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“Add-On” FWA Claims Open the Door for Employers to Recover Attorneys’ Fees

Labor & Employment Law Alert Kelly L. Davis

A mental health counselor working at a court-ordered residential treatment program for delinquent youths believes she has uncovered multiple instances of child abuse, along with evidence that the center falsified medical forms and engaged in reporting violations and Medicaid fraud. The counselor reports this information to the center’s management and is fired soon thereafter. Following entry of summary judgment for the employer on both the Sarbanes-Oxley and state whistleblower law claims, the court awarded defendants their attorneys’ fees, finding that Sarbanes-Oxley’s ban on such fee awards is not preclusive if fees are available on another basis.

The counselor filed a lawsuit in state court against her former employer (and its parent companies). She asserted claims under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Florida Whistleblower Act (“FWA”) for retaliatory discharge. The employer removed the case to federal court. The district court then granted summary judgment for the employer and its parent companies, finding that the counselor did not offer any admissible evidence of the underlying violations by her employer about which she claims to have blown the whistle.

The question then arose: Can the employer and its parent companies recover their attorneys’ fees for successfully defending the former employee’s lawsuit? It is a question many employers ask at the start of litigation, and the answer often factors into the employer’s decision about whether to aggressively defend the lawsuit or pursue an earlier (and generally less costly) resolution through informal negotiation, mediation, or arbitration.

Last week, the Eleventh Circuit answered that question in the affirmative in Smith v. Psychiatric Solutions, Inc., No. 13–12785, 2014 WL 1775875 (11th Cir. May 6, 2014). Although a successful employer cannot recover its fees for defending a claim brought under Sarbanes-Oxley, the Eleventh Circuit held that the act does not preclude trial courts from awarding successful employers their attorneys’ fees if an alternative basis for fees exists.

In Smith, the counselor not only asserted a retaliatory discharge claim under Sarbanes-Oxley, she also brought a claim for violation of the FWA. The FWA’s fee provision gives the trial court discretion to award fees to the prevailing party, whether that party is the employee or the employer. The employee argued in Smith that because Sarbanes-Oxley does not allow for fees to be awarded to an employer, it preempts the FWA’s fee provision. The court rejected this argument and upheld the district court’s order directing the former employee to pay her employer nearly $54,000 for the fees it incurred in defending against her FWA claim (which work was relevant to developing defenses to both the FWA and Sarbanes-Oxley claims because of the factual and legal overlap).

The Eleventh Circuit also rejected the former employee’s alternate argument that an award of fees to the employer under the FWA is never proper, despite the discretionary language of the statute. The court noted that there is no set standard for trial courts to follow when exercising their discretion to award fees under the FWA. One of the important factors, however, is whether an award of fees to a successful employer would likely deter other parties from bringing worthy FWA claims in the future. In the Smith case, the trial court determined that an award of fees when the claim was dismissed at the summary judgment stage after unnecessary discovery and motion practice by the former employee was not likely to deter others from bringing meritorious claims.

Some employees may include claims under the FWA as an “add-on” to what they consider their primary claim under a federal law such as Sarbanes-Oxley. The Eleventh Circuit confirmed that doing so opens the door for employers to recover their attorneys’ fees and counseled employees that they can eliminate the risk by foregoing FWA claims. What impact the Smith ruling will have on the number of lawsuits in which former employees assert claims under both a federal law such as Sarbanes-Oxley and the FWA in the future remains to be seen.

If you have questions about this holding or retaliation and whistleblower claims in general, contact Kelly L. Davis at (239) 659-5066 / [email protected], or your Quarles & Brady LLP attorney.