SCOTUS Confirms Narrow Scope of Dodd-Frank “Whistleblowers”
In February 2018, the United States Supreme Court issued a decision that resolved a circuit court split by siding with the narrower definition of a “whistleblower” under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). In its decision, the Supreme Court made clear that an employee must first report a securities law violation to the Securities and Exchange Commission (“SEC”) to qualify under Dodd-Frank’s definition of a “whistleblower.”
- Dodd-Frank Whistleblower Protections
In general, Dodd-Frank was passed following the financial downturn in 2008, and was drafted for the purpose of encouraging accountability and enforcement of consumer protection laws. To that end, it provides that the SEC shall pay awards to eligible whistleblowers who voluntarily provide the SEC with original information that leads to a successful enforcement action yielding monetary sanctions of over $1 million. 15 U.S.C. § 78u-6(b). Dodd-Frank defines a “whistleblower” as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the commission, in a manner established, by rule or regulation, by the commission.” 15 U.S.C. § 78u-6(a)(6).
- Asadi v. G.E. Energy, LLC, 720 F.3d 620 (5th Cir. 2013)
In Asadi, an employee filed a complaint alleging that the employer violated the Dodd-Frank whistleblower protection provisions by terminating him after he made an internal report of possible securities law violation. The 5th Circuit held that the employee was not a “whistleblower” as defined under the Dodd-Frank Act because it only creates a private cause of action for individuals who provide information to the SEC. Here, the employee only made an internal report of a possible securities law violation and thus is not protected under the Dodd-Frank.
- Berman v. NEO@OGILVY LLC, 801 F.3d 145 (2nd Cir. 2013)
In Berman, a former employee similarly brought an action against the employer alleging Dodd-Frank whistleblower protection violations, i.e., retaliation. The 2nd Circuit held that the Dodd-Frank Act was ambiguous, and thus SEC regulations extending anti-retaliation protection would apply to such employees that only reported internally. The Court noted that, as a practical matter, requiring an employee to first report violations to the SEC would virtually eliminate Dodd-Frank’s whistleblower protections.
- Somers v. Digital Realty Trust, Inc., 850 F.3d 1045 (9th Cir. 2017)
In 2017, the 9th Circuit in Somers agreed with the 2nd Circuit’s interpretation in a similarly-situated matter where a former employee brought a Dodd-Frank retaliation claim against the employer. In a matter of first impression for the circuit, the Court held that the employee was indeed a “whistleblower” under the Dodd-Frank Act even though he only reported violations to the company’s senior management rather than the SEC. Since the employee here made disclosures as required by the related Sarbanes-Oxley Act, which mandates internal reporting to supervisors before reporting to the SEC, the Court drew a parallel and determined that the Dodd-Frank definition of “whistleblower” therefore includes employees that report only internally. The Court noted that any other interpretation would narrow the Dodd-Frank Act “to the point of absurdity” because it would require the unlikely event of dual reporting, i.e., reporting both internally and to the SEC.
United States Supreme Court Decision in Digital Realty
On February 21, 2018, the Supreme Court resolved the circuit court split in holding, unanimously, that an employee must first report a securities law violation to the SEC to fall within Dodd-Frank’s definition of a “whistleblower.” See Digital Realty Trust, Inc. v. Somers, 583 U.S. ___, No. 16-1276, 2018 WL 987345 (Feb. 21, 2018). In reversing the 9th Circuit’s decision, and thus agreeing with Asadi and abrogating Berman, the Supreme Court held that an employee who did not report any securities law violations to the SEC did not qualify as whistleblower because that employee did not first report to the SEC.
Drawing on distinctions between Dodd-Frank and Sarbanes-Oxley, such as how Dodd-Frank permits a whistleblower to sue a current or former employer directly in federal district court, the Court ultimately reasoned that explicit definitions in statutes must be followed and, therefore, Dodd-Frank’s explicit definition of a “whistleblower” expressly included an SEC-reporting requirement. Based on the plain language of the statute specifically requiring SEC reporting, employees must first report to the SEC to be protected under Dodd-Frank.
The Court noted that applying the definition in this matter does not narrow Dodd-Frank’s protections “to the point of absurdity” as claimed by the 9th Circuit because Dodd-Frank would still protect employees who reported both internally and to the SEC. Dual reporting was found to be quite common, with the Supreme Court citing to a Solicitor General brief stating that approximately 80 percent of whistleblowers who received awards in 2016 reported internally before reporting to the SEC. The Supreme Court also noted that the SEC is required to protect the identity of whistleblowers, so employers will often be unaware that an employee has reported to the SEC. Regardless, the Supreme Court ultimately relied on the plain language of the statute to support its holding.
Considerations for Employers
Employees can no longer argue that they are protected as whistleblowers under Dodd-Frank after only reporting an SEC violation internally. They must actually report directly to the SEC. Thus, a potential result is that employees may simply skip internal reporting altogether. That being said, this decision should not practically be an issue for companies that are not engaging in retaliatory practices. Whistleblowers have many other protections outside of the realm of Dodd-Frank. Therefore, as it was prior to this decision, employers should frequently review their reporting policies to maintain clear anti-retaliatory guidelines, and update if needed to ensure that internal reporting is encouraged. Further, after reviewing and updating, employers should consider publishing these policies to employees to allow an opportunity for open and transparent discussion about the procedures. Maintaining a clear anti-retaliatory policy and fostering channels for knowledge and discussion of said policies can go a long way in avoiding issues like those discussed in the cases above.