United States: Supreme Court Limits Dodd-Frank Retaliation Protections To Employees Who Blow The Whistle To The SEC

On February 21, 2018, the U.S. Supreme Court issued its decision in Digital Realty Trust, Inc. v. Somers, Case No. 16–1276, resolving a circuit split on whether the Dodd-Frank Act ("Dodd-Frank" or the "Act") requires employees to report externally to the SEC in order to be protected by the Act's anti-retaliation provision. Siding with the petitioner-employer, the Court held that Dodd-Frank's definition of "whistleblower," which requires a person to report "to the Commission," precludes extending the Act's anti-retaliation protections to employees who do not report a violation of the securities laws to the SEC.

Case Background

Respondent Somers filed a Dodd-Frank Act whistleblower suit in the Northern District of California alleging he was terminated for reporting suspected securities-law violations to his then-employer. The alleged protected activity involved only an internal complaint to his employer.  Somers did not notify the SEC of his concerns. The employer moved to dismiss the lower court case, arguing that the definition of "whistleblower" under the Act does not cover an employee who does not report a violation to the SEC. The district court denied the motion, and the Ninth Circuit affirmed.

The Ninth Circuit's decision was consistent with the SEC's August 4, 2015 interpretive guidance. The SEC claimed that the Act contained "catchall" language that was intended to extend Dodd-Frank's whistleblower protection to employees who internally reported securities violations.1

The Ninth Circuit's decision conflicted, however, with a Fifth Circuit decision,2 which held that Dodd-Frank's whistleblower protections do not apply unless the employee provided information directly to the SEC. The Supreme Court granted certiorari to resolve the circuit split.

Reasoning

The Act unambiguously defines "whistleblower" as "any individual who provides... information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission." See 15 U.S.C. § 78u-6(a)(6) (emphasis added). The Act later includes a "prohibition against retaliation" for whistleblowers who make "disclosures that are protected under the Sarbanes-Oxley Act of 2002... and any other law, rule, or regulation subject to the jurisdiction of the Commission." See 15 U.S.C. § 78u-6(h)(1)(A)(iii). Because SOX protects internal reporting, Somers and the Solicitor General (on behalf of the SEC) argued that this language was intended to also extend Dodd-Frank's workplace retaliation protection to individuals who internally report violations of the securities laws. They argued that the narrower whistleblower definition applied only to the Act's bounty award provision, not the anti-retaliation provision.

The Supreme Court disagreed and reversed the Ninth Circuit. In the opinion drafted by Justice Ginsburg and joined by Chief Justice Roberts and Justices Kennedy, Breyer, Sotomayor and Kagan, the Court held that the statutory language provided an explicit definition of whistleblower as someone who provides information "to the Commission." The Court noted that another provision in the Act did not require reporting to the Commission, so Congress must have intended a difference in meaning in the definition of whistleblower. The Court found support for its decision in the purpose and design of the Act as stated in the Senate Report, which says the Act was to encourage people to report securities violations to the SEC.

As for the language in the "prohibition against retaliation," the Court found no issues with extending whistleblower protections to individuals who report violations to the SEC and internally. The Court held that this language alleviates the employee's potential need to demonstrate that alleged retaliation was motivated by the report to the SEC rather than the internal report. In light of the requirement that the SEC protect the identity of whistleblowers, the Court recognized that the Act's anti-retaliation language protects employees who report both internally and to the SEC, even where the employer may be unaware of the external report.

Implications for Employers

The Court's decision provides a narrower definition of "whistleblower" under the Dodd-Frank Act than the enlarged definition sought by the SEC. Had the Court ruled otherwise, employees who only reported internally would no longer be required to file an administrative complaint within the 180-day filing deadline under SOX. Instead, such employees would have been able to take advantage of Dodd-Frank's Act's "generous" six-year statute of limitations and its additional available remedies, including double backpay. The Court's ruling makes it clear that the whistleblower protections of Dodd-Frank are limited to those employees who report to the SEC.

However, it is important for employers regulated by the SEC to note that employees who only report violations internally are still covered by the anti-retaliation provisions under SOX.  There are also a host of other statutory protections for whistleblowers under federal and some state laws.  It remains prudent and important for employers to have robust internal reporting and incident management systems and to ensure that the reasons for employee discipline are sound and well-documented.

Footnotes

1 See  Ed Ellis, Kevin Griffith and Alexa Laborda Nelson SEC Continues its Efforts to Make Dodd-Frank Whistleblowing Easier, Littler Insight (Aug. 14, 2015).

2 Asadi v. G.E. Energy (U.S.A), L.L.C., 720 F.3d 620 (5th Cir. 2013).

3 Justice Sotomayor filed a concurring opinion, which Justice Breyer joined, holding that legislative history may be an important tool for understanding the text of a statute even where the statute is unambiguous. Justice Thomas filed an opinion concurring in part and concurring in the judgment, which Justices Alito and Gorsuch joined, holding that the plain language of the Act does not require a review of the purpose of the statute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Edward T. Ellis
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