United States: Supreme Court Resolves Circuit Split On Scope Of Whistleblower Protections

On February 21, 2018, the Supreme Court issued a pivotal decision narrowing the definition of a whistleblower under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank," or the "Act"). In Digital Realty Trust, Inc. v. Somers, the Court unanimously held that to qualify as a whistleblower, a person must first report a securities law violation to the Securities and Exchange Commission (the "SEC"). 583 U.S. __, No. 16-1276, 2018 WL 987345 (Feb. 21, 2018).

The decision resolved a circuit split over whether such reporting is required for recovery under the Act's retaliation provisions. These provisions give whistleblowers the right to sue employers who terminate, harass, or discriminate against them for reporting securities violations at their firms. 15 U.S.C. § 78u-6(h)(1)(A) (2010). In 2013, the Fifth Circuit Court of Appeals ruled that a person must report violations to the SEC to be eligible for this protection. See Asadi v. G. E. Energy (USA), L. L. C., 720 F.3d 620, 630 (2013). However, the Second and Ninth Circuits have held that SEC reporting is not a prerequisite to pursuing a retaliation claim. See Digital Realty Trust, 850 F. 3d 1045, 1050 (9th Cir. 2017); Berman v. NEO@OGILVY LLC, 801 F. 3d 145, 155 (2d Cir. 2013). Instead, these courts have held that an employee can meet the definition of a whistleblower, not only by reporting to the SEC, but also by reporting securities violations to any other federal agency, Congress, or an internal supervisor. Writing for the Court in Digital Realty Trust, Justice Ginsburg explained that Dodd-Frank's explicit definition of "whistleblower" controls the rest of its provisions, including those protecting whistleblowers against retaliation. See Digital Realty Trust, 2018 WL 987345, at *8, 10. Under Dodd-Frank's definition, a "whistleblower" is "any individual who provides ... information relating to a violation of the securities laws to the Commission." 15 U.S.C. 78u-6(a)(6). As a result, Ginsberg reasoned, a person must report a securities violation to the SEC in order to sue an employer for retaliation under the Act. See Digital Realty Trust, 2018 WL 987345, at *8, 10.

Passed in the wake of the 2008 financial crisis, Dodd-Frank created new measures to promote accountability and transparency in the financial system by escalating oversight and enforcement of consumer protection laws. Dodd-Frank Wall Street Reform and Consumer Protection Act, 124 Stat. 1376, Pub. L. No. 111-203. One such measure was Congress's directive to the SEC to reward individuals who voluntarily provide information that leads to successful actions for securities law violations. 15 U.S.C. § 78u-6(b). In response, the SEC created the Office of the Whistleblower (the "OWB"), which forwards such tips to the Enforcement Division and distributes financial awards when tips result in monetary sanctions of over $1 million. U.S. Securities and Exchange Commission, 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program, at 4, 6. The OWB also identifies and monitors complaints alleging retaliation by employers in response to reports of potential securities law violations. 2016 Annual Report, at 7.

The case before the Court arose when Paul Somers sued his former employer, Digital Realty Trust, for retaliation under Dodd-Frank. 119 F. Supp. 3d 1088, 1091-1092 (N.D. Cal. 2015). Digital Realty Trust, 2018 WL 987345, at *7. Somers alleged that Digital Realty terminated him for reporting securities law violations to senior management. 119 F. Supp. 3d at 1091-1092. Somers never reported the violations to the SEC. Digital Realty Trust, 2018 WL 987345, at *7. Digital Realty moved to dismiss, arguing that the statutory definition of whistleblower required employees to do so in order to avail themselves of the Act's protections. See 119 F. Supp. 3d at 1094.

The District Court for the Northern District of California denied the motion. See id. at 1106. On appeal, the Ninth Circuit affirmed, ruling that that application of the textual definition leads to absurd results. See 850 F. 3d at 1051. If the statutory definition were applied, the Court reasoned, the third clause of the Act's anti-retaliation provision would require plaintiffs to report both internally and to the SEC. See id. at 1049. Because such "dual reporting" was unlikely to occur, the Court read the statute to protect employees who make disclosures to the SEC, other federal agencies, or internal supervisors. See Digital Realty Trust, 2018 WL 987345, at *7; id. This reading drew from SEC regulations defining "whistleblower" more broadly, to include employees alleging retaliation who report internally, without contacting the SEC. See 850 F. Supp. 3d at 1051; 17 CFR § 240.21F–2(b)(1)(i)–(iii) (2011).

At issue for the Supreme Court was whether the statutory definition requiring reporting to the SEC is sufficiently clear to override these regulations. Somers argued that the statutory definition was ambiguous, necessitating deference to the SEC's interpretation under the Chevron doctrine. See Brief for Respondent at 3, Digital Realty Trust, No. 16-1276 (2018); see also Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984). However, the Court ruled that the plain language in the Act's definition section makes clear that reporting to the SEC is a prerequisite for any of the Act's protections. See Digital Realty Trust, 2018 WL 987345, at *8-9. This definition holds forth throughout the Act's anti-retaliation provisions, which set forth what conduct triggers protection, once an employee has contacted the SEC. See id. at 9-11. In support of this reading, the majority cited a Senate Report stating that the Act's purpose was to encourage individuals aware of illegal activity to "tell the SEC." See id. at 9; S. Rep. No. 111-176, at 38 (2010).

Justice Ginsberg's majority opinion generated two brief concurrences, which together, illustrate the ongoing debate over the propriety of using legislative history to establish a statute's meaning. Echoing the late Justice Scalia, Justice Thomas criticized the majority for "ventur[ing] beyond the statutory text" by considering congressional reports that are not law. See Digital Realty Trust, 2018 WL 987345, at *15 (Thomas, J., concurring). Justices Alito and Gorsuch joined. Justice Sotomayor, joined by Justice Breyer, countered that drawing on legislative history to resolve textual debates is a legitimate analytical tool and promotes government comity by giving weight to the intent of the legislative branch. See id. at 14 (Sotomayor, J., concurring).

The Court's decision puts to rest the issue of whether employees are required to report violations to the SEC in order to qualify for the Act's anti-retaliation protections. Depending on the situation, however, whistleblowers may have access to protections outside of Dodd-Frank. Thus, companies should approach whistleblower complaints with restraint and caution to reduce exposure to retaliation claims.

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