8th Circuit Upholds Dismissal of Insurance Executive’s Whistleblower Suit

By Jim Sams | May 3, 2021

A federal appellate court upheld the dismissal of a whistleblower lawsuit filed by an insurance executive who was fired after allegedly submitting false expense reports and encouraging employees under him to do the same.

A panel of the 8th Circuit Court of Appeals rejected Jonathan Scarborough’s arguments that Federated Mutual Insurance Co. made a scapegoat out of him so that the company could protect another manager who had committed even worse misdeeds.

The decision affirmed a ruling made by the U.S. District Court in Minnesota granting Federated’s motion for summary judgment.

Federated fired Scarborough in August 2014, two years after he had sold his house in Kansas and moved family to Nashville, Tenn. to accept a promotion from district to regional marketing manager. He had worked for the carrier almost 17 years.

The series of events that led to his firing started when a manager noticed that Frederick Johnston, one the six district managers assigned to Scarborough, had placed on his expense report a $702.87 charge to his company credit card for customized framing of personal photographs, according to the opinion. Johnston said the charge was for laminating company documents and buying printing ink.

While discussing the suspect expense item, Scarborough told his supervisor, Michael Pennington, that Johnston “likes fancy things” and had also placed on his expense report fees to rent meeting rooms at the Husch Blackwell law firm. Pennington expressed surprise because the law firm allowed Federated to use its meeting rooms for free, the opinion says.

Federated investigated and learned that Johnston has submitted invoices totaling about $5,000 for meetings at Husch Blackwell and that Scarborough had approved those expenses.

Johnston admitted to lying about the purpose of the framing purchase. He told Pennington that Scarborough know that the law firm didn’t charge for use of its meeting rooms. He knowingly approved the false expense reports and encouraged other district managers to report meeting room expenses as well.

Another employee confirmed Johnston’s story, the opinion says. Federated gave Johnston the option of resigning or accepting a demotion. Scarborough insisted that he did not know that Johnston had submitted fraudulent invoices.

Federated issued a warning letter to Scarborough for continuing to deny knowledge of Johnston’s conduct. The company said it would not tolerate any future wrongdoing.

But Scarborough irked his supervisors when he called employees who worked under Johnston to tell them that what had happened with their boss. To make things worse, the company learned that Scarborough charged personal expenses to his company credit card and had only recently offered to reimburse the company, the opinion says.

Pennington’s supervisor, Michael Kerr, told Scarborough that he could accept a demotion to district manager or resign. Scarbourgh decided to stay on, but then called a colleague to tell him that Federated was trying to force him out, according to the opinion.

When Kerr learned about that conversation, he terminated Scarborough for his “lack of professionalism.”

Scarborough filed a wrongful termination suit in Johnson County, Kansas. Federated had the case removed to federal court and then reassigned to Minnesota because Scarborough had signed an employment agreement requiring all disputes to be resolved according to Minnesota law.

Scarborough filed an amended complaint charging that Federated had violated his rights under the Minnesota Whistleblower Act.

His lawsuit tells a very different tale than Federated. Scarborough alleged that Pennington was aware that Johnston was submitting fraudulent expenses when the two worked together previously and ignored it. He submitted as evidence two meeting room invoices that presumably Pennington had approved.

Scarborough said he was fired only after pushing for Johnston’s termination, and after he expressed his opinion that both Federated and Johnston may have violated tax laws. The stated reasons for terminating him, the suit charges, were a pretext.

The district court granted summary judgment to Federated, but the 8th Circuit overturned that decision and sent the case back to the trial court because the judge did not use the proper analysis. The district court granted summary judgment again, and this time the 8th Circuit upheld that ruling.

The opinion explained that Scarborough had the burden of proving that a “retaliatory animus” motivated the decision to fire him. The opinion notes that two employees told managers that Scarborough had knowingly approved falsified expense reports.

“Scarborough has failed to provide any direct evidence that he was retaliated against for flagging Johnston’s expense reporting activities,” the opinion says.

Scarborough is now president of Iron Mountain Insurance in Birmingham, Ala. He did not respond Friday to an email and telephone call requesting comment.

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