United States: Supreme Court To Whistleblowers: If You See Something, Say Something (To The SEC)

On February 21, 2018, the US Supreme Court unanimously held in Digital Realty Trust, Inc. v. Somers that whistleblowers must report their concerns to the Securities and Exchange Commission (SEC or Commission) in order to be protected by the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).

The Court focused on the plain language of Dodd-Frank, which defines a "whistleblower" as "any individual who provides . . . information relating to a violation of the securities laws to the Commission." Because the individual in question–Paul Somers, a former employee of Digital Realty Trust–reported his concerns to the company but not the Commission, the Court found that he was not eligible for protection under the anti-retaliation language of Dodd-Frank.

The Court's decision resolved a circuit split over the scope of Dodd-Frank's anti-retaliation protections for whistleblowers. The decision may have a significant impact on public companies given that employees may now be incentivized to bypass internal reporting mechanisms and report potential wrongdoing directly to the Commission.

Background

Both Dodd-Frank and the earlier Sarbanes-Oxley Act of 2002 (SOX) provide various protections and incentives for employees who voluntarily report potential violations of the federal securities laws, including a private right of action for certain retaliatory acts. Dodd-Frank's anti-retaliation provision is broader, however, and it includes direct access to the federal courts without the initial requirement of filing a claim with a federal agency, greater monetary damages in some circumstances, and a much longer statute of limitations.1

Importantly, Dodd-Frank and SOX also differ with respect to who is protected against retaliation. SOX protects "employees" of public companies who, among other things, provide information regarding certain alleged violations to an internal supervisor, a federal regulatory or law enforcement agency (including the Commission), or Congress.2 By comparison, Dodd-Frank protects only individuals who fall within the definition of "whistleblower," which Section 21F(a)(6) defines as someone who has reported information relating to a violation of the securities laws "to the Commission."3

In 2011, however, the Commission promulgated a rule that defined "whistleblower," for purposes of Dodd-Frank's anti-retaliation provision, to include those employees who reported the potential violations internally at their companies.4 The Commission based its interpretation on a purported tension between the statutory definition of "whistleblower" and the statutory anti-retaliation provision. Specifically, subdivision (iii) of Dodd-Frank's anti-retaliation provision expressly incorporates SOX by providing that employers may not retaliate against whistleblowers "because of any lawful act done by the whistleblower" in, among other things, "making disclosures that are required or protected under [SOX] . . . and any other law, rule, or regulation subject to the jurisdiction of the Commission."5 As the Commission explained, the "statutory anti-retaliation protections apply to three different categories of whistleblowers, and the third category includes individuals who report to persons or governmental authorities other than the Commission."6

The difference between the definition of "whistleblower" in the statute and rule led to a circuit split. While the Fifth Circuit held that the statutory definition left no room for the Commission to interpret "whistleblower" more broadly, the Second Circuit held that the Commission's interpretation was entitled to Chevron deference.7 In Somers v. Digital Realty Trust, Inc., the Ninth Circuit adopted the Second Circuit's position, holding that Mr. Somers could pursue his retaliation claim against his former employer Digital Realty Trust, a publicly-traded real estate investment trust, despite his failure to report to the SEC.8

The Supreme Court's Decision

The Supreme Court easily resolved the circuit split, finding an "unequivocal answer" in Dodd-Frank's definition of whistleblower, which the Court noted required an individual to report potential violations "to the Commission."9 The Court found that "Dodd-Frank's purpose and design" corroborated that reading, given that the "core objective" of Dodd-Frank's whistleblower program was to "motivate people who know of securities law violations to tell the SEC."10

The Court interpreted Dodd-Frank's anti-retaliation provision to describe first who would be eligible for protection–i.e., a whistleblower who provided pertinent information to the Commission – and then to describe what type of conduct would be protected. As the Court explained: "An individual who meets both measures may invoke Dodd-Frank's protections. But an individual who falls outside the protected category of 'whistleblowers' is ineligible to seek redress under the statute, regardless of the conduct in which that individual engages."11 As a result, "Dodd-Frank's award program and anti-retaliation provision thus work synchronously to motivate individuals with knowledge of illegal activity to 'tell the SEC.'"12

The Court also considered a separate anti-retaliation measure that Congress included as part of Dodd-Frank, relating to whistleblower protections for employees who report violations under the jurisdiction of the Consumer Financial Protection Bureau (CFPB), as a further indication that Congress intended the anti-retaliation provision at issue to apply only to individuals who report to the Commission.13 The CFPB whistleblower language did not have any requirements about particular entities to whom employees must report. Instead, it protected employees who report to their employers, the CFPB, or any other government authority or state, local, federal, or law enforcement agency. The Court noted that when Congress "includes particular language in one section of a statute but omits it in another[,]. . . this Court presumes that Congress intended a difference in meaning."14 As a result, "Courts are not at liberty to dispense with the condition—tell the SEC—Congress imposed."15

None of the arguments advanced by Mr. Somers or the United States Government (in an amicus curiae brief) persuaded the Court to ignore the plain language of the statute or Congress's purpose in including the whistleblower provisions in Dodd-Frank, i.e., to incentivize employees to report to the SEC. In particular, the Court did not find subsection (iii) of Dodd-Frank's anti-retaliation section to be meaningless once the definition of "whistleblower" was incorporated, as Mr. Somers and the United States had argued. Rather, it found that subsection (iii) would protect an employee who reports misconduct to both the SEC and another entity and then suffers retaliation based on the non-SEC disclosure (where, for example, the retaliating employer does not realize that the employee has reported to the SEC).16 The Court also found unpersuasive the argument that attorneys, auditors, and others who are required first to report internally would be unprotected by the anti-retaliation provisions of Dodd-Frank. Instead, the Court found that its reading of the statute "shields employees in these circumstances . . . as soon as they also provide relevant information to the Commission."17 The Court noted that "such employees will remain ineligible for Dodd-Frank's protection until they tell the SEC, but this result is consistent with Congress' aim to encourage SEC disclosures . . . [and] Congress may well have considered adequate the safeguards already afforded by Sarbanes-Oxley, protections specifically designed to shield lawyers, accountants, and similar professionals."18

The Court did suggest that the Commission consider expanding the ways in which it accepts whistleblower reports. It acknowledged the argument made by the United States that applying the whistleblower definition to require a report to the Commission would have the unintended consequence of leaving unprotected employees who testify before the Commission but have not previously become whistleblowers by submitting an online or written form to the Commission. However, the Court noted that the statute "expressly delegates authority to the SEC to establish the 'manner' in which information may be provided to the Commission by a whistleblower," and that nothing in the Court's opinion would prevent the Commission from enumerating additional ways whistleblowers could report to the Commission, including through testimony.19

Finally, some observers had predicted that the Court might use Digital Realty as an opportunity to revisit Chevron deference for agency rule-making, but the Court did not consider the scope of Chevron deference because it found the statute was unambiguous. Accordingly, the Commission was precluded from issuing a more expansive interpretation of the term "whistleblower" than the language of Dodd-Frank provided.

Potential Implications

  1. The decision may lead more employees to report suspicions of wrongdoing directly to the Commission and to bypass their companies' internal compliance reporting procedures. If so, this could lead to more costly and intrusive external investigations, and it may reduce the ability to voluntarily disclose issues to the Commission, as well as to limit meritless claims and correct minor issues without drawing regulatory scrutiny.
  2. As the decision may incentivize employees to report potential violations to the Commission, companies should continue to be mindful of Rule 21F-17, which prohibits actions taken to "impede an individual from communicating directly with the Commission staff about a possible securities law violation."
  3. The decision may lead to more whistleblower retaliation claims being brought under SOX rather than Dodd-Frank, particularly by those individuals (such as auditors and attorneys) who are not permitted to report directly to the Commission without first reporting their concerns internally.

Footnotes

1. Compare 15 U.S.C. § 78u–6(h)(1)(B) (Dodd-Frank), with 18 U.S.C. § 1514A(b)(1) (SOX);Compare 15 U.S.C. § 78u–6(h)(1)(C) (Dodd-Frank provision providing for two times the amount of back pay), with 18 U.S.C. § 1514A(c)(2) (SOX provision providing for back pay only); Compare 15 U.S.C. § 78u–6(h)(1)(B)(iii) (Dodd-Frank provision requiring that an action be brought within six years after the violation occurs or three years after the facts material to the right of action are known or should have been known, but no more than 10 years after the violation occurs), with 18 U.S.C. § 1514A(b)(2)(D) (SOX provision requiring that an action be brought within 180 days after the violation occurs or the employee becomes aware of the violation).

2. 18 U.S.C. § 1514A(a)(1).

3. 15 U.S.C. § 78u-6(a)(6).

4. Exchange Act Regulation 21F, 17 C.F.R. § 240.21F. For more background, please see our prior advisory, " SEC Approves Final Rules for Implementation of Dodd-Frank Whistleblower Program," May 2011.

5. 15 U.S.C. § 78u-6(h)(1)(A)(iii).

6. Securities Whistleblower Incentives and Protections, Release No. 34–64545, 76 Fed. Reg. 34300–01, at *34304 (June 13, 2011) (emphasis added).

7. See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013); Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 155 (2d Cir. 2015). For an in-depth discussion of the circuit split, see our prior advisory, Supreme Court to Decide Whether Dodd-Frank Whistleblowers Must Report to the SEC (Nov. 27. 2017).

8. Somers v. Digital Realty Trust, Inc., 850 F.3d 1045, 1050 (9th Cir. 2017).

9. Digital Realty Trust, Inc. v. Somers, 538 U.S. ___ (2018) (slip op. at 9).

10. Id. at 11 (quoting Senate Rep. No. 111-176, p. 38 (2010) (emphasis in opinion). Justices Thomas, Alito, and Gorsuch concurred in part (and in the judgment), taking issue with the Court's reliance on a Senate Report for determining Dodd-Frank's purpose. In their view, the plain language of the statute resolved the matter without the need to "venture beyond the statutory text." Justice Sotomayor, joined by Justice Breyer, filed a concurring opinion defending the Court's consideration of the Senate Report as a "useful" tool that allowed the Court "to corroborate and fortify {its} understanding of the text.

11. Id. at 10.

12. Id. at 11.

13. Id. at 10.

14. Id. (quoting Loughrin v. United States, 573 U.S. ___, ___ (2014) (slip op. at 6)).

15. Id. at 11.

16. Id. at 14.

17. Id. at 15 (emphasis in original).

18. Id. at 15-16.

19. Id. at 18.

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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