Professor Steven Solomon, who teaches at U.C. Berkeley’s School of Law, recently argued in the New York Times that “[i]nstead of incentivizing the reporting of criminal conduct and fraud, the laws [like the False Claims Act] may be turning everyone into entrepreneurs looking for a possible case in their own companies.” The main thrust of his argument was that large whistleblower rewards motivate employees to blow the whistle merely for the reward.
The problem, as hypothesized by Professor Solomon, is that “the current structure of whistle-blower compensation…may create perverse incentives and reward wrongdoing.” He speculates that some whistleblowers receiving these awards may have been at the center of the wrongdoing and therefore should not benefit from later exposing that wrongdoing to law enforcement and regulatory authorities. Professor Solomon asks the government to do something about this purported problem.
There are two obvious problems with his arguments: the words “may.” Both of Professor Solomon’s predicate assumptions–that whistleblowers are only stepping forward to receive rewards and that large numbers of such whistleblowers are central to the wrongful conduct–are wrong. Unfortunately, many companies make the same erroneous assumptions, which is counterproductive to the objective of preventing fraud and ensuring compliance.
Several objective studies and surveys have demonstrated that whistleblower rewards do not generally motivate whistleblower complaints. For example, a recent survey found that only 13% of managers of U.S. companies said that financial rewards would motivate them to blow the whistle. On the contrary, the report noted that financial rewards may actually deter whistleblowing because the “financial rewards taint the perceptions of whistleblowers’ motives”–employees don’t want to be viewed as reporting fraud simply to get a reward, so they don’t report.
Indeed, other surveys and studies demonstrate that the reasons whistleblowers actually come forward have little to do with financial gain. If Professor Solomon had walked the 100 or so yards from Berkeley’s law school to its famed business school (Haas) and talked with Professor Adair Morse, who has actually conducted research in this area, he would have learned his assumptions are all wrong.
Professor Adair and her colleagues found that while monetary incentives play a role, they are hardly the sole–or even primary–factor motivating whistleblowing activity. Her study showed that whistleblowers often face significant monetary losses–at least in the near-term–for going public. Indeed, in “82 percent of cases…[whistleblowers] were fired, quit under duress, or had significantly altered responsibilities as a result of bringing the fraud to light.” She found that “many employee whistleblowers report having to move to another industry and often to another town to escape personal harassment.” Summing up their findings, Professor Adair found that “[n]ot only is the honest behavior not rewarded by the market,…it is penalized” and that “the surprising part is not that most employees do not talk; it is that some talk at all.”
Moreover, Professor Adair’s study directly tested Professor Solomon’s implicit assumption that the availability of monetary incentives encourages employees to blow the whistle when there is no actual wrongdoing. After analyzing available data, Professor Adair and her colleagues found that “there is no evidence that having stronger monetary incentives to blow the whistle leads to more frivolous suits.”
Professor Adair also found that a more important motivating factor was often the whistleblowers’ desire to distance themselves from the improper activity–exactly the opposite of Professor Solomon’s assumption that many whistleblowers are intimately involved in the wrongdoing. Professor Adair’s study concluded that while “[s]ome [whistleblowers] might be accomplices, enjoying some of the benefits of the fraud,…most are not.”
Professor Adair’s study is bolstered by others, including a study published in the New England Journal of Medicine, which analyzed successful whistleblower suits in the healthcare industry. Addressing Professor Solomon’s first assumption, the study found that most successful whistleblowers were not initially motivated to come forward by the possibility of a financial reward. Only a small fraction of whistleblowers in the NEJM study specifically intended to take advantage of the qui tam mechanism (i.e., the monetary award) when they first came forward. Moreover, “[e]very [whistleblower]…interviewed stated that the financial bounty offered under the federal statute had not motivated their participation in the qui tam lawsuit.”
Instead, the successful whistleblowers’ “[r]eported motivations coalesced around four non–mutually exclusive themes: integrity, altruism or public safety, justice, and self-preservation.” Rather than naked monetary motivations, the vast majority of successful whistleblowers came forward because of “strong [personal] ethical standards” and to protect themselves from being implicated in the improper conduct. And even though every single whistleblower in that study received a monetary payment, “a majority perceived their net recovery to be small relative to the time they spent on the case and the disruption and damage to their careers.”
The NEJM study’s authors concluded that, contrary to Professor Solomon’s erroneous assumption, whistleblowers filed lawsuits “as a last resort” after steps to correct the problems internally were unsuccessful. They also came to the exact opposite policy recommendation as Professor Solomon based on actual study and not just bald hypothesizing: rather than make whistleblowing more difficult, the government should do exactly the opposite. They concluded, “Justice Department investigators and others involved in the process [should be] more cognizant of the tribulations faced by [whistleblowers]” and provide them with ”needed resources (for example, temporary financial or medical benefits during unemployment) during the course of litigation.”
As for Professor Solomon’s second assumption–that those involved in the wrongdoing are becoming whistleblowers–the NEJM’s study found that a “large proportion” of the whistleblowers “refused to participate in the corporate actions that led to the suit,” often to their professional detriment. It also found that “[n]early all…insiders first tried to fix matters internally by talking to their superiors, filing an internal complaint, or both.” Far from participating in or directing the improper conduct, the vast majority of whistleblowers first attempted to correct it internally before blowing the whistle.
Finally, it is also worth noting that Professor Solomon’s concern that employees involved in the wrongdoing are financially benefiting from blowing the whistle on their own misconduct is a circumstance already specifically addressed in the False Claims Act. The False Claims Act expressly provides that
if the court finds that the action was brought by a person who planned and initiated the violation…, then the court may, to the extent the court considers appropriate, reduce the share of the proceeds of the action which the person would otherwise receive…, taking into account the role of that person in advancing the case to litigation and any relevant circumstances pertaining to the violation. If the person bringing the action is convicted of criminal conduct arising from his or her role in the violation…, that person shall be dismissed from the civil action and shall not receive any share of the proceeds of the action.
31 U.S.C. § 3730(d)(3). Thus, there are already mechanisms in place to address Professor Solomon’s concerns, which he fails to acknowledge.
Finally, Professor Solomon’s piece is interesting because it likely reflects the same erroneous assumptions that a significant number companies also harbor about whistleblowers and their motivations. To the extent that such erroneous assumptions exist, they likely negatively shape how companies address whistleblowers–both before and after they come forward.The objective research, discussed above, demonstrating why whistleblowers actually step forward, suggests several practical steps that companies can take to encourage employees with information about wrongdoing to report internally first, before blowing the whistle externally. Internal reporting can be worth millions—or hundreds of millions–of dollars to a company’s bottom line. While these steps will be addressed in an upcoming post, the basic take-home message should be that the type of open hostility towards whistleblowers reflected in Professor Solomon’s piece is antithetical to fostering a corporate culture that encourages such internal reporting.