By Erica Shelley Nelson and Brennen Johnson
In Becker v. Community Health Systems, Inc., Division III of the Washington State Court of Appeals determined that a Chief Financial Officer could sue his former employer for firing him when he refused to submit a false or misleading financial report. Although the Company sought to dismiss the CFO’s lawsuit, the Court decided that the former CFO could pursue a state common law claim for “wrongful discharge in violation of public policy.”
In 2011, the Company hired the CFO with a business strategy to increase profitability. At that time, the Company also represented to investors that it expected to incur a 4 million dollar operating loss in 2012. However, at the end of 2011, the CFO correctly projected that the company would actually sustain a 12 million dollar operating loss the following year. After informing the Company of his projections, the Company demanded that the CFO recalculate his projection to show a target 4 million dollar loss in 2012. The CFO refused to do so because he believed it would require overstating the income of the company and understating its expenses, fraudulently misleading investors and creditors in violation of criminal laws.
After the CFO refused to submit the 4 million dollar figure, the Company rated his job performance as “unacceptable,” placed him on a probationary “performance improvement plan,” and told him he could either submit the 4 million dollar figure or lose his job. When the CFO responded by informing the Company that it needed to cease attempting to submit the 4 million dollar figure or he would have no choice but to resign, the Company responded the next day with a one line email accepting his resignation.
Shortly thereafter, the CFO sued the Company for wrongful discharge in violation of public policy. In order to succeed he had to argue that filing a false financial statement was clearly against the public policy of honesty in financial reporting, that refusing to file the report was necessary to defend the public policy, and that he was fired because he refused to submit the false statement.
The Company argued that the CFO’s claim must fail because his actions were not necessary to defend the public policy of honesty in financial reporting. It explained that a cocktail of existing statutes, like the Sarbanes-Oxley act and the Dodd-Frank Consumer Protection Act, adequately promote public policy of honesty in corporate financial reporting, rendering a separate state law claim superfluous.
The Court explained that a claim for wrongful discharge in violation of public policy requires the plaintiff to show that he or she “engaged in particular conduct, and the conduct directly relates to the public policy, or was necessary for the effective enforcement of the policy.” It rephrased this requirement as a duty on the CFO to show that the actions he took were the only available adequate means to promote honesty in the Company’s financial reporting.
Although the Court recognized that laws such as the Sarbanes-Oxley Act and Dodd-Frank Act promoted honesty in financial reporting, it determined that these laws alone were inadequate to promote it fully. It explained:
These statutes provide comprehensive… protections… But because these statutes declare their remedies do not preclude others, we have the strongest possible evidence these remedies are inadequate, on their own, to fully vindicate public policy… These statutes and regulations provide comprehensive criminal, civil, and administrative enforcement mechanisms promoting the important public policies they secure. But those means of promoting public policy do not foreclose private common law tort remedies for employees.
In reaching this conclusion, the Court indicated that refusing to engage in certain conduct can be deemed necessary to promote public policy when an employer forces an employee “to choose between the consequences of disobeying his employer and the consequences of disobeying criminal laws.”
The Court concluded that discharging the CFO would jeopardize the public policy of honesty in corporate financial reporting by discouraging a CFO from refusing to submit a false or misleading financial statement. Ultimately, the CFO’s lawsuit survived the Company’s motion to dismiss.
Over the last nine years, Washington courts have been chipping away at the tort of wrongful discharge in violation of public policy, leaving plaintiffs with no avenue for relief. Fortunately, over the last couple years, the tort has been slowly revived—allowing plaintiffs to pursue these claims in court. Part of this shift, has been the courts recognition of the fact that they have perhaps overemphasized the abstract adequacy of the statutes and regulations while forgetting the concrete public policy impact of chilling protected employee conduct. Recently, there has been a push in the legislature to codify the wrongful discharge in public policy claim to create statutory parameters and aid in more consistent interpretation.
