United States: Second Circuit Splits With Fifth Circuit Setting Up Possible Supreme Court Review: Are Internal Whistleblowers Protected Under Dodd-Frank?

Last Updated: September 17 2015
Article by Jason M. Halper

On September 10, 2015, a divided panel of the Second Circuit issued an opinion in Berman v. Neo@Ogilvy LLC, No. 14-4626 (2nd Cir. Sept. 10, 2015), creating a split with the Fifth Circuit on an issue that has also divided lower federal courts: whether the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply to tipsters who claim retaliation after reporting internally, or only to those retaliated against after reporting information to the SEC. The Second Circuit, granting Chevron deference to SEC interpretive guidance, held that Dodd-Frank protections apply to internal whistleblowers. This stands in contrast to the Fifth Circuit's holding in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), where that court found that on their face, the Dodd-Frank anti-retaliation provisions unambiguously limited protection to whistleblowers reporting to the SEC, and that, therefore, the SEC's contrary guidance was not entitled to deference. Given this Circuit split, Supreme Court review is possible.

Why It Matters

Whether internal reports qualify for Dodd-Frank coverage has important implications because, among other things, Dodd-Frank provides greater recoveries (including two times back pay) and longer time frames (six years) for bringing a retaliation claim than those available under the anti-retaliation provisions in Sarbanes-Oxley.

The extension of Dodd-Frank protections to internal whistleblowers may also incentivize internal reporting prior to any reporting to the SEC (thereby affording the company an opportunity to control the timing and content of any self-disclosure to the government). This would be consistent with the SEC's adoption of several other provisions in its Dodd-Frank regulations which are intended to encourage internal reporting. For example, the SEC has provided for a 120-day "look-back period" for whistleblowers who first report internally. Under this rule, if a whistleblower reports to the SEC within 120 days of reporting internally to the company, the whistleblower will receive 'credit' for reporting the information as of the date of the internal report. This allows the whistleblower to maintain priority status over any subsequent whistleblowers. The SEC has also said that it will consider whether a whistleblower first reported the information internally before reporting to the SEC when it is considering whether the whistleblower should receive an award and, if so, where the award should fall in the 10 – 30% discretionary range. According to the SEC, "a whistleblower's voluntary participation in an entity's internal compliance and reporting systems is a factor that can increase the amount of an award, and ... a whistleblower's interference with internal compliance and reporting is a factor that can decrease the amount of an award."

Regulatory and Judicial Background

The dispute over whether internal reporting is covered by Dodd-Frank's anti-retaliation provisions is rooted in what the Commission maintains is conflicting statutory language. A "whistleblower" under the Act is defined as "any individual who provides, or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission in a manner established, by rule or regulation, by the Commission." 17 C.F.R. § 240.21F-(a)(6). These whistleblowers are protected for three different categories of reporting activity: (1) providing information to the SEC; (2) assisting in an SEC investigation; or (3) making "disclosures that are required or protected" under Sarbanes-Oxley, the securities laws, and other SEC regulations. 15 U.S.C. § 78u-6(h)(1)(A). Because the third category of protected reporting activity references Sarbanes-Oxley, which provides its own anti-retaliation protection for internal reporting, a number of courts have held that the statute is internally contradictory and that the best way to harmonize the conflicting provisions is to read the third category's protection of certain whistleblower disclosures not requiring reporting to the SEC as a narrow exception to section 21F's definition of a whistleblower as one who reports to the SEC.

The courts coming to this conclusion typically do so in deference to the consistent position that the SEC has taken in amicus briefs, now also reflected in interpretive guidance issued on August 4, 2015—that Dodd-Frank protections may apply to those internal whistleblowers who are also protected by Sarbanes-Oxley. (see Orrick August 20, 2015 client alert). See, e.g., Kramer v. Trans-Lux Corp., No. 3:11cv1424 (SRU), 2012 WL 4444820 (D. Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 995 (M.D. Tenn. 2012); Genberg v. Porter, 935 F. Supp. 2d 1094, 1106-07 (D. Colo. 2013); Murray v. UBS Secs., LLC, No. 12 Civ. 5914(JMF), 2013 WL 2190084, at *3–7 (S.D.N.Y. May 21, 2013); Ellington v. Giacoumakis, 977 F. Supp. 2d 42, 45-46 (D. Mass. 2013); Rosenblum v. Thomson Reuters (Mkts.) LLC, 984 F. Supp. 2d 141, 148 (S.D.N.Y. 2013); Ahmad v. Morgan Stanley & Co., 2. F. Supp. 3d 491, 496 n.5 (S.D.N,Y, 2014); Khazin v. TD Ameritrade Holding Corp., Civil Action No. 13-4149 (SDW) (MCA), 2014 WL 940703, at *6 (D.N.J. Mar. 11, 2014); Yang v. Navigators Grp., Inc., 18 F. Supp. 3d 519, 533 (S.D.N.Y. 2014); Bussing v. CorClearing LLC, 20 F. Supp. 3d 719, 729 (D. Neb. May 21, 2014); Connolly v. Remkes, Case No,:5:14-cv01344, 2014 WL 5473144, at *6 (N.D. Cal. Oct. 28, 2014); Somers v. Digital Realty Trust, Inc., No. C-14-5180 EMC, 2015 WL 2354807, at *1 (N.D. Cal.May 15, 2015).

In contrast, the Fifth Circuit, in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), declined to extend deference to, and disagreed with, the SEC's interpretation of the Dodd-Frank protections. In Asadi, the Fifth Circuit examined whether Dodd-Frank protections applied to a GE Energy executive who reported a potential violation of the Foreign Corrupt Practices Act internally. He was subsequently given a negative performance review, pressured to step down from his position, and ultimately fired. He sued, claiming retaliation. The court adopted GE Energy's argument that Dodd-Frank did not protect employees against retaliation in response to internal reporting, stating that "[u]nder Dodd-Frank's plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC." A number of district courts outside the Fifth Circuit have followed this holding. See, e.g., Wagner v. Bank of Am. Corp., No. 12-cv-00381-RBJ, 2013 WL 3786643, at *4 (D. Colo. July 19, 2013); Banko v. Apple, Inc., No. CV 13-02977 RS, 2013 WL 7394596, at *6 (N.D. Cal. Sept. 27, 2013); Englehart v. Career Educ. Corp., No. 8:14-cv-444-T-33EAJ, 2014 WL 2619501, at *9 (M.D. Fla. May 12, 2014); Verfuerth v. Orion Energy Sys., 65 F. Supp. 3d 640, 646 (E.D. Wis. Nov. 4, 2014); Lutzeier v. Citigroup, Inc., 305 F.R.D. 107, 110 (E.D. Mo. Mar. 2, 2015); Wiggins v. ING U.S., Inc., Civil Action No. 3:14-CV-1089(JCH), 2015 WL 3771646, at *9-11 (D. Conn. June 17, 2015).

The Berman Decision

Two judges (Newman and Calabresi) on the Second Circuit Berman panel sided with the position taken by the SEC, over a strong dissent from Judge Jacobs. The facts in Berman appear straightforward. Plaintiff Berman was the finance director for Neo@Ogilvy from 2010-2013. He was allegedly terminated by the company after internally reporting practices that he claimed amounted to accounting fraud and violated Sarbanes-Oxley and Dodd-Frank. After he was terminated, and after the limitations period on Sarbanes-Oxley anti-retaliation claims had expired, he provided this information to the SEC. The district court adopted the reasoning in Asadi, and dismissed Berman's Dodd-Frank retaliation claims based on Section 21F(a)(6)'s definition of a whistleblower as limited to one who provides information to the Commission.

The Second Circuit reversed. At the outset, the court described the relevant question as whether the "arguable tension" between the definition of whistleblower in Section 21F-(a)(6) and the anti-retaliation coverage provided in 21F-(h)(1)(A)(iii) "creates sufficient ambiguity as to the coverage of subdivision (iii) to oblige us to give Chevron deference to the SEC's rule." In answering that question, the court observed that "[a]pplying the Commission reporting requirement to employees seeking Sarbanes-Oxley remedies pursuant to subdivision (iii) would leave that subdivision with an extremely limited scope." That is so, according to the court, because there are categories of whistleblowers who, under Sarbanes-Oxley, cannot report to the SEC until after reporting internally (i.e., auditors and attorneys) and, as to the rest, only the "few" who report "simultaneously" to the SEC when they report internally would obtain Dodd-Frank protection.

In assessing whether "Congress intended to add subdivision (iii) . . . only to achieve such a limited result," the court noted that an inquiry into legislative history "yields nothing" because subdivision (iii) was added at the end of the legislative process during attempts to reconcile House and Senate versions of Dodd-Frank. Characterizing subdivision (iii) as a "kind of legal Lohengrin; . . . no one seems to know whence it came," (citing ITT v. Vencap, Ltd., 510 F.2d 1001, 1015 (2d Cir. 1975) (Friendly, J.)), the majority members of the panel found it "not surprising" that the "new subdivision" and the whistleblower definition "do not fit together neatly" given the "realities of the legislative process" whereby "conferees are hastily trying to reconcile House and Senate bills, each of which number hundreds of pages."

Based on the "tension" between these two provisions and "the limited protection provided by subdivision (iii)" if it is subject to Commission reporting, the court found the statute "as a whole sufficiently ambiguous to oblige us to give Chevron deference to the reasonable interpretation of the agency charged with administering the statute." As a result, the court deferred to the SEC position on the issue and concluded that Berman was permitted to pursue Dodd-Frank anti-retaliation remedies despite not reporting to the Commission before being terminated.

The majority compared this problem of interpretation to that faced by the Supreme Court in King v. Burwell, 135 S.Ct. 2480 (2015). In that case, the issue was whether the ambiguous statutory phrase "established by the State" indicated "established by the State or by the Federal Government." The fate of a broad legislative scheme clearly intended to reform health insurance turned on interpretation of this phrase. Likewise, the Berman majority stated, an overly literal interpretation of the term "whistleblower" would run contrary to the apparent purpose of Dodd-Frank. Ultimately, however, unlike the King Court, the Berman court did not need to conduct its own interpretation of the ambiguous term, as there was no question of the SEC's competence to administer and interpret Dodd-Frank. (In contrast, the King Court engaged in an independent analysis of the ambiguous statute, holding that the IRS lacked the necessary expertise, although the Court ultimately reached the same conclusion as the IRS.)

The Berman Dissent

Judge Jacobs dissented in no uncertain terms. Siding with the reasoning in Asadi, he stated that the statute was unambiguous in defining "whistleblowers" as those who report information to the SEC, excluding internal reporters from Dodd-Frank retaliation protections. Given this lack of ambiguity, Judge Jacobs determined that Chevron deference should never have come into play.

Judge Jacobs took strong issue with the panel's "limited effect" analysis: "the majority has no support for the proposition that when a plain reading of a statutory provision gives it an 'extremely limited' effect, the statutory provision is impaired or ambiguous. The U.S. Code is full of statutory provisions with 'extremely limited' effect; there is no canon that counsels reinforcement of any sub-sub-subsection that lacks a paradigm-shift." He was equally critical of the majority's references to the fact that lawyers and auditors would not be protected under Dodd-Frank if its anti-retaliation provisions are limited to Commission reporting. Echoing an increasingly persistent theme from regulators regarding the role of such "gatekeepers," Judge Jacobs stated that "Congress may well have considered that additional incentives should not be offered to get lawyers and auditors to fulfill existing professional duties, for the same reason reward posters often specify that the police are ineligible."

Finally, Judge Jacobs thought little of the majority's analysis of King v. Burwell, explaining that in King, any departure from statutory text was supported by extraordinary circumstances not present in Berman. In King, inflexible interpretation of the term "the state" as it appeared in a sub-sub-sub section of the tax code would have upended an entire legislative scheme and undermined Congress's intent to improve health insurance markets. In Berman, in contrast, the contested term "whistleblower" was in the prominent definitions section of the statute, and strict adherence to the statutory definition would have had relatively limited consequences, reducing, not eliminating, statutory protections available to internal reporters.

Takeaways

The split among lower and now appellate federal courts (to say nothing of the split on the Second Circuit Berman panel itself) concerning the scope of the Dodd-Frank anti-retaliation provisions may lead to Supreme Court review. In that event, we anticipate the major focus to be on whether the statute is ambiguous, and if so, whether the SEC's interpretation is a "permissible construction of the statute" and therefore entitled to Chevron deference. As noted above, the issue is important, perhaps in surprising ways. If the question ultimately is resolved along the lines of Asadi, companies may face fewer anti-retaliation suits under Sarbanes-Oxley (given the more limited damages available and increased procedural hurdles to maintaining a claim) but also confront the possibility of more frequent instances of whistleblowers reporting directly to the Commission and seeking increased remedies under Dodd-Frank. That would deprive a company of the chance to get a handle on the underlying facts and control any disclosure to the government. Regardless of whether or how the Supreme Court rules, the SEC itself is likely to continue to assert the authority to bring claims for retaliation and more such suits should be expected. As we have indicated on many occasions, whistleblowing is a fact of life that is not going away, and companies should take care to ensure that their systems and procedures designed to detect and uncover wrongdoing, and address whistleblowing complaints, are as close to best practices as possible.

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