What you need to know: 

In a divided 2-1 decision, the United States Court of Appeals for the Second Circuit ruled today in Berman v. Neo@Ogilvy that employees who complain only internally, rather than complaining to the SEC, are “whistleblowers” under Dodd-Frank, based on the SEC’s interpretation of the statute. This means that an employee who raises a securities law issue internally, but who does not report it to the SEC, satisfies the definition of “whistleblower” under the statute and is therefore entitled to the anti-retaliation protections of Dodd-Frank. This decision rejects the Fifth Circuit’s 2013 decision on this point in Asadi v. GE Energy LLC. 

What you need to do:

Employers, especially those located in the Second Circuit, should stay apprised of developments as other circuits address this issue, especially because the current circuit split could lead to a Supreme Court decision. Employers are also advised to review their internal reporting policies to ensure that employees understand the importance of raising compliance issues internally, and to ensure that internal reports are promptly and thoroughly investigated. 

The details on Berman

Daniel Berman, former finance director of Neo@Ogilvy LLC, sued Neo@Ogilvy and its parent company, WPP Group USA, in January 2014. Berman had reported suspected irregularities internally – including delayed payments to clients and improperly recognized revenues – but was terminated before he raised these concerns with the SEC. 

At issue in Berman was whether Berman’s internal report conferred upon him the anti-retaliation protections afforded to whistleblowers under Dodd-Frank. In 2013, the Fifth Circuit in Asadi ruled that the strict construction of the statute only provides protections to whistleblowers that complain to the SEC. At oral argument, Neo@Ogilvy urged an apparently divided panel of the Second Circuit to apply the plain language of the statute and adopt the Fifth Circuit’s interpretation. 

The SEC filed an amicus brief in the case and took a strong interest in Berman, demonstrating its heightened focus on whistleblower cases in general. In its brief, the SEC asserted that in its final rules implementing the anti-retaliation provision of Dodd-Frank, it sought to ensure that individuals who reported violations internally before contacting the SEC were protected. It stated that Rule 21F-2(b)(1), which designates which individuals are considered “whistleblowers” under the statute, include those reporting violations to individuals and entities other than the SEC. Both the SEC and Berman emphasized the remedial nature of Dodd-Frank and argued that adopting Asadi would effectively eviscerate the congressional purpose behind the statute.

Ultimately, the Second Circuit rejected Asadi, holding that the statute is ambiguous about when a whistleblower must report to the SEC to be protected by the statute’s anti-retaliation protections. In a 2- 1 decision, the court reversed the district court’s dismissal of Berman’s claims and remanded the case, holding that courts must defer to the SEC to interpret the ambiguity in the statute. In a sharply worded dissent, Judge Dennis Jacobs wrote that the obligation of the courts is to “apply Congressional statutes as written” and warned that the majority holding “creates a circuit split, and places us firmly on the wrong side of it.”

Given this new development, employers are advised to review their internal reporting policies and to proceed with caution when disciplining or terminating an employee that has raised internal complaints. Employers should consult with employment counsel and stay apprised of new developments in this area, especially since the circuit split could lead to an eventual Supreme Court decision.