Wednesday’s Supreme Court ruling limiting the scope of the Dodd-Frank Act’s whistleblower protections immediately disrupts the status quo created by SEC’s broader interpretation.
Under the ruling, whistleblowers are now required to report violations of law to the Securities and Exchange Commission — and not just to their employers, as was previously permitted — in order to qualify for whistleblower protection under Dodd-Frank’s anti-retaliation provisions.
In certain respects, however, the practical effects of the ruling in the case, Digital Realty Trust, Inc. v. Somers, may be minimal, especially in the short term. Whistleblowers still are protected from termination by provisions of the Sarbanes-Oxley Act. In any event, it can be difficult, if not impossible, for an employer to determine whether an employee has reported violations to the SEC, thereby qualifying as a statutory “whistleblower.”
It is important to note that the Somers decision will further incentivize whistleblowers to report to the SEC. It will surely discourage some individuals from reporting only internally, thus allowing for the possibility of the reported matter to be resolved without additional regulatory scrutiny.
The anti-retaliation provisions at issue in Somers are part of a multi-faceted statutory and regulatory scheme designed to protect whistleblowers and encourage disclosure to regulators.
The Sarbanes-Oxley Act of 2002 established a private right of action for individuals who provide information concerning violations of federal law or SEC rules and regulations to regulators, Congress, or employers and are subsequently terminated or subject to discrimination in the terms or conditions of their employment.
Under Sarbanes-Oxley, an individual claiming retaliation is required to exhaust administrative remedies prior to commencing a civil action, and is not eligible for a damages multiplier.
Dodd-Frank also created a private right of action to protect putative whistleblowers from retaliation. The relevant statutory provision specifically defines “whistleblower” to include any individual who provides “information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission” (the Definition Clause).
A “whistleblower,” thus defined, may bring suit against his or her employer for retaliation based on the following lawful conduct: (i) providing information concerning violations of law to the SEC; (ii) initiating, testifying in, or assisting with an SEC investigation based upon or related to such information; or (iii) making a disclosure required or protected under Sarbanes-Oxley or certain other acts (collectively, the Conduct Clauses).
This statute is more generous to whistleblowers than Sarbanes-Oxley in several respects. It does not require exhaustion of administrative remedies, it provides for a damages multiplier for back pay, and it includes a lengthy statute of limitations.
Then, effective in 2012, the SEC issued a final rule purporting to interpret Dodd-Frank as prohibiting retaliation against individuals who provide information relating to a possible violation of federal securities law either to the commission or in a manner “protected under the Sarbanes-Oxley Act of 2002.”
Given that disclosures to one’s employer may be “protected” under Sarbanes-Oxley (as set forth above), under the SEC’s final rule a report to a company supervisor could qualify as a disclosure warranting anti-retaliation protection.
In the years since the SEC adopted its final rule, the Second, Fifth and Ninth circuits each addressed the scope of Dodd-Frank’s anti-retaliation provisions applicable to “whistleblowers.”
In Asadi v. G.E. Energy (USA), L.L.C., the Fifth Circuit held that an employee must provide information to the SEC in order to qualify for “whistleblower” protection. In Berman v. [email protected] LLC, the Second Circuit reached the opposite conclusion. The Ninth Circuit agreed with the Second Circuit in the opinion, subject to review in Somers.
With this statutory and regulatory framework in mind, the Supreme Court (the Court) in Somers had little trouble concluding that Dodd-Frank’s anti-retaliation provisions apply only to would-be “whistleblowers” who provide information directly to the SEC, and not, for example, to their employers.
In reaching this conclusion, the Court found that the Definition Clause and the Conduct Clauses “operate in conjunction … to spell out the [anti-retaliation] provision’s scope.”
The definition first describes who is eligible for protection — namely, a whistleblower who provides pertinent information “to the Commission.” The three Conduct Clauses then describe what conduct, when engaged in by a whistleblower, is shielded from employment discrimination.
In other words, only a “whistleblower” can take advantage of the anti-retaliation protections of Dodd-Frank, and individuals who do not provide information to the SEC are not “whistleblowers” within the meaning of this statute.
The Court found this straightforward textual analysis to be consistent with and reinforced by the anti-retaliation provisions of Sarbanes-Oxley, as well as separate provisions of Dodd-Frank related to the Consumer Financial Protection Bureau (CFPB).
Each of those provisions was designed and structured so as to further distinct objectives, the Court found, with Dodd-Frank providing additional inducement for employees to make disclosures directly to the SEC, thus facilitating the SEC’s pursuit of its statutory objectives.
The text of Dodd-Frank, and the broader legislative and regulatory scheme in which it is embedded, were found to be more than sufficient to dispose of Somers’ and the government’s objections.
Of note, the Court countered claims that a narrower construction of Dodd-Frank would “shrink to insignificance the clause’s ban on retaliation.” It pointed out that, according to the government’s own submissions, “approximately 80 percent of the whistleblowers who received awards in 2016 reported internally before reporting to the Commission.”
Further, “in dual-reporting cases, retaliation not prompted by SEC disclosures … is likely commonplace: The SEC is required to protect the identity of whistleblowers, so employers will often be unaware that an employee has reported to the Commission.”
All nine Justices agreed with the Court’s principal holding.
As noted above, Somers has the immediate effect of displacing existing precedent concerning the scope of Dodd-Frank’s anti-retaliation provisions applicable to “whistleblowers.”
Going forward, it’s to be expected that employers’ legal exposure related to whistleblower claims, particularly baseless ones, will likely be somewhat reduced in light of the holding that whistleblower claims must be reported to the SEC to be protected under Dodd-Frank.
However, it is important not to overstate the significance of this decision, for several reasons.
First, as a practical matter, whistleblowers often already report violations both internally and to the SEC. Second, the Court’s decision may cause more whistleblowers to report violations to the SEC, without first contacting their employers. That necessarily prevents the employers from endeavoring to resolve the issue internally and avoid additional regulatory scrutiny.
Third, a company considering taking adverse employment action with respect to an apparent whistleblower very well may be unsure as to whether a disclosure to the SEC already has been made.
Finally, the Sarbanes-Oxley provisions described above remain in place and are only somewhat less generous to putative whistleblowers than those of Dodd-Frank.
While Somers may be a positive development for employers in the near term, in the long run this decision may increase the number of whistleblower complaints filed directly with the SEC, to the detriment of employers. Companies considering taking adverse employment action with respect to suspected whistleblowers should continue to act cautiously.
Marc Rosen is a litigation partner and Robert Tuchman an associate at the law firm Kleinberg Kaplan.