Jun 272014

Ex-Employee’s Threat to Bring Qui Tam Is Extortion, According to California Appeals Court

Jaime L.M. Jones and Nicole Brown
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Posted by Jaime Jones and Nicole Brown

Recently, the California Court of Appeals held that an individual who threatens a whistleblower action in an attempt to drive a settlement of unrelated employment claims may be held liable for extortion. Stenehjem v. Sareen, No. H038324 (Cal. Ct. App. Jun. 13, 2014). The matter resolved a counterclaim against Jerry Stenehjem, who had sued his former employer, Akon, Inc., and Surya Sareen, Akon’s CEO, for defamation and wrongful termination. Prior to trial of those claims, Stenehjem and his attorney made several unsuccessful attempts to initiate settlement discussions with Akon and Sareen. The last of these attempts was an e-mail from Stenehjem to Sareen’s attorney, extending “one last opportunity to settle,” which Stenehjem suggested would trigger “the Qui Tam option,” if rejected.

In response to Stenehjem’s e-mail, which included several other inflammatory statements and accusations of fraudulent business practices, Sareen countersued Stenehjem for extortion. Stenehjem moved to strike Sareen’s counterclaim under California’s anti-SLAPP statute, a law permitting dismissal of lawsuits that seek to chill or punish a party’s constitutional free speech. The trial court granted Stenehjem’s motion to strike, and Sareen appealed, claiming that Stenehjem’s e-mail was not protected by the anti-SLAPP statute because it was extortion.

The Court of Appeals agreed that Stenehjem’s threat to alert federal authorities to the alleged fraud and FCA exposure met the legal definition of extortion. Notably, the court held that the veracity of the allegations in Stenehjem’s e-mail was irrelevant to deciding this question. More importantly, the court held that Stenehjem’s statements could not be considered pre-litigation communications, protected under the anti-SLAPP statute, because the “qui tam action was entirely unrelated to any alleged injury suffered by Stenehjem as alleged in his demotion and wrongful termination claims.” Thus, the court signaled that in the future similar statements may be treated differently if there is an established nexus between the pending litigation and threatened FCA suit. Nonetheless, FCA defendants will be sure to focus on the outcome in this case and consider such counterclaims where appropriate.

Jaime L.M. Jones

Chicago

jaimejones@sidley.com

Nicole Brown

NicoleBrown@sidley.com

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