Why it matters
The scope of the Dodd-Frank Wall Street Reform and Consumer Protection Act's whistleblower protections may be headed to the U.S. Supreme Court after a recent Second Circuit Court of Appeals decision created a circuit split. In 2013, the Fifth Circuit held that an employee was not entitled to the statute's whistleblower protections because he reported allegedly unlawful behavior internally and not to the Securities and Exchange Commission (SEC). In September, the Second Circuit reached the opposite conclusion, ruling that an internal company complaint was sufficient to support a whistleblower claim under Dodd-Frank and that reporting to the SEC was not necessary. The split panel majority explained that the anti-retaliation provisions of the statute are ambiguous, requiring deference to the SEC's more generous interpretation of the statute. A dissenting opinion noted that the decision not only created a split among the federal appellate courts but also placed the Second Circuit "firmly on the wrong side of it." Given the split among the courts—and the continuing rise in the number of whistleblower suits being filed—the issue looks headed to the U.S. Supreme Court for review.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act established legal protections for employees who blow the whistle on a company's illegal activities. But the statute wasn't entirely clear. Section 78u-6(a)(6) defines a whistleblower as "any individual who provides or two 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."
Separately, Section 78u-6(h)(1)(A) provides whistleblowers with a private right of action against employers who take retaliatory actions against a whistleblower for taking certain protected actions, delineated in three subsections. Two subsections specifically reference working with the SEC, while the third provides protections more generally "in making disclosures that are required or protected" under the Sarbanes-Oxley Act, the Exchange Act, "and any other law, rule, or regulation subject to the jurisdiction of the Commission."
Daniel Berman argued he fell under the final catch-all subsection. As the finance director at media agency Neo@Ogilvy, Berman was responsible for all of the company's financial reporting and compliance with Generally Accepted Accounting Principles (GAAP), as well as internal accounting procedures.
According to Berman's complaint against his former employer, he discovered various practices that he claimed amounted to accounting fraud and violated GAAP, Sarbanes-Oxley, and Dodd-Frank. Berman alleged he reported the violations internally and was terminated as a result of his whistleblower activities. Only after the limitations period on whistleblower protections under Sarbanes-Oxley had expired did he report the alleged violations to the SEC and file suit under Dodd-Frank.
Neo moved to dismiss the complaint, arguing that Berman failed to meet the definition of a whistleblower in the statute because he neglected to report his concerns to the SEC as required by Section 78u-6(a)(6). A federal court judge agreed and dismissed the suit, finding that Berman was terminated long before he reported any alleged violations to the Commission.
Berman appealed and a divided panel of the Second Circuit Court of Appeals reversed.
Reviewing the statute, the majority found "a significant tension" between the definitional subsection, where "whistleblower" means an individual who reports violations to the Commission, and the later subsection, which "does not within its own terms limit its protections to those who report wrongdoing to the SEC."
This tension left questions unanswered, the court said, particularly with regard to whistleblowers who report wrongdoing simultaneously to their employer and the Commission, as well as regarding certain categories of whistleblowers—including auditors and attorneys—who are required to report wrongdoing to their employers before they can reach out to the SEC.
Congressional history does not shed any light on the problem, the majority said, and other courts have reached conflicting results. Led by the Fifth Circuit Court of Appeals in Asadi v. G.E. Energy, a group of federal courts from California, Colorado, Texas, and Wisconsin have ruled that the statute's definition of "whistleblower" controls, mandating a report to the SEC to receive the protections of Dodd-Frank.
A "far larger number" of district courts have reached the opposite conclusion. Courts in California, Colorado, Connecticut, Kansas, Massachusetts, New Jersey, New York, and Tennessee have all held the catch-all subdivision permits internal reporting. "Thus, although our decision creates a circuit split, it does so against a landscape of existing disagreement among a large number of district courts," the panel wrote.
With the text leaving the matter unclear and no hints in the legislative history, the court said the provision was "sufficiently ambiguous to oblige us to give Chevron deference to the reasonable interpretation of the agency charged with administering the statute."
In 2011, the SEC promulgated Exchange Act Rule 21F-2, which provided a definition of a whistleblower that included those who provide specified information "in a manner described in" the retaliation protection provisions of Dodd-Frank, including the catch-all subdivision, which protects "an employee who reports internally without reporting to the Commission." The agency's position was recently reiterated in a rule interpretation.
"We conclude that the pertinent provisions of Dodd-Frank create a sufficient ambiguity to warrant our deference to the SEC's interpretive rule, which supports Berman's view of the statute," the majority wrote, reversing and remanding for further proceedings. "Under SEC Rule 21F-2(b)(1), Berman is entitled to pursue Dodd-Frank remedies for alleged retaliation after his report of wrongdoing to his employer, despite not having reported to the Commission before his termination."
One member of the panel filed a dissenting opinion, criticizing the majority for rewriting a federal statute. "No doubt, my colleagues in the majority, assisted by the SEC or not, could improve many federal statutes by tightening them or loosening them, or recasting or rewriting them," Judge Dennis Jacobs wrote. "I could try my hand at it. But our obligation is to apply congressional statutes as written. In this instance, the alteration creates a circuit split, and places us firmly on the wrong side of it."
To read the opinion in Berman v. Neo@Ogilvy LLC, click here.