New Life to Retaliation Suit Against SC Johnson

CHICAGO (CN) - In a ruling likely to make waves in corporate America, the 7th Circuit allowed a SC Johnson & Son whistle-blower to proceed with claims of retaliation and tax fraud under federal anti-racketeering law.

Michael DeGuelle, who worked in the tax department for the home products manufacturer from 1997 to 2009, claimed that he was fired after reporting SC Johnson's tax fraud to federal agents.

DeGuelle's complaint describes a pattern of tax fraud and cover-ups beginning in December 2000, when he first discovered that the company had improperly received more than $5 million in foreign tax credits. When DeGuelle reported his findings, global tax counsel Daniel Wenzel allegedly told DeGuelle not to report to discovery and said, "This is why I go to church on Sundays."

DeGuelle also claimed to have witness other incidents of document falsification and records destruction as recently as 2005. In total, DeGuelle believes SC Johnson received as much as $11 million in the form of reduced tax liability.

After providing documentation of the improprieties to the human resources department in January 2008, DeGuelle was informed that an outside law firm had been hired to investigate the allegations. No fraud was found.

DeGuelle later announced his intentions to file a whistle-blower complaint with the Department of Labor, claiming that Wenzel had created a hostile work environment and issued him a retaliatory negative performance review. He was allegedly offered a salary increase and partial payment of attorneys' fees if he agreed to sign a release of claims and confidentiality agreement.

DeGuelle believes this offer came from Executive Vice President and Chief Financial Officer W. Lee McCollum and Vice President and Chief Information Officer Mark Eckhardt.

Instead of accepting the offer, DeGuelle filed the federal complaint in 2008 under the Sarbanes-Oxley Act, which makes it a felony to retaliate against whistle-blowers on corporate fraud.

SC Johnson allegedly next offered to let DeGuelle resign with one year of salary and benefits if he released all claims and signed a confidentiality agreement. He declined.

Shortly afterward, the company investigated DeGuelle for the release of confidential business documents outside the company, placed him on administrative leave and fired him. DeGuelle claims that he only turned the documents over to federal investigators, an action protected by law.

SC Johnson sued DeGuelle for breach of contract in Racine County Court, seeking recovery of SCJ property, documentation and other confidential information. The company made statements about DeGuelle to local media outlets.

In June 2011, the court ruled in favor of SC Johnson, finding DeGuelle liable for $50,000 in damages and making him return all documents.

While appealing the decision, DeGuelle filed a federal countersuit in Wisconsin, claiming that the fraud, combined with his termination, constituted a pattern of activity proscribed by the Racketeer Influenced and Corrupt Organizations Act.

U.S. District Judge J.P. Stadtmueller dismissed the suit, ruling that the retaliation could not be seen as an attempt to "cover up" the tax fraud since it occurred after DeGuelle's whistle-blowing.

"Because the District Court considered the alleged predicate acts as two separate schemes, the retaliatory actions taken against DeGuelle ... were considered unrelated to the predicate acts alleged as part of the tax fraud scheme... because they involved different actors, motives, and victims," according to the 7th Circuit's Dec. 15 summary.

The three-judge appellate panel rejected this interpretation, however, holding that violations of a provision in the 2002 Sarbanes-Oxley Act can be considered as elements of a RICO conspiracy.

"Under the district court's reasoning, retaliation cannot be related to the underlying wrongdoing for purposes of RICO because the retaliatory acts will always occur after the underlying wrongdoing has been disclosed," Judge Michael Kanne wrote for the court. "Thus, there is no 'cover up.' In addition, the motives and victims will almost never be the same. We can conceive of very few cases in which a single retaliatory act would be considered 'related' to other predicate acts under this reasoning. This is troubling when one considers the purposes of the Sarbanes-Oxley Act and its addition ... to RICO's statutory scheme."

"When an employer retaliates against an employee, there is always an underlying motivation. ... Retaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower. ... Accordingly, we believe a relationship can exist between [acts of retaliation] and predicate acts involving the underlying cause for such retaliation. Such a finding is consistent with the Supreme Court's flexible standard and acknowledges the rationale behind the Sarbanes-Oxley Act's whistleblower provisions."

Courts will still have to examine the facts of each case to determine whether the alleged retaliation satisfies the Supreme Court's so-called test for a continuity-plus relationship.

SC Johnson said it is not worried. "The Seventh Circuit Court of Appeals held that Mr. DeGuelle's complaint included enough unproven claims to start a lawsuit. However, Mr. DeGuelle's federal court lawsuit essentially attempts to re-litigate the Racine County suit where that court decided in SC Johnson's favor, dismissing all of DeGuelle's claims and awarding SC Johnson damages on its claims," spokesman Christopher Beard in a statement. "Like the Racine county case, we believe we will prevail in the District Court and that the case will be dismissed."

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