In 1989, when Guttman did a second stint in the Senate with Pryor’s committee, foreign policy focused on Japan’s economic power. DOE hired a contractor to steer a highly controversial shipment of plutonium to Japan through bipartisan congressional opposition. “We found that, again unknown to DOE, the contractor was simultaneously reporting back on its work for the U.S. government — including its dealing with Congress — to Japan’s electric utility beneficiaries.” Columnist Andy Rooney wrote a humorous article on hearings led by Pryor, in which he described “Dan Guttman, a bright young lawyer who apparently hasn’t combed his hair this year but is otherwise hard to find fault with. Guttman asked many of the most penetrating questions himself, and [the DOE official he was grilling] was often unable to reply at all.”

In between his stints with Pryor, Guttman and his brother, Reuben, a labor lawyer, accidentally came to represent workers in an event yielding another serendipitous entry into environmental law. As Guttman explains today, “The workers we came to represent — janitors and oil, chemical, and atomic workers — see environmental problems that governments, the press, and top corporate officials don’t see. They are the proverbial ‘canaries.’ U.S. labor law is weak. But threats to worker health and safety are also threats to community health and safety. So, on behalf of workers, and working with environmental NGOs, we began to use, and make, environmental law.”

As school buildings aged, janitors were the first exposed to friable (flaking) asbestos. On behalf of the Service Employees International Union, he teamed with Robert Percival and the Environmental Defense Fund to bring a successful lawsuit against the Reagan administration’s EPA. “The case,” Guttman recalls, “was the first use of the citizen petition provision of the Toxic Substances Control Act, which provides for de novo U.S. district court review.”

Peering into a mud puddle, court discovery showed that EPA staff’s draft responses had granted their petition. Then, following a note from EPA’s deputy administrator that said, “Don’t piss off OMB,” the petition was denied. “We took the documents to Congress. Following hearings, with bipartisan agreement and speed that seems impossible today, they enacted
the 1986 Asbestos Hazard Emergency Response Act, which required EPA to engage in a rulemaking on asbestos in schools. Following perhaps the agency’s first use of negotiated rulemaking, the workers joined EPA to support the regulations against unsuccessful asbestos industry appeal.”

In the early 1990s, through further serendipity, the two brothers came to represent the workers who operate the U.S. nuclear weapons complex. Guttman had been asked by Nye County, Nevada, the locale for the proposed Yucca Mountain nuclear waste site, to help advise it based on his knowledge of the Department of Energy. “We organized a workshop and a guy named Richard Miller called. He was an assistant to the president of the Oil, Chemical, and Atomics Workers, which represented DOE contractor employees who were the backbone of the weapons-complex workforce. Richard asked if I wanted to help the union in its dealings with DOE and its contractors.”

The workers had little recourse under labor laws, but knew how government and its contractors had created hazards, and how sums spent to address them were too often making them worse. Could they invoke laws other than labor law? Indeed they could.

In a series of lawsuits, OCAW, represented by the Guttman brothers, drew on environmental law to successfully take on the nuclear weapons complex, and, ultimately, obtain in 2000 bipartisan congressional enactment of a law to compensate those of the 500,000 weapons workers sickened through government and contractor negligence. Once again, court discovery uncovered facts not known to top corporate and government officials. “When Fluor Daniel, the engineering firm operating DOE’s Fernald, Ohio, site, sought to replace OCAW workers who knew the hazards, discovery revealed, unbeknownst to top DOE officials, Fluor was doing cost-benefit analysis of whether to comply with the Occupational Safety and Health Act.”

According to Guttman, Fluor told the court that workers would be protected by a DOE approved health and safety plan. “But Richard Miller appeared to be the only one who had ever read the plan.” To DOE’s embarrassment, the plan stated that workers were not to volunteer health and safety information to government inspectors. On receipt of these documents, a House oversight committee invited embarrassed DOE and Fluor officials to testify. As a result, Fluor’s senior site official was terminated, DOE agreed to changes in its management, and the case was settled.

The litigation against DOE on behalf of workers led to Guttman’s being asked to serve as executive director of a presidential advisory committee to do independent inquiry into press revelations that during the Cold War the government performed human radiation experiments on unwitting citizens. The committee, composed of biomedical and radiation science, bioethics, law, history,
and data experts, analyzed and made public hundreds of thousands of documents, many from classified files held by the Pentagon and the nuclear weapons complex. At the same time, the committee conducted 30 days of public hearings and reviewed ongoing human subject research.

The report to President Bill Clinton told the story of what had gone wrong, with recommendations to address lessons learned, particularly about the relationship between government and contractor secret-keeping and citizen exposure to risk. “As with the work with Senator Pryor and the value of congressional oversight, this was an education in the value of citizen inquiry, conducted independently yet in cooperation with agency officials,” Guttman says today.

In 1996, Vice President Al Gore announced a quarter-billion-dollar deal by which contractors would remove nuclear waste from the Oak Ridge laboratory and recycle the material for unrestricted commercial use. “The nuclear workers saw the administration’s supposed ‘win-win’ as an effort to bust the union,” Guttman remembers, “and also, in replacing experienced workers, an invitation to environmental disaster without environmental review.” When the Clinton administration refused to listen, the workers went to court, with the Guttman brothers and Barbara Finamore of the Natural Resources Defense Council as co-counsel. “Here, again, discovery revealed facts seemingly unknown to highest-level officials,” Guttman says.

In 1999, Judge Gladys Kessler held that Section 113(h) of Superfund barred standing for the plaintiffs, but proceeded to state that they had unearthed “ample evidence that the proposed recycling significantly affects the quality of the human environment.” The judge confirmed that “no national standard exists” for the core recycling work. The result, she explained, “Is no oversight by any federal regulatory agencies.” The judge termed “startling and worrisome” the absence of opportunity for “public scrutiny or input on a matter of such grave importance.” DOE Secretary Bill Richardson declared a moratorium on the recycling.

Guttman and colleagues began to use whistleblower law, for fraud against the military, but also violation of natural resource regulations, recovering hundreds of millions for the U.S. government from oil companies who cheated on royalty obligations. In addition, the Oak Ridge nuclear waste recycling case led to the use of whistleblower law to protect against environmental harm. “And I was the whistleblower,” Guttman adds. Following the DOE recycling moratorium, the Nuclear Regulatory Commission proceeded with rulemaking to permit recycling. “In October 1999, I went to testify at the NRC’s public hearing. I was shocked to discover from the draft rules made available that the NRC had turned over rule drafting to SAIC, one of the very DOE recycling contractors that, as Judge Kessler had found, had already made a mess of it.”

Through his work on contracting, Guttman knew conflict-of-interest rules required SAIC to disclose its relevant interests. “I assumed SAIC had done so and that NRC had cynically hired the contractors without regard to conflicts. When I began to express my disgust in testimony, I was stunned to learn that NRC staff had no clue of the contractor’s further interests or Judge Kessler’s decision.” Much to his surprise, in December 1999, NRC terminated the contract.

Then the Department of Justice brought a False Claims Act case against SAIC for failure to disclose its conflicts. “In court I testified as a government witness, a first and humbling experience.” The jury found SAIC had made dozens of false statements to the NRC. Following a 2010 ruling on SAIC’s appeal, the case was settled with contractor payment to the government. In its 2016 decision in Universal Health Services, Inc. v. Escobar, the Supreme Court confirmed the SAIC case’s core principle: government contractors can commit fraud under the False Claims Act by failing to disclose
conflicts of interest.

As Government Executive wrote, Guttman “helped set the parameters” for debate over contractor use. In a 1983 decision, the Fifth Circuit had cited The Shadow Government for the proposition that while EPA may use contractors, “an agency may not delegate its public duties to private entities,” particularly if there may be a conflict of interest. Following the 1989 Pryor hearings, the White House reviewed and altered its policy on what work can be done by contractors, to reserve to agency personnel “inherently governmental” functions and to require conflict-of-interest disclosures. EPA also undertook to revise its contractor conflict rules. “However, the fundamental problem remains,” Guttman says today. “Despite law and policy, because of continued caps on Civil Service hiring, contractors not subject to ethics, pay, and open information rules that apply to agency officials continue to do much basic work, including environmental work, too often beyond official oversight capacity and public view.”

Reprinted by permission from The Environmental Forum®, March/April 2017

Government By Contract: The White House Needs Capacity To Account For The Legacy Of 20th Century Reform

By Dan Guttman

Signature priorities of the Bush and Obama administrations highlighted the deep and oft unaccountable roles of private contractors in the basic work of government, including national security activities and public welfare activities of highest level White House priority. Following 911, the country learned that, in addition to designing and building weapons, much of the work of war fighting is contracted out—through companies like Halliburton, Blackwater, CACI—contractors in the mess halls, on the battlefield, in Abu Ghraib prison. The “roll out” of the Obamacare, the domestic policy signature of the Obama Administration, was jeopardized by the reliance on contractors whose work was seemingly beyond official control. The post 911 dependence of national security cyber intelligence gathering on contractors was punctuated by the ability of a contractor employee—Edward Snowden—to access and release a trove of ostensibly deep national secrets.

Read the full article here.

Corporate Compliance Programs: Pretext or Panacea?

Proponents of corporate compliance programs loudly sing their praises while detractors point to ceaseless prosecutions and a parade of civil suits—often resulting in multi-billion dollar verdicts or settlements—as evidence that they are ineffective. So, are corporate compliance programs a panacea or a pretext? The truth lies somewhere in between.

As a threshold issue, corporations are for-profit institutions. Indeed, most corporations have a mandate to maximize profit for shareholders. This can encourage senior management to operate in grey areas, and regulators may later deem their actions (and board oversight of such actions) to violate a wide array of laws. Second, formalistic compliance programs are not enough to ensure internal reporting of potential fraud and are not enough to inspire companies to take appropriate corrective actions. Instead, as set forth below, companies must take steps to ensure effective implementation of compliance programs and foster a culture of corporate compliance.

The countervailing factors that motivate officers and directors to engage in or acquiesce to fraudulent conduct or, alternatively, devise and implement an effective compliance program warrant in-depth treatment in a standalone piece. Here, I turn to answering the specific questions posed with these general principles in mind.

Question 1: Do corporate compliance programs actually suppress information from regulatory oversight?

Response: Yes, often appropriately. But meritorious—and sometimes non-meritorious—allegations of misconduct tend to get reported externally where internal responses are inadequate or the company has not created a culture of compliance and reporting.

Recent reports, compiled through surveys of hundreds of senior executives from a broad range of industries, indicate that roughly two-thirds of United States companies are affected by fraud. 1 Costs to companies, including reputational damage, can be substantial as can costs associated with remediation and investigation of fraudulent practices.

Internal reporting programs such as corporate compliance hotlines represent a company’s first line of defense against corporate fraud. Internal whistleblower hotlines are a key component of a company’s anti-fraud program: where such hotlines are implemented, tips are typically the most common method of detecting fraud. 2 Moreover, the Sarbanes-Oxley Act (“SOX”), international guidelines from the European Union, and the U.S. Federal Sentencing Guidelines have deemed hotline reporting programs a good and necessary business practice. At the same time, internal compliance hotlines serve to screen out frivolous and baseless claims.

In my experience counseling and defending large corporations on employment matters and corporate compliance, reports to company ombudsman, managers, or human resources and compliance personnel often lack merit or do not implicate fraud. Employees often file malicious or fictitious complaints against fellow employees or the organization to ward off pending termination or to seek revenge for perceived slights. But treating employees with respect, even in these situations, can dissuade employees from unwarranted external reports.

Unfortunately, despite strong incentives to self-report credible evidence of wrongdoing, companies may conceal such evidence. Like companies, whistleblowers have incentives under various statutory regimes to report internally. For example, under the SEC whistleblower program established by the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010, a whistleblower’s participation in internal compliance systems will generally increase an award and interference with or bypass of those systems can decrease an award. 3A whistleblower who reports conduct to the SEC within 120 days of reporting internally will also receive credit for any information the company later self-reports to the SEC. 4

In our experience, external reporting typically follows internal reporting when an employee felt the company response was not adequate. As of 2014, 80% of company insiders who reported potential misconduct to the SEC first raised their concerns internally to compliance personnel or their supervisors. 5 Likewise, Guttman, Buschner & Brooks attorneys have represented countless whistleblowers bringing cases under the False Claims Act and have helped recover billions of dollars on behalf of federal and state governments. In our experience, these whistleblowers typically reported internally first and only sought representation after the company responded inadequately or dismissed concerns as “this is the way we do business.” Thus, while corporate compliance hotlines and related reporting mechanisms serve as the first line of defense against fraud, the False Claims Act, Dodd-Frank and other whistleblower protection statutes effectively incentive employees to report fraud externally when a company’s response has been ineffective or where a company has not created a culture where employees feel comfortable reporting misconduct internally.

Companies are most likely to dissuade external reporting by creating and implementing effective compliance programs as well as self-reporting credible allegations of misconduct. Such self-reporting may also result in cooperation credit. Indeed, on September 9, 2015, Deputy Attorney General Sally Yates issued a memo instructing the DOJ to seek individual accountability from individuals perpetrating wrongdoing in the course of fighting corporate fraud and misconduct. 6 The memo was sent to every United States Attorney, the Assistant Attorney General heading up each DOJ division, the Director of the Executive Office for United States Trustees, and the Director of the FBI.

Consistent with the Yates directives, we have seen renewed focus on individual accountability in the False Claims Act cases we have litigated alongside the government over the past year. This has manifested in the government’s decision to name individual executives as defendants in complaints in intervention, the structure of settlements, and a myriad of other ways.

In keeping with its renewed focus on individual liability, the Yates memo articulated several changes to DOJ policy regarding the definition of “cooperation credit” for corporations. These changes are applicable to criminal as well as civil enforcement matters. Corporations historically have received and continue to receive more favorable settlement terms when the government concludes they provided material cooperation with respect to a government investigation. But companies have struggled to understand what it means to “cooperate” in a post-Yates world.

In a September 27, 2016 speech, Principal Deputy Associate Attorney General Bill Baer provided some insight as to what such cooperation now entails, highlighting the importance of prompt and material assistance. 7 Merely responding to a subpoena or civil investigative demand (“CID”) will not qualify as cooperation. Rather, a company hoping to obtain cooperation credit is expected to provide specific information about any and all employees involved in wrongdoing that is unknown to DOJ and that materially assists in its investigations. Thus, while meritless claims not implicating fraud are properly vetted and disposed of through company screening without ever coming to the attention of government regulators and investigators, an effective compliance program will also develop mechanisms to affirmatively identify and provide material information to regulatory agencies investigating the company.

Question 2: Do corporate compliance programs create an environment where employees are led to believe that wrongdoing in the corporate environment is implausible because a compliance program exists?

Response: No. But implicit or explicit directives from management can lead to false beliefs that particular actions comport with the law.

A corporate compliance program should and generally does sensitize employees to the fact that wrongdoing isplausible. A strong compliance program often identifies the relevant laws applicable to an employees’ day-to-day activities and may include fact patterns the company has identified as violative of relevant laws. For example, compliance training for pharmaceutical sales representatives is likely to and should inform employees that promoting off-label uses of company drugs can be deemed to be a violation of the Federal Food, Drug, and Cosmetic Act and likewise expose the company to liability under the False Claims Act. 8

Having said that, we have represented relators in False Claims Act cases in which company management has been warned by its own third-party regulatory consultants that certain conduct and types of interactions with physicians is proscribed. These companies have nonetheless directed such conduct in business plans, training documents, and other written directives to sales representatives. Similarly, employee performance reviews may—in writing—encourage conduct that is deemed by the government to be unlawful. Managers may also encourage such conduct when accompanying employees on sales detailing visits.

Thus, the existence of written policies and a compliance program does not itself create an environment where employees believe wrongdoing is implausible. But written directives, communications, and training by management can cause employees to believe that particular conduct is appropriate and in conformity with stated company policies and cause them to ignore other signs or evidence that such conduct is—in fact—unlawful.

Question 3: From a practical viewpoint, what kind of corporate compliance programs work better than others?

Response: Corporate compliance programs that incorporate the principles of communication, responsiveness, and transparency

Above all, compliance programs should be transparent and comprehensible to employees (and management), and the goals of enforcement mechanisms should be clearly communicated. Measures also must be implemented to ensure prompt and efficient responses to allegations of corporate wrongdoing. How this manifests will vary from industry to industry and company to company. It largely depends on the service or product a company offers, specific rules and regulations that govern the company, the size and geographic breadth of a company, and a myriad of other factors.

In addition to general principles of communication, responsiveness, and transparency, certain key factors tend to underlie effective compliance programs:

1. Guidelines: companies should have explicit guidelines that instruct employees how to perform their jobs in a legal and ethical manner, including training programs, codes of conduct, and written performance standards.

2. Surveillance: companies should have official policies and procedures that detail the manner in which they will monitor employees and how (and to whom) employees can report wrongdoing.

3. Sticks and Carrots: companies should identify and implement sanctions for wrongdoing as well as rewards in the form of promotions and positive reviews for demonstrated competence and compliance with company guidelines. A program can be well-drafted on paper but useless in practice if a company does not punish misconduct or reward behavior it wishes to incentivize.

4. Leadership: it is not enough to have formal procedures in place to foster compliance. The “water cooler” conversation and conduct of top-level management are equally important. The “tone at the top” and informal communications as set by leadership behavior is critical, but it is equally critical for top management to monitor and instill the same behavioral norms in middle management.

5. Independence of compliance personnel. Local management are rarely trained as investigators, and may be part of the problem. Likewise, local human resources personnel may appear to employees to be aligned with management and unlikely to take employee concerns seriously, disincentivizing employees from raising concerns about potential misconduct. Accordingly, effective compliance programs often provide mechanisms for employees to report concerns to independent third parties (such as ombudsmen) specifically trained in addressing employee concerns. Depending on the nature of the complaint, legal personnel, compliance officers, or human resources personnel may need to become involved after the initial investigation has begun.

Corporate compliance programs play an important role in modern corporate governance. But they are only as good as management’s commitment to effective resolution of employee concerns and implementation of corrective action when credible misconduct has been identified. Companies have strong incentives to get it right.


Justin S. Brooks is a founding partner of Guttman, Buschner & Brooks PLLC. Mr. Brooks represents relators in qui tam litigation under the False Claims Act and other federal and state statutes and corporate clients in a wide variety of complex commercial and employment litigation. He also provides employment and compliance counseling to companies, represents institutional investors in shareholder derivative and corporate governance litigation, and represents employees in employment litigation of all types. He has represented clients in claims brought under the Federal False Claims Act, securities laws, the Worker Adjustment and Retraining Notification Act (WARN), Racketeer Influenced and Corrupt Organizations Act (RICO), and various employment discrimination, labor and environmental statutes.Prior to founding the firm, Mr. Brooks worked at Kirkland & Ellis LLP, Morgan, Lewis & Bockius LLP, and Grant & Eisenhofer P.A. He also served as law clerk for a federal judge. He has authored numerous articles on class action litigation and other topics.

1. Kroll, 2013/2014 Global Fraud Report, Who’s Got Something to Hide? 12 (2013),

2. See, e.g., Ass’n of Certified Fraud Exam’rs, Report to the Nations on Occupational Fraud and Abuse, 2014 Global Fraud Study 19 (2014),

3. 17 C.F.R. § 240.21F-6(a)(4); 17 C.F.R. § 240.21F-6(b)(3).

4. 17 C.F.R. § 240.21F-4(b)(7).

5. U.S. Sec. & Exch. Comm’n, 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program 16 (2014),

6 .See Memorandum from the Office of the Deputy Attorney Gen. to the Assistant Attorney Gen., Antitrust Div., the Assistant Attorney Gen., Civil Div., the Assistant Attorney Gen., Criminal Div., the Assistant Attorney Gen., Envtl. and Nat. Res. Div., the Assistant Attorney Gen., Nat’l Sec. Div., the Assistant Attorney Gen., Tax Div., the Dir., Fed. Bureau of Investigation, the Dir., Exec. Office for U.S. Trs., & all U.S. Attorneys (Sept. 9, 2015)

7 .See Bill Baer, Principal Deputy Assoc. Attorney Gen., Remarks at Society of Corporate Compliance and Ethics Conference (Sept. 27, 2016)

8 .The type of conduct that qualifies as “promotion” and the degree to which certain activity may be protected by the First Amendment involve a nuanced assessment, is largely unsettled, and varies from jurisdiction to jurisdiction. Detailed discussion is beyond the scope of this article.

“Conscientious Objectors” to Arbitration Policies Can Proceed in Federal Court

The Third Circuit allows two employees to sue their employer in court even though the company’s dispute resolution policy requires binding arbitration because they objected to the policy at the time of adoption.

On October 18, 2016, the Third Circuit held that two employees could sue their employer in federal court even though the company’s dispute resolution policy required binding arbitration because these employees objected to the policy at the time of its adoption. The decision reverses the district court, which had dismissed plaintiffs’ ADEA and VII claims in light of their coverage by the policy.  The case is Scott v. Education Management Corporation, No. 15-2177.


Plaintiffs Scott and Jones worked as Assistant Directors of Admissions at the Art Institute of Pittsburgh, a subsidiary of Education Management Corporation (“EDMC”).  Plaintiffs filed virtually identical Charges with the EEOC, claiming they were subject to unfair performance evaluations on the basis of their age.  Additionally, Jones alleged discrimination on the basis of race.  After Scott and Jones filed their charges, EDMC instituted a company-wide alternative dispute resolution (“ADR”) policy, which included final binding arbitration.  The policy was designed to establish arbitration as the exclusive means by which all work-related disputes would be resolved, including disputes sounding in “discrimination, harassment, retaliation, wrongful termination or other alleged unlawful treatment under state, local, or federal law.”

Plaintiffs’ attorney emailed EDMC on behalf of Jones, suggesting the policy was “illegal” and violated Title VII.  Plaintiffs then amended their EEOC complaints to include a retaliation claim on the basis of institution of the ADR policy.  After requesting Right to Sue letters from the EEOC, plaintiffs filed complaints in federal court, alleging violations of the ADEA, Title VII as well as Pennsylvania common law.  The district court dismissed both cases with prejudice, holding that the claims fell within the scope of the ADR policy.  The district court further reasoned that plaintiffs manifested assent to the policy by continuing to work after it was instituted.

On appeal, the Third Circuit rejected the reasoning on mutual assent.  EDMC argued that an employee assents when the employee continues to work for the employer.  The court disagreed, reasoning that plaintiffs promptly voiced their specific objection to and rejection of the ADR policy, which precluded assent to the policy.  The court held that on these facts, the plaintiffs’ continuing to work did not manifest assent to the policy.  The court also stated that Pennsylvania law would dictate the same holding.

Although the Third Circuit designated the decision as “not precedential,” employers can expert plaintiffs’ counsel to rely on the decision as persuasive authority.  The impact of the decision  will play out in the years to come, but the case indicates the Third Circuit may not be as deferential to agreements to resolve disputes through arbitration or mediation as other appellate courts.  On the other hand, the case is easily cabined on its facts and is likely only applicable to post-hoc changes meant to defeat judicial resolution of existing disputes.  There are parallels in other areas of law.  For example, then-Chancellor, now Chief Justice Leo Strine, has suggested that a company’s post-hoc enactment of forum selection clauses to defeat jurisdiction of actual or threatened shareholder litigation would be unenforceable because application would be unreasonable.  See Boilermakers Local 154 Ret. Fund v. Chevron Corp. (“Chevron”), 73 A.3d 934 (Del. Ch. 2013).

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact Justin Brooks at

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