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U.S. Supreme Court Unanimously Narrows The Definition Of Whistleblower Under Dodd-Frank

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  • Posted on: Feb 26 2018

On February 21, 2018, the United States Supreme Court ruled that the anti-retaliation protections passed by Congress after the 2008 financial crisis extend only to individuals who report suspected violations of the securities laws to the Securities and Exchange Commission (“SEC” or “Commission”). In Digital Realty Trust, Inc. v. Somers, 583 U.S. _____ (2018) (here), the Court held that individuals who blow the whistle through internal means only are precluded from the anti-retaliation protections enjoyed under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank” or the “Act”).

This Blog has written about Digital Realty here, here, here and here.

The Court, in an opinion authored by Justice Ruth Bader Ginsburg, resolved a circuit court split over whether individuals are required to report alleged violations of the securities laws to the SEC to qualify as a whistleblower under Dodd-Frank. The Ninth and Second Circuits held that Dodd-Frank did not limit the anti-retaliation protections of the Act to those who disclose information to the SEC only.  Digital Realty Trust, Inc. v. Somers, 850 F.3d 1045 (9th Cir. 2017); Berman v. NEO@OGILVY LLC, 801 F.3d 145 (2d Cir. 2015). 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” or “SOX”) and other laws, rules, and regulations. By contrast, the Fifth Circuit, which was the first to address the issue, held that the Act’s definition of “whistleblower” applied 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). 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.

In reversing the Ninth Circuit decision, the Court held that a “plain-text reading” of Dodd-Frank controlled because the statute unequivocally limited the definition of “whistleblower” to only those individuals who provide “information relating to a violation of the securities law to the commission.” 15 U.S.C. §78u-6(a)(6). The Court held as such notwithstanding the anti-retaliation provision of Sarbanes-Oxley, which applies to all “employees” who report misconduct to the SEC, any other federal agency, or their internal supervisors.

In giving Section 21F(a)(6) its plain meaning, Justice Ginsburg refused to give deference, under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984), to the SEC’s interpretation of Dodd-Frank – that is, the Court refused to ascribe different meanings to “whistleblower” in the reward and anti-retaliation provisions of the Act. Because “Congress has directly spoken” to the matter, she wrote, the SEC is precluded from a more expansive interpretation.

Background

Paul Somers (“Somers”), a former Vice President of Digital Realty Trust (“Digital Realty”), a real estate investment trust specializing in properties for data centers, alleged that he was fired after reporting possible securities law violations to senior management. Somers was an executive in the company’s Singapore office when he reported that his boss had hidden millions of dollars in cost overruns, granted no-bid contracts and made payments to friends, among other things. Although nothing impeded Somers from reporting the suspected wrongdoing to the SEC prior to his termination, he failed do so. Additionally, Somers failed to file an administrative complaint within 180 days of his termination, rendering him ineligible for relief under Sarbanes-Oxley.

Thereafter, Somers sued Digital Realty, alleging violations of state and federal securities laws, including violations of the anti-retaliation provisions of the Act (e.g., Section 21F(h)(1)(A) of the Act).  Digital Realty moved to dismiss on the ground that Somers was not a “whistleblower” under Dodd-Frank because he only reported the wrongdoing internally and not to the SEC.

In May 2015, the district court denied the company’s motion to dismiss. In denying the motion, the district court deferred to the SEC’s interpretation of “whistleblower” to include internal whistleblowers. The court analyzed the statutory text, the Act’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. Digital Realty Trust, 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 Dodd-Frank. Id. at 1106.

The district court certified the question for interlocutory appeal pursuant to 28 U.S.C. § 1292(b), and the Ninth Circuit granted Digital Realty’s petition for permission to appeal. 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.  Digital Realty Trust, Inc. v. Somers, 850 F.3d 1045 (9th Cir. 2017).  The majority found that “[b]y broadly incorporating, through subdivision (iii), Sarbanes-Oxley’s disclosure requirements and protections, [the 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 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 Securities Exchange Act of 1934 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 Ninth Circuit found that Dodd-Frank’s anti-retaliation provision “unambiguously and expressly protects” whistleblowers of both types: those who report matters to the SEC and those who only make internal reports to their employer. 850 F.3d at 1050.

In a brief dissent, Judge John Owens sided with the Fifth Circuit.  Judge Owens maintained that the statutory definition of whistleblower was clear, left no room for interpretation, and plainly governed. Id. at 1051.

Sommers appealed to the Supreme Court.

The Supreme Court’s Decision

In reversing the Ninth Circuit decision, the Court held that the plain text of the statute, in conjunction with the Act’s anti-retaliation provision, as well as the intent of Congress in enacting the statute, negated the Ninth Circuit’s expansive reasoning.

The Court found that the definition of “whistleblower” under Section 21F(a)(6) plainly “describes who is eligible for protection” from retaliation, i.e., someone who “‘provides … information relating to a violation of the securities laws to the Commission.’” (Citation omitted; orig’l emphasis.) This definition, Justice Ginsburg found, applies “throughout” the statute.

The definition section of the statute supplies an unequivocal answer: A “whistleblower” is “any individual who provides . . . information relating to a violation of the securities laws to the Commission.” §78u–6(a)(6) (emphasis added). Leaving no doubt as to the definition’s reach, the statute instructs that the “definitio[n] shall apply” “[i]n this section,” that is, throughout §78u–6. §78u–6(a)(6).

Having determined “who” is a whistleblower, the Court turned to the conduct protected under the Act – that is, “what” conduct is protected by Dodd-Frank. The Court explained that such conduct can be found in the three clauses of Section 21F(h)(1)(A).

The three clauses of §78u–6(h)(1)(A) then describe what conduct, when engaged in by a whistleblower, is shielded from employment discrimination. See §78u–6(h)(1)(A)(i)–(iii). [Orig’l emphasis.]

Reading the “who” and the “what” provisions together, Justice Ginsburg explained how an individual can obtain the anti-retaliation protections of the Act.

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.

Justice Ginsburg noted that “Dodd-Frank’s purpose and design corroborate our comprehension of §78u–6(h)’s reporting requirement,” noting that Congress enacted Dodd-Frank “to motivate people who know of securities law violations to tell the SEC,” and, in connection with this purpose, Congress granted such individuals “immediate access to federal court, a generous statute of limitations … and the opportunity to recover double backpay.” The Court, however, found that the reason for such incentives was to effectuate Dodd-Frank’s narrow objective of motivating individuals to “tell the SEC,” and not (as with SOX) to “disturb the ‘corporate code of silence’” and embolden employees to report fraudulent behavior “not only to the proper authorities … but even internally.”

The “core objective” of Dodd-Frank’s robust whistleblower program, as Somers acknowledges is “to motivate people who know of securities law violations to tell the SEC.” By enlisting whistleblowers to “assist the Government [in] identify[ing] and prosecut[ing] persons who have violated securities laws,” Congress undertook to improve SEC enforcement and facilitate the Commission’s “recover[y] [of] money for victims of financial fraud.”  To that end, §78u–6 provides substantial monetary rewards to whistleblowers who furnish actionable information to the SEC. See §78u–6(b).

Financial inducements alone, Congress recognized, may be insufficient to encourage certain employees, fearful of employer retaliation, to come forward with evidence of wrongdoing. Congress therefore complemented the Dodd-Frank monetary incentives for SEC reporting by heightening protection against retaliation. While Sarbanes-Oxley contains an administrative-exhaustion requirement, a 180-day administrative complaint-filing deadline, and a remedial scheme limited to actual damages, Dodd-Frank provides for immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double backpay. Dodd-Frank’s award program and anti-retaliation provision thus work synchronously to motivate individuals with knowledge of illegal activity to “tell the SEC.”

When enacting Sarbanes-Oxley’s whistleblower regime, in comparison, Congress had a more far-reaching objective: It sought to disturb the “corporate code of silence” that “discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally.”

(Citations omitted; orig’l emphasis; internal quotation marks omitted.)

The Court concluded that, given the unambiguous definition of whistleblower, because “Somers did not provide information ‘to the Commission’ before his termination,” “he did not qualify as a ‘whistleblower’ at the time of the alleged retaliation.”  Therefore, he was “ineligible to seek relief under §78u–6(h).”

In a concurrence, Justice Clarence Thomas, joined by Justices Samuel Alito and Neil Gorsuch, agreed with the Court’s conclusion, but declined to adopt Justice Ginsburg’s argument that the purpose and design of Dodd-Frank and its legislative history supported the Court’s decision. Justice Thomas maintained that even if “a majority of Congress read the Senate Report, agreed with it, and voted for Dodd-Frank with the same intent, ‘we are a government of laws, not of men, and are governed by what Congress enacted rather than by what it intended’” (quoting Justice Antonin Scalia’s concurring opinion in Lawson v. FMR LLC). Justice Sonia Sotomayor, joined by Justice Stephen Breyer, filed a separate concurrence that supported Justice Ginsburg’s use of legislative history, noting that “[j]ust as courts are capable of assessing the reliability and utility of evidence generally, they are capable of assessing the reliability and utility of legislative-history materials.”

Takeaway

As Justice Ginsburg observed, Congress “complemented the Dodd-Frank monetary incentives for SEC reporting by heightening protection against retaliation.” In this regard, the Act “provides for immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double backpay.” (Citation omitted.) Thus, “Dodd-Frank’s award program and anti-retaliation provision … work synchronously to motivate individuals with knowledge of illegal activity to “‘tell the SEC.’” (Citation omitted.)

In light of this synchronicity, giving the term “whistleblower” a consistent meaning makes sense. It not only comports with the plain text of the Act, but also the legislative history and “purpose and design” of the statute.

After Digital Realty, whistleblowers will no longer have a reason to blow the whistle internally, even where the company has a strong and robust compliance program. Instead, to avail themselves of the Act’s anti-retaliation protections, employees will likely report their concerns of suspected wrongdoing directly to the SEC – before any adverse action occurs, but also before employers have had the chance to hear, investigate, and address their concerns – notwithstanding the fact that they may receive a higher bounty for participating in internal compliance programs in the first instance. See Rule 21F-6, 17 C.F.R. § 240.21F-6 (listing as a factor that may increase an award whether the individual reported internally before, or at the same time, as any report to the SEC). Whether the incentive to report wrongdoing to the SEC in the first instance trumps the financial incentive to report internally remains to be seen. No doubt, the number of filings with the SEC after Digital Realty will be watched closely by practitioners and the Commission.

Finally, although Digital Realty eliminates the ability of individuals who report suspected violations of the securities laws only internally to bring retaliation actions under Dodd-Frank, internal whistleblowers still have protections under Sarbanes-Oxley.

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