United States: Second Circuit: No SEC Reporting Requirement In Dodd-Frank Whistleblower Provisions

In a much-anticipated decision, the U.S. Court of Appeals for the Second Circuit set up a possible showdown at the U.S. Supreme Court when it decided on September 10 that whistleblowers need not report to the SEC in order to state a claim for unlawful retaliation under the Dodd-Frank Act whistleblower provisions. (See our earlier discussion on this issue here.) The court expressly recognized that, in deferring to the SEC's interpretation of the statute and its implementing rules, it parted company with the Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013).

At issue was the relationship between the definition of a whistleblower in Section 21F(a)(6) of the Act, which defines a "whistleblower" as "any individual who provided information relating to a violation of the securities laws to the Commission..." 15 U.S.C. § 78u-6(a)(6) (emphasis added) and Section 21F(h)(1)(A), the anti-retaliation provision, which provides that an employer may not retaliate against a "whistleblower" for (i) providing information to the Commission; (ii) initiating or assisting in an action of the Commission based on such information; or (iii) "making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002..." 15 U.S.C. § 78u-6(h)(1)(A). The confusion relates to the fact that disclosures required or protected under Sarbanes-Oxley do not require reporting to the Commission; merely providing information to one's employer will suffice.

The Fifth Circuit in Asadi found no ambiguity in the statutes because only one who provides information to the SEC can be a "whistleblower." Asadi, 720 F.3d at 623. Thus, the Fifth Circuit did not look to the SEC rules, which expressly broadened the scope of the term "whistleblower" in the context of the anti-retaliation provisions (as opposed to the use of the term for purposes of the Act's bounty award provisions). In contrast to the Fifth Circuit, the Second Circuit found an "arguable tension" in the provisions. First, while conceding that there was "no absolute conflict" in the provisions because some employees might report to their employers and the SEC and thus be protected by subdivision (iii), the court said applying the SEC reporting requirements to subdivision (iii) would leave the statute with extremely limited scope because "few" people would report to their employers and the SEC. Second, the court noted that some whistleblowers, namely attorneys and auditors, who cannot report to the SEC until after they report to their employers, would be unlikely to have Dodd-Frank protection under the reading accepted in Asadi.

In light of the "limiting effect" of a Commission reporting requirement, the court looked to the legislative history of the statute. While stating that the legislative history "yields nothing," the court was influenced by the fact that subdivision (iii) was a late add to the statute and questioned whether the "whistleblower" definition should apply to the "late-added subdivision." The court said that it would not be surprising if "no one noticed that the new subdivision and the definition of 'whistleblower' do not fit together neatly." The court concluded that it was "doubtful" that those who accepted the last-minute insertion of subdivision (iii) would have expected it to have the limited scope it would have if restricted by the SEC reporting requirement. Ultimately, the court did not have to choose between "reading the statute literally or broadly to carry out its apparent purpose" because Section 21F was "as a whole sufficiently ambiguous" to oblige the court to give the SEC's reading of the statute deference. Thus, the court concluded that the plaintiff stated a claim, despite not having reported to the SEC before his termination.

In a strongly worded dissent, Judge Dennis Jacobs, relying on the rationale of Asadi, found no ambiguity and opined that the Second Circuit was "firmly on the wrong side" of the circuit split.

The Second Circuit's view on this much-debated issue obviously is significant. The clear circuit split may next be addressed by the Supreme Court. Stay tuned.

See decision here.

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