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U.S. Supreme Court Agrees To Consider Whether The Anti-Retaliation Provisions Of The Dodd-Frank Act Protect Internal Whistleblowers

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  • Posted on: Jul 3 2017

On Monday, June 26, 2017, the United States Supreme Court agreed to consider whether the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or the “Act”) extends to individuals who have not reported alleged misconduct to the Securities and Exchange Commission (“SEC”) and, thereby, fall outside the Act’s definition of “whistleblower.” Digital Realty Trust v. Somers, 16-1276.

In Digital Realty Trust v. Somers, the Ninth Circuit 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 and other laws, rules, and regulations. (Discussed here.) By contrast, the Fifth Circuit, which was the first to address the issue, strictly applied the Act’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 ma de internally or to the SEC. Id. at 630.

This split among the circuits provided support to Digital Realty to convince the Supreme Court to take its case.

The Court’s June 26, 2017 order granting Digital Realty’s petition for a writ of certiorari can be found here.

The Cert. Petition, the Opposition, and the Amici Briefs

In seeking the Court’s review, Digital Realty highlighted the circuit split as the primary reason the why the Court should consider the case. Underscoring the importance of the split, the company opened its cert. petition (here) by stating “[t]his case presents a clear and intractable conflict on an important and recurring question of statutory interpretation,” and stated the following as the overarching reasons for granting petition:

This case presents a straightforward conflict among the courts of appeals on an important and recurring question involving the interpretation of the Dodd-Frank Act. In the decision below, the Ninth Circuit expressly recognized that it was deepening an existing conflict on the question whether the anti-retaliation provision for “whistleblowers” extends to individuals who have not reported alleged misconduct to the SEC and thus fall outside the Act’s definition of a “whistleblower.” Three courts of appeals and at least two dozen district courts have weighed in on that issue. One court of appeals has held that the anti-retaliation provision reaches only individuals who qualify as “whistleblowers.” Two courts of appeals, including the court below, have held (over dissents) that the anti-retaliation provision applies to all individuals, regardless of whether they qualify as “whistleblowers” under the statutory definition.

That conflict cries out for the Court’s review, and this case is an optimal vehicle in which to resolve it. The arguments on both sides of the conflict are well developed, having been aired in dozens of opinions. The question presented is one of substantial legal and practical importance, potentially affecting every publicly traded company. And this case presents the question squarely and cleanly. Because this case readily satisfies the criteria for the Court’s review, the petition for a writ of certiorari should be granted.

The question for the Court, said the company, is whether the anti-retaliation provisions of the Act extend to individuals who have not reported alleged misconduct to the SEC and, thus, fall outside the statutory definition of “whistleblower.”

In opposition to the petition (here), the respondent, Paul Somers, an executive fired by the San Francisco-based company after he complained internally about alleged misconduct by his supervisor but never reported the matter to SEC, argued that there was no meaningful circuit court split, stating that any split was based on one court ruling without the benefit of the SEC’s position, thereby rendering the split “shallow” and subject to resolution on its own:

[T]he circuit conflict is shallow and may ultimately resolve itself. The Fifth Circuit was not only the first circuit to resolve the issue, but the only circuit to do so without the benefit of the SEC’s direct participation. There is accordingly no split (2-0) in the courts of appeals where the panel had the benefit of hearing directly from the expert agency tasked with administering this particular statute.

The Fifth Circuit’s reasoning has since been roundly criticized by a majority of lower courts, and the SEC has carefully articulated a host of reasons that the Fifth Circuit erred. Other circuits will soon have an opportunity to consider the issue; if they continue following the majority view, there is every reason to believe the Fifth Circuit will reconsider the question at the appropriate time.

Somers also argued that the Ninth Circuit’s ruling did not need to be reviewed because it was correct; that is, the court had correctly interpreted and applied the applicable SEC regulatory provisions.

And the SEC’s construction is not only reasonable but correct: petitioner’s view would render entirely insignificant a critical anti-retaliation safeguard, and do so in a way that would upset the proper operation of both Dodd-Frank and Sarbanes-Oxley. The SEC has carefully balanced the competing interests in this area, and resolved the question presented in a manner that is consistent with the statute and advances Congress’s intent. Its authoritative construction controls, and petitioner’s contrary position is mistaken. The petition should be denied.

The case has attracted significant attention from the business community. Indeed, numerous third parties filed amici briefs with the Court, all in support of Digital Realty:

1. The U.S. Chamber of Commerce argued that the Ninth Circuit’s ruling “would greatly expand the number of employees authorized to pursue the enhanced remedies of the Act, and the period of time in which they may sue for alleged retaliation, without yielding the law enforcement benefits Congress intended when it enacted a ‘bounty’ and heightened protections for persons who complain to the Securities and Exchange Commission.” (Here.)

2. The New England Legal Foundation and Associated Industries of Massachusetts argued that the Ninth Circuit impermissibly read into the Act language that was not used by Congress, thereby “extending Dodd-Frank’s whistleblower provision to employees who are not Dodd-Frank whistleblowers.” (Here.)

3. Lime Energy, a provider of energy savings to utility clients, and a defendant in a wrongful termination action under the Act, argued that the circuit split necessitated action by the Court, and sided with the Fifth Circuit contending that the court’s analysis was the correct one: it “makes far more sense and is faithful to the statutory scheme, distinguishing between Dodd-Frank’s definition of a ‘whistleblower’ and the three categories of protected activity.” (Here.)

4. DRI–The Voice of the Defense Bar, an international organization of attorneys who defend the interests of businesses and individuals in civil litigation, argued that the Ninth and Second Circuits’ “expansion of Dodd-Frank’s anti-retaliation provision moots the streamlined administrative dispute-resolution process for claims of retaliation for reporting suspected securities-law violations in the Sarbanes-Oxley Act, undercutting the efficiencies Congress intended.

Takeaway

In considering the case, the Court will have the opportunity to not only address the circuit split on the issue, but also the issue of 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.

With Justice Gorsuch now on the Court, it remains to be seen whether the doctrine will survive scrutiny. While sitting on the Tenth Circuit, then-Judge Gorsuch called the doctrine “a judge-made doctrine for the abdication of the judicial duty.”

As noted in this Blog’s original post discussing the case (here), Chevron deference was a decisive factor in the Second Circuit’s ruling. The doctrine was also a factor in the Ninth Circuit’s opinion.

If Justice Gorsuch’s view prevails, the Court’s analysis of the Act’s language and a decision on whether that language is as expansive as the Second and Ninth Circuits have held or as narrow as the Fifth Circuit has held, will have a profound impact on corporate whistleblowers.

Indeed, if the Court sides with the Second and Ninth Circuits, the protections afforded under the Act will apply broadly and protect a wide number of individuals, regardless of whether they have reported alleged wrongdoing to the SEC. This result could mean an increase in the number of wrongful termination and/or retaliation lawsuits under the Act. However, if the Court sides with the Fifth Circuit’s narrower interpretation, the protections afforded under the Act will reach fewer persons and result in fewer filed actions. Such a result could court deter employees from reporting misconduct internally, which is the process advocated by the business community.

This Blog will continue to follow the case. Argument should be scheduled for the Court’s next term, which begins in October.

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