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Supreme Court Hears Argument In Digital Realty – Whistleblowers Who Report Suspected Violations Of Law Internally May Not Be Protected From Retaliation Under Dodd-Frank

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  • Posted on: Dec 6 2017

On November 28, 2017, the United States Supreme Court heard arguments (here) in Digital Realty Trust v. Sommers, a case that will determine whether employees who report suspected violations of the securities laws internally can file suit against their employers under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or “Dodd-Frank”) for retaliation, even if they do not report their concerns to the Securities and Exchange Commission (“SEC”).

At issue in Digital Realty is whether the anti-retaliation provisions in the Dodd-Frank Act protect whistleblowers who report suspected violations of the law internally, rather than directly to the SEC. Under Dodd-Frank, the term “whistleblower” is defined to mean an “individual who provides information . . . to the Commission.”

The case reached the Supreme Court on appeal from a decision of the Ninth Circuit, which joined the Second Circuit in finding that the term “whistleblower” as used in the Dodd-Frank Act did not limit the anti-retaliation protections of the Act 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 the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and other laws, rules, and regulations.  In so holding, the court deferred to the SEC’s interpretation of the term “whistleblower” under the Dodd-Frank Act.

This Blog has been following the case since the Ninth Circuit issued its opinion in March of this year. (Here, here, and here.)

(Before the Ninth Circuit heard the appeal of the district court’s order, the Second Circuit decided Berman v. Neo@Ogilvy LLC, WPP Group USA, Inc.)

By contrast, the Fifth Circuit, which was the first to address the issue, strictly applied Dodd-Frank’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 those who make disclosures of suspected violations, whether the disclosures are made internally or to the SEC. Id. at 630.

Summary of the Allegations

Digital Realty arose from the dismissal of Paul Somers, a vice president and portfolio manager at Digital Realty’s Singapore office. Somers alleged that he was fired in 2014, weeks after reporting a possible $7 million cost overrun on a project in Hong Kong. Somers did not contact the SEC before his firing, or file a complaint with the Department of Labor, as required under Sarbanes-Oxley.

The company denied Somers’ claims of wrongdoing, and moved to dismiss on the grounds that, among other things, under the Dodd-Frank Act, Somers was not a whistleblower entitled to protection from retaliatory acts. Both the district court and the Ninth Circuit rejected the company’s argument.

The Argument

Narrow or Broad Reading. Which is it?

The parties and the Court focused on whether Congress intended the definition of whistleblower to be narrowly or broadly interpreted. The lawyers for Digital Realty contended that the term should be read narrowly –  that is, only individuals who report suspected violations of the securities laws to the SEC are protected by Dodd-Frank – claiming that any contrary reading was “nakedly atextual.”  Lawyers for Somers and the SEC argued that such a narrow reading of the statute would weaken internal corporate compliance programs and substantially diminish Dodd-Frank’s deterrent effect.

Justices Ginsburg and Sotomayor expressed concern for individuals who report suspected violations of the securities laws internally and are fired before they also reported to the SEC – a group likely to include auditors and attorneys engaged in internal reporting (assuming members of this group could go outside the organization at all). For example, Justice Sotomayor noted that employees who are subpoenaed by the SEC before they report a suspected violation of the law and then fired for cooperating also would be excluded from Dodd-Frank protection, as well as Sarbanes-Oxley: “I don’t know that that employee is protected under the Sarbanes-Oxley provision either. The only thing that would protect that particular employee is the government’s reading.”  Justice Kagan questioned the fairness of protecting an individual who was fired for reporting internally and externally to the SEC about an unrelated matter that occurred in the past: “There are two employees, and they both internally report, and they’re both fired. And one of them, tough luck, but the other one is going to get protection because he’s filed a report with the SEC about some different matter entirely 10 years earlier. Why does he get extra protection?”

By contrast, Justice Gorsuch expressed support for the narrow reading, asking: “I’m just stuck on the plain language here . . . how much clearer could Congress have been than to say in this section the following definitions shall apply, and whistleblower is defined as including a report to the Commission?” Justice Gorsuch pressed further, rhetorically asking: “So ‘shall’ just means maybe; sometimes?”

To Give Chevron Deference or Not Give Chevron Deference, that is the Question

In addition to addressing whether a narrow or broad reading of the statute was appropriate, the Court considered whether it should give deference to the SEC in construing the statute. In a prior post about this case (here), this Blog discussed the possibility that the Court could address the “Chevron deference” doctrine enunciated in the Court’s 1984 decision Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. Under this doctrine, courts defer to agency interpretations of statutory mandates unless the interpretations are unreasonable.

This Blog opined that Justice Gorsuch was no fan of the doctrine, noting that “[w]hile sitting on the Tenth Circuit, then-Judge Gorsuch called the doctrine ‘a judge-made doctrine for the abdication of the judicial duty.’” During the argument, Justice Gorsuch showcased his dislike of the doctrine.

For example, during questioning of Somers’ attorney, Justice Gorsuch argued that the SEC’s administrative procedures were fundamentally flawed – an issue that went to the heart of whether deference should be given to the SEC’s interpretation of the statute. In that regard, he expressed the view that although it might be too late to challenge the validity of the SEC’s definition of “whistleblower” on those grounds, the soundness of those procedures could be taken into account in determining whether Chevron deference should be accorded: “The agency acts without the benefit of the notice and comment and is unable to issue a reasoned decision-making, and then we’re supposed to defer to that to resolve this ambiguity? … How does all that get you Chevron?”

In pressing the point with the assistant to the solicitor general, as an amicus in support of Somers, Justice Gorsuch extracted a concession that if the administrative procedures were inadequate, it would be inappropriate to accord deference to the SEC’s interpretation – a concession that Justice Breyer encouraged the government to retract: “I would be wary of that because I don’t know what implications it has for other cases … I’m just saying … that is not necessarily … a lifetime concession on the part of the government” to make, “is it?” “No, it is not,” responded the government.

Can A Court Ignore the Meaning of a Statutory Term?

The Court considered whether it is permissible to ignore specific language in a statute to reach a particular result.  The government argued, relying on Lawson v. Suwanee Fruit & SS Steamship Co., that giving the term “whistleblower” “its ordinary meaning in the retaliation context would harmonize the statute and avoid the anomalies that would result from woodenly applying the statutory definition.” Lawson involved a sailor who had been injured in a pre-employment accident – he lost sight in one eye. He sued his employer for disability when he injured his other eye. The applicable statute defined “injury” as harm or damage that happens on the job; it did not include pre-existing injuries. The Court explained that under the circumstances of the case (which it described as “unusual”), it would be anomalous to give employers relief from injuries incurred while employees worked for them, but not for pre-existing injuries. While such a result would be definitionally correct, it would “create obvious incongruities in the language, and … destroy one of the major purposes of the second injury provision: the prevention of employer discrimination against handicapped workers.”

If A Court Can Ignore the Meaning of a Statutory Term, What Standard Should Apply?

Justice Alito questioned how the Court could articulate the standard for future cases if it were to ignore the meaning of a term in a statute: “So, you have a statute … that uses a particular term … [a]nd what we write is that the definition in the statute doesn’t apply if it produces an anomaly. Is that the standard?” Justice Ginsburg added that the standard needed to address circumstances that were more than mere anomalies but ones that would produce “an absurd result”: “I thought the stock phrase was absurd, that you — if the statute gives a definition, you follow the definition in the statute unless it would lead not merely to an anomaly, but to an absurd result.” Ultimately, the government conceded, in response to a question from Justice Gorsuch, that application of the narrow reading of the definition of whistleblower would not produce an absurd result.

Conclusion

As with most cases before the Supreme Court, it is difficult to tell from the argument how the Court will ultimately decide the case. However, if one were to glean anything from the argument, it is fair to conclude that Digital Realty had a good day.

A decision is expected by the end of June 2018.

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