Another Front in Retaliation Risk: Front Pay

The wide world of whistleblower retaliation risk just grew even wider: a federal judge in New York has upheld the awarding of “front pay” for retaliation lawsuits filed under the Sarbanes-Oxley Act.

Front pay is a form of damages akin to winning back pay. The difference: front pay is money awarded for a job you should be able do into the future but can’t, because the relationship with your employer has soured so much that returning to work is impossible. That mistake just cost one company more than half its annual revenue in damages to one ex-employee.

The particulars involve Progenics Pharmaceuticals, which develops cancer treatments; and Dr. Julio Perez, a chemist who worked at Progenics in the 2000s. For more than eight years Perez has sparred with Progenics in federal court, alleging that he was fired in 2008 for raising concerns about drug trials Progenics had been conducting.

On Sept. 9, district court judge Loretta Preska (until recently the chief judge for the Southern District of New York, and well-respected across the federal bench) ended the fight with ruling in favor of Perez. She upheld a jury award of $1.67 million for retaliation, plus $613,000 in interest, plus $2.7 million in front pay—the amount of money Perez should have earned from today, when he is 58 years old, until his future retirement in 2024.

This decision does no favors to compliance officers trying to contain whistleblower retaliation risk. Worse, the details of the Progenics case show how your most senior executives can cause the most trouble. They create the culture at your firm; if they create one that’s intolerable for whistleblowers, front pay can enter the picture and lead to some very expensive predicaments. And all this can happen under the auspices of SOX, with its sweeping protections for whistleblowers.

The Backstory

In 2008 Progenics had been working with Wyeth Pharmaceuticals (since acquired by Valeant Pharmaceuticals) to study the effectiveness of a drug called Relistor. That spring, Progenics published a press release that it was “pleased” with recent clinical trials. At that time, Perez was working on an oral version of Relistor and had known about the press release, but had not seen results of those clinical trials.

By that July, Perez saw a confidential presentation prepared by Wyeth executives that said Relistor’s results weren’t meeting Wyeth’s expectations. On Aug. 5, 2008, Perez sent a memo to Progenics’ senior executives saying the press release was tantamount to fraud against shareholders. The company then cut off his computer access and demanded to know how Perez obtained that confidential Wyeth presentation. He declined to answer and said he wanted to speak to his attorney. Progenics fired him the next day.

For our purposes here, accept that Progenics did retaliate against Perez, which led to $2.28 million in damages and pre-judgment interest. You can read Preska’s complete decision if you like; it runs to 89 pages and spends considerable time recapping this ponderous, meandering case. Our concern is how Progenics also boxed itself into paying another $2.7 million in front pay.

The key player in that part of the drama is Mark Baker. He was Progenics’ general counsel in 2008, and the man who fired Perez. Baker was also deposed in Perez’ subsequent lawsuit, and cross-examined during the whistleblower trial. Even better, by that point Perez was representing himself, so he personally cross-examined the man who fired him. Baker was promoted to CEO in 2011, a job he holds to this day.

Bad Blood

According to Preska’s decision, Baker was condescending to Perez throughout the trial. For example, during cross-examination Baker referred to Perez by his first name, and subtly mocked him for not speaking English as his native language. (“We are English-speaking people, we know how to read,” he replied to one question from Perez.)

That demeanor sealed Progenics’ fate. At one point in her decision Preska wrote: “The relationship between Mr. Baker and Dr. Perez will inform the court’s decision regarding the feasibility of Dr. Perez’s reinstatement.” Even if Perez could return to a useful role at Progenics (the company said it had eliminated his position in 2009 and had no use for him), “manifest hostility exists between them.”

So Preska took Perez’ annual salary in 2008 ($203,000), and calculated how much he would have received since then, with cost-of-living pay raises along the way. If you keep running those calculations until Perez’s presumed retirement in late 2024, you arrive at $2.7 million in front pay. (Perez had also convinced the court that he had searched in good faith to find other employment, without success.)

That’s a total of nearly $5 million awarded to Perez, more than half Progenics’ 2015 revenue of $8.67 million. Lucky for the company, it will see much more revenue this year thanks to hitting some drug development milestone payments. Otherwise Baker’s poor handling of Perez might have posed dire threats to the business.

This case underlines the need for strong ethical leadership specifically at the top. You can fire a sourpuss mid-level manager to reinstate a whistleblower and avoid the threat of front pay. You can’t do that when the problem manager is the CEO. That person’s tone fills the organization. If the tone is to treat whistleblowers poorly, reinstation anywhere becomes impossible.

Want to feel even more uneasy? Imagine a top sales executive accusing your company of retaliation rather than a chemist. For someone like that—someone working on commission, possibly with stock options—front pay could go well beyond the $2.7 million Progenics is facing.

SOX doesn’t specifically name front pay as a remedy for whistleblowers. Rather, it says judges can aware back pay and “other relief” to make whistleblowers financially whole after suffering retaliation. If a company’s poor attitude about whistleblowers makes reinstation impossible—well, suddenly front pay becomes a much more plausible solution for the whistleblower.