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Ninth Circuit Joins The Second Circuit To Apply Dodd-Frank Anti-Retaliation Protections To Whistleblowers Who Report Wrongdoing Internally

  • Posted on: Mar 31 2017

Being a whistleblower involves personal sacrifice and professional risk.  Many violations of the law go unreported because people who know about them are afraid of being disciplined, losing their job, being demoted, or being passed over for promotion.  Recognizing the financial, reputational and professional risks associated with whistleblowing, Congress included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act” or the “DFA”) strong anti-retaliation provisions to protect whistleblowers who provide information about violations of the securities laws to the Securities Exchange Commission (“SEC”), or violations of any protected activity under the Sarbanes-Oxley Act of 2002 (“SOX”).

The Dodd-Frank Act creates a private right of action for employees who have suffered retaliation “because of any lawful act done by the whistleblower – ‘(i) in providing information to the Commission in accordance with [the whistleblower incentive section]; (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or (iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002,’” the Securities Exchange Act of 1934 (the “Exchange Act”), and “‘any other law, rule, or regulation subject to the jurisdiction of the [SEC].’”

Importantly, Congress did not limit the private right of action to employees.  The Dodd-Frank Act extends the cause of action to any individual claiming to have been threatened, harassed or subjected to discrimination because of conduct protected by the Dodd-Frank Act.  A whistleblower may file a retaliation claim in federal court and seek, among other remedies, reinstatement, double back pay (as opposed to just back pay, as under SOX) with interest, litigation costs, expert witness fees and reasonable attorneys’ fees.

Since its enactment, there has been a question over whether the whistleblower protections in the Dodd-Frank Act extend to employees who whistleblow internally, rather than to the SEC. The answer to this question has resulted in a split among the circuits.

The Fifth Circuit, which was the first to address the issue, strictly applied the DFA’s definition of “whistleblower” to apply only to those who disclose suspected wrongdoing to the SEC. Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 621 (5th Cir. 2013). In doing so, the court rejected the SEC’s regulation (17 C.F.R. § 240.21F-2) which extends the anti-retaliation protections to all those who make disclosures of suspected violations, whether the disclosures are made internally or to the SEC. Id. at 630.

The Second Circuit, by contrast, found that, if the DFA were restricted only to reporting to the SEC, Section 21F(a)(6), subdivision (iii), would protect only those employees who notify the SEC at the same time, or just before, they report internally under SOX.  The court concluded that the language in the DFA was “ambiguous” obligating it to accord Chevron deference (Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984)) to the SEC’s regulation. Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 155 (2d Cir. 2015).

On March 8, 2017, the Ninth Circuit joined the Second Circuit in finding that the term “whistleblower” as used in the Dodd-Frank Act did not evince a congressional intent to limit the anti-retaliation protections to those who disclose information to the SEC only. Rather, the anti-retaliation provisions also protect those who were fired after making internal disclosures of alleged unlawful activity under SOX and other laws, rules, and regulations. Somers v. Digital Realty Trust, ___ F.3d ___, No. 15-17352, 2017 WL 908245 (9th Cir. Mar. 8, 2017).

Background

Paul Somers (“Somers”), a former Vice President of Digital Realty Trust (“Digital Realty”), alleged that Digital Realty fired him after he made several reports to senior management regarding possible securities law violations. Somers only reported these possible violations internally, and not to the SEC.  Somers was unable to report his concerns to the SEC before Digital Realty terminated his employment.

Thereafter, Somers sued Digital Realty, alleging violations of state and federal securities laws, including violations of the anti-retaliation protections of the Dodd-Frank Act (i.e., Section 21F of the Exchange Act).  Digital Realty moved to dismiss on the ground that Somers was not a “whistleblower” under Dodd-Frank because he only reported the possible violations internally and not to the SEC.

The district court denied the motion, deferring to the SEC’s interpretation that internal whistleblowers are also protected from retaliation under the Dodd-Frank Act. Like the Second Circuit, the court analyzed the statutory text, the DFA’s legislative history, and the procedural and practical implications of harmonizing the narrow definition of “whistleblower” with the broad protections of the anti-retaliation provision.  Somers v. Dig. Realty Tr. Inc., 119 F. Supp. 3d 1088, 1100–05 (N.D. Cal. 2015). The court observed that “[a]t bottom, it is difficult to find a clear and simple way to read the statutory provisions of Section 21F in perfect harmony with one another.” Id. at 1104.  Having analyzed the tension between the definition and anti-retaliation provisions, the district court deferred to the SEC’s interpretation that individuals who report internally only are nonetheless protected from retaliation under DFA. Id. at 1106.

The district court certified the question for interlocutory appeal pursuant to 28 U.S.C. § 1292(b), id. at 1108, and the Ninth Circuit granted Digital Realty’s petition for permission to appeal.

The Ninth Circuit’s Decision

As noted by the court, “[t]he underlying issue” in the case was “whether, in using the term ‘whistleblower,’ Congress intended to limit [the anti-retaliation] protections to those who come within DFA’s formal definition, which would include only those who disclose information to the” SEC.

The issue arises because of the tension between the definition of who qualifies as a “whistleblower” under Section 21F(a)(6) and the anti-retaliation provisions of Section 21F(h)(1)(A)(iii). The former defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission,” while the latter protects individuals who make “‘disclosures that are required or protected under’ Sarbanes-Oxley, the Exchange Act, 18 U.S.C. §1513(e), ‘and any other law, rule, or regulation subject to the jurisdiction of the Commission.’”

The court concluded, like the Second Circuit, that Congress intended Section 21F(h)(1)(A) (iii) to broaden the anti-retaliation protections to include internal reporters.  The majority found that “[b]y broadly incorporating, through subdivision (iii), Sarbanes-Oxley’s disclosure requirements and protections, [the Dodd-Frank Act] necessarily bars retaliation against an employee of a public company who reports violations to the boss, i.e., one who ‘provide[s] information’ regarding a securities law violation to ‘a person with supervisory authority over the employee.’” The court noted that “[a] strict application of [the Dodd-Frank Act]’s definition of whistleblower would, in effect, all but read subdivision (iii) out of the statute.”  The court also noted that there are provisions in SOX and the Exchange Act that mandate internal reporting before external reporting in certain instances.  Therefore, “[l]eaving employees without protection for that required preliminary step would result in early retaliation before the information could reach the regulators.”

The court also found support in King v. Burwell, 135 S. Ct. 2480, 2489 (2015), the Supreme Court’s Affordable Care Act decision, for the proposition that a statutory term can have different operative consequences in different contexts.” Thus, it was reasonable to conclude that the term “whistleblower” “may mean [a] different thing[]” in a different part” of the statute”. Id. at 2493 n.3.

The majority concluded that a narrow ruling applying protections only to those reporting to the SEC “would make little practical sense and undercut congressional intent” to protect whistleblowers from retaliation.

For all these reasons, we conclude that subdivision (iii) of section 21F should be read to provide protections to those who report internally as well as to those who report to the SEC. We also agree with the Second Circuit that, even if the use of the word “whistleblower” in the anti-retaliation provision creates uncertainty because of the earlier narrow definition of the term, the agency responsible for enforcing the securities laws has resolved any ambiguity and its regulation is entitled to deference.

In a brief dissent, Judge John Owens sided with the Fifth Circuit.  Judge Owens criticized the majority for relying, in part, on King, and advocated for a “quarantine” of “King and its potentially dangerous shapeshifting nature to the specific facts of that case to avoid jurisprudential disruption on a cellular level.”

Takeaway

Given the split in the circuits, it is likely the issue will reach the Supreme Court for review. This is especially so in light of the implications of extending the DFA anti-retaliation protections to internal whistleblowers.

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