October 25th, 2018
Partnerships and LLCs, are they the magic bullet to help protect whistleblower confidentiality?
In this video I discuss the benefits and limitations of whistleblowers using a corporate entity (like an LLC) or a partnership (LLP) to protect themselves from whistleblower retaliation. In short, using an LLC or LLP can be helpful, but: (1) only in specific limited situations; (2) there are risks that come with using a partnership or a corporate form while you are blowing the whistle; and (3) you cannot guarantee anonymity.
The following is a rough transcript of the video:
Hi, this is Tim from TheWhistleblower.com. Whistleblowers or potential whistleblowers often are looking for ways to minimize the risk of illegal retaliation because, although the laws prohibit it, very often companies will retaliate anyway, and one of the best ways to avoid retaliation is to maintain your confidentiality.
Whistleblowers often ask: Well how about if I form an LLC, a corporation, or a partnership and have that entity serve as the whistleblower? Will that do the trick?
The short answer is: It can be helpful, but within limits.
It’s not a magic bullet; it’s not perfect. In fact, nothing is perfect. It can be helpful, but it is important to recognize: (1) that there are limited situations where it will be helpful; and (2) that in all events there are tradeoffs, there are risks that come with using a partnership or a corporate form while you are blowing the whistle; and (3) you cannot guarantee anonymity.
Some of the programs like the SEC, the CFTC and the IRS programs have really strong institutional protection for whistleblowers, including in some of those programs you can file anonymously so that even the government doesn’t know your identity until the very end of a successful case. But even in those cases there are practical limitations. Companies often can figure it out even if they don’t know “officially.” And there is human error. Sometimes courts make mistakes, and things get disclosed that shouldn’t have, and so in no event – there is never a magic bullet – can you say, as a whistleblower, that you will never be outed.
But there are things you can do to decrease the chances that you’ll be identified, or certainly that you will be identified before the case ultimately is resolved. Filing as a partnership or as corporation is one of the things that can be done. That being said, because of how those corporate structures work, there are limits to how effective they can be, even if everything goes right.
Where using an LLC or LLP is most likely to be effective
First, if you voluntarily dismiss your case before active litigation starts.
If you file a case but the government declines to join it and you look and say: “you know what, without the government, the company committed fraud, but without the government it doesn’t make sense for me to go forward on my own. In a normal False Claims Act case, in most situations, at that point when the case is dismissed, it becomes public, and it is out there on the court records, and even if no one does press about it, it is there to be found. The company will probably find it, and so your name will be revealed. There are some situations where you can try and get the court to keep it under seal, but those are really tough motions to win.
So if you have filed as a partnership or another corporate entity that your name isn’t attached to, in those cases were the case is dismissed the public record, the public document doesn’t have your name on it. That provides you some protection.
It is possible that in that situation a defendant could try and go to court and take legal steps to try and unmask your identity. Different state laws have better and worse protections for that. But there is also the practical question of whether the company will want to expend their own legal resources and even if they are willing to do that, that process brings attention to the fact that there was a whistleblower case. Instead, many companies would rather just be able to say: “yeah, there was a case, but it was dismissed, there is no merit.” And move on. And so filing in a corporate form or a partnership form can be helpful there.
But — situations where using an LLC or LLP is less likely to be helpful.
It is generally not going to be helpful in terms of keeping your identify from the defendants in a case where you win, where there’s a settlement and you get money. The reason for that is, generally speaking, defendants, before they pay you, they are going to want to know who you are and they are going to want releases. So, whatever the technical legal protections of your confidentiality, to get that settlement probably defendants, at least, are going to want to find out who you are.
And, win, lose or draw, after the government makes its intervention decision, if you go into active litigation, it will be tough for you, even with a corporate form or partnership to maintain your confidentiality, because, in the process of discovery, in litigation, there will be conversations about: “Okay, XYZ company, how did you learn about the fraud? What documents did you have? Where did you get them? Who did you learn it from?” And so, in that process it’s hard to imagine a situation where you can successfully get to the other side of a case, prove up your case, without the defendants in discovery being able to figure out who is behind this entity.
On the plus side, if the defendant learns your identity, using a corporate form can limit who else does
So, ultimately, in that process of discovery, or going back to the situation where there’s a settlement and defendants find out who you, the whistleblower, are, there are things you can do to make it so the defendant knows, but they can’t make that public. Or, even more, although defendants know, but the public record that is out there once the case is settled, what is in the public, what people outside of your case can know is limited. So there are situations where it may not protect you from being retaliated against by the defendants or people they know and talk to, but to the general public, your name is not going to be out there as a whistleblower. So someone on a Google search wouldn’t learn that.
What are the risks?
So those ways that that could be hopeful. But in thinking about that, and thinking about if that makes sense for you, there also risks and a big part about these risks is that a lot of times you cannot really figure out what they are at the time you are filing you case. Some of them you can, but others you can’t.
The public disclosure bar
So one of the risks, for instance, there is an aspect of False Caims Act, the public disclosure bar, that says: if there was public – if there was news, or public cases, certain kinds of cases, and people knew about the fraud, then your case can be dismissed.
One of the defenses to that, a primary defense is that you are what’s called an “original source.” Part of that is you had information about the fraud independent of the public disclosure, and you have to have shared that with the government. Well, some courts have held that if the whistleblower is, for instance, an LLC that was formed at the time the complaint was filed, that corporation can’t know anything, can’t have any information that existed before it was formed, or how would it know it.
In partnerships, a partnership can be a way to get around that because you can form a certain kind of partnership that is really tied to the individual’s identity and therefore you can argue “Well, the partnership knew it, because it’s a product of the individuals.”
But even then, and again this is getting kind of technical, but even then there was a case recently where that happened and then … a variety of steps … one of the partners left the partnership and then a new one joined, and there was a question of what that meant. Ultimately, the court decided that because of the nature of partnership law, this individual identity basis that gives you a benefit in terms of public disclosure and original source, that law also says that when one partner leaves the partnership, the partnership dissolves.
Who is the whistleblower?
So then they were litigating the more technical False Claims Act question of whether the new partnership could substitute in as the whistleblower or did they have to file a new case. Ultimately, for variety of reasons far longer than you want to hear me talk about right now, because of that corporate form issue and the subsequent facts, the case was dismissed. So there are those legal issues that, while you get some protection, you add some risk.
What will the government think?
There is also the practical risk that the government, for good or for ill, a number of government attorneys really don’t feel comfortable with whistleblowers — they would sometimes call it – hiding behind a corporate form and thus not putting their name on the allegations.
The government is going to be investigating this fraud based in large part on your credibility on their belief that you know what you’re talking about and are trying to do the right thing. And there are times when they feel like if you’re not willing to put your name out there, then they’re not – maybe they won’t take your case as seriously. I don’t think that’s fair, I don’t think that’s right, I don’t think it recognizes the reality of retaliation, but it is what it is.
There are steps you can take to minimize whistleblower retaliation, but you have to consider the trade-offs
And so if you do file with a partnership or a corporate form, you have to think about that consequences and they are all tradeoffs. Going back to the beginning, there is no magic bullet, there’s no silver bullet, there’s no one-size-fits-all solution. There are things you can do, there are steps you can take to minimize the risk, but it really is all a balancing act. And that is why it is important to work with your lawyer, and be thoughtful throughout the process as you are getting ready to file, and when you file.
So this has been an overview – information, issues to think about if you are thinking about blowing the whistle. If you would like to get legal advice, please contact me or call me at (207) 747-7639 for a free, confidential discussion.
Also, the disclaimer:
While I hope this video was informative, it is not legal advice and you should not rely on it as such. Watching this video does not make me your lawyer or you my client.