Second Circuit, Disagreeing with Fifth Circuit, Defers to SEC’s Interpretation of Dodd-Frank Whistleblower Definition and Holds That Internal Whistleblowers Are Entitled to Pursue Dodd-Frank Retaliation Claims

SUMMARY

On September 10, 2015, the U.S. Court of Appeals for the Second Circuit held that the Dodd-Frank Act’s anti-retaliation provision can be used not just by individuals who report concerns to the SEC but also by individuals who complain to their employers internally. Berman v. Neo@Ogilvy LLC & WPP Group USA, Inc., No. 14-4626. The majority reasoned that the Dodd-Frank Act’s use of the word “whistleblower” was sufficiently ambiguous that the Court should defer to the SEC’s interpretation of the statute; in 2011, the SEC promulgated Rule 21-F2, taking the position that Dodd-Frank protected internal whistleblowers. Judge Jacobs dissented, noting that Dodd-Frank unambiguously defines “whistleblower” as a person who reports to the SEC and criticizing the majority for engaging in unnecessary rewriting of the statute. He dismissed Rule 21-F2 as reflective of “the SEC’s territorial interests” and not an appropriate reading of the statute. The decision is significant because Dodd-Frank’s whistleblower provisions are significantly more generous to potential plaintiffs than the Sarbanes Oxley Act (“SOX”) whistleblower law. Indeed, to a significant extent, the decision will make a dead letter of SOX’s whistleblower provisions. The decision openly acknowledges that it creates a circuit split with the Fifth Circuit and the question may well ultimately reach the U.S. Supreme Court.

BACKGROUND

The Dodd-Frank Act added amendments to the Securities Exchange Act of 1934 (the “Exchange Act”) that (a) created a bounty provision, allowing whistleblowers who provide information to the SEC that results in a recovery of funds to participate in a share of the recovery; and (b) created a cause of action  for whistleblowers who claim to have been retaliated against. There is only one definition of whistleblower: in Section 21F(a)(6), Dodd-Frank states, “In this section the following definitions shall apply: . . . The term ‘whistleblower’ means 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).

The provision creating a private cause of action for retaliation, Section 21F(h)(1)(A), states that “a whistleblower” is protected from retaliation for any of three “lawful act[s]”: “(i) providing information to the Commission in accordance with this section; (ii) initiating, testifying in, or assisting in any investigation or judicial  or  administrative  action  of  the  Commission  based  upon  or  related  to  such  information;  or (iii) making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter [i.e., the Exchange Act], including section 78j-1(m) of this title [i.e., Section 10A(m) of the Exchange Act], section 1513(e) of Title 18, and any other law, rule or regulation subject to the jurisdiction of the Commission.” 15 U.S.C. § 78u-6(h)(1)(A). As noted below, the Berman majority agreed with the plaintiff that “subdivision (iii) expands the protections of Dodd-Frank to include the whistleblower protection provisions of Sarbanes-Oxley, and those provisions, which contemplate an employee reporting violations internally, do not require reporting violations to the Commission.”

On August 12, 2011, the SEC adopted Rule 21F-2, 17 C.F.R. § 240.21F-2, taking the position that persons reporting internally can bring causes of action under Dodd-Frank as whistleblowers: “For purposes of the anti-retaliation protections afforded by Section 21F(h)(1) of the Exchange Act (15 U.S.C. 78u-6(h)(1)), you are a whistleblower if: (i) You possess a reasonable belief that the information you are providing relates to a possible securities law violation (or, where applicable, to a possible violation of the provisions set forth in 18 U.S.C. 1514A(a)) that has occurred, is ongoing, or is about to occur, and; (ii) You provide that information in a manner described in Section 21F(h)(1)(A) of the Exchange Act (15 U.S.C. 78u-6(h)(1)(A)).”

THE SECOND CIRCUIT’S DECISION

Daniel Berman was the finance director of Neo@Ogilvy LLC (“Neo”) and was responsible for the company’s financial reporting and its compliance with Generally Accepted Accounting Principles. Berman alleged that in April 2013 he reported to his superiors concerns about certain suspected fraudulent accounting practices and thereafter was terminated in retaliation. Berman says that he then reported his concerns to the SEC (after his termination). In January 2014, Berman sued, alleging he was discharged in violation of Dodd-Frank and his employment contract. The District Court dismissed Berman’s Dodd- Frank claims, ruling that the anti-retaliation provision “provided whistleblower protection only to those discharged for reporting alleged violations to the Commission.” By a 2-to-1 majority, the Second Circuit reversed and remanded, holding that 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.”

The Second Circuit’s decision, by Judge Newman and joined by Judge Calabresi, is premised on what it perceived to be a “tension” between Dodd-Frank’s definition of whistleblower and the usage of the term in the private cause of action for retaliation. Although acknowledging that there is “no absolute conflict” between the “Commission notification requirement in the definition of ‘whistleblower’ and the absence of such a requirement in both subdivision (iii) of subsection 21F(h)(1)(A) of Dodd-Frank and the Sarbanes- Oxley provisions incorporated by subdivision (iii)”—because an individual could “simultaneously” report concerns to the SEC and also report internally to the employer—the majority concluded that “a significant tension within subsection 21F nevertheless remains.” The Court summarized the implications of the ambiguity: “In statutory terms, the issue presented is whether the ‘whistleblower’ definition in subsection 21F(a)(6) of Dodd-Frank applies to subdivison (iii) of subsection 21F(h)(1)(A). In operational terms, the issue is whether an employee who suffers retaliation because he reports wrongdoing internally, but not to the SEC, can obtain the retaliation remedies provided by Dodd-Frank.”

The majority observed that the legislative history of Section 21F “yields nothing” because the provision was inserted into the bill during the conference between the House and Senate without any accompanying statements of interpretation. The majority then surveyed how other courts have approached the inconsistent provisions. Although, as it conceded, the Fifth Circuit found no ambiguity in the statute requiring deference to the SEC, the decision noted that “a far larger number of district courts have deemed the statute ambiguous and deferred to the SEC’s Rule.” Ultimately, the majority concluded that it “need not definitively construe the statute” because “the tension” between the definitions “renders section 21F as a whole sufficiently ambiguous to oblige [the Court] to give Chevron deference to the reasonable interpretation of the agency charged with administering the statute.”

THE DISSENTING OPINION

Judge Jacobs, in dissent, emphasized that Dodd-Frank contains one unambiguous definition of whistleblower explicitly applicable to the entire “Securities whistleblower incentives and protection” section, which requires that the individual report to the SEC as a requisite to coverage under the Act. The three sub-clauses of the anti-retaliation provision, Section 21F(h)(1)(A), merely list “three ways that ‘a whistleblower’ may take protected activity.” Under Judge Jacobs’s reading, “subdivision (iii) only protects someone who (1) makes a protected disclosure under Sarbanes-Oxley, and (2) also satisfies Dodd- Frank’s definition of ‘whistleblower.’” Judge Jacobs noted that those who report internally have a cause of action under SOX if they choose to pursue it. He dismissed the majority’s concern that subdivision (iii) would have “extremely limited scope” if it were interpreted to require both internal reporting and reporting to the SEC; he argued that a court has no basis for disregarding “a plain reading of a statutory provision” merely because it believes it has an “‘extremely limited’ effect.”

IMPLICATIONS

The Berman decision sets up a clear circuit split between the Second and Fifth Circuits.

In 2013, the Fifth Circuit adopted the narrower position that the only whistleblowers protected by Dodd- Frank are those who provide information relating to a securities law violation to the SEC. Asadi v. G.E. Energy, 2012 WL 2522599 (S.D. Tex. June 28, 2012), aff’d sub nom. Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013). In the Fifth Circuit’s analysis, the inconsistency between the whistleblower provisions is reconcilable – the statutory definition is the definition, and the anti-retaliation definition merely sets out the types of protected activity. “Under Dodd-Frank’s plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC. The three categories listed in subparagraph § 78u–6(h)(1)(A) represent the protected activity in a whistleblower-protection claim. They do not, however, define which individuals qualify as whistleblowers.” 720 F.3d at 625. Both the majority and the dissent in Berman acknowledge the circuit split with Asadi, and the Supreme Court likely will be asked to resolve it.

The whistleblower definition accepted by the majority would make the Sarbanes-Oxley whistleblower cause of action a dead letter to a significant extent.

The significant procedural and substantive advantages to a plaintiff of bringing a whistleblower claim under Dodd-Frank compared to SOX may render the SOX cause of action obsolete if Dodd-Frank is held to allow plaintiffs to bring retaliation claims without first reporting to the SEC. Unlike SOX, Dodd-Frank has no prerequisite of an administrative complaint, has a much longer statute of limitations and provides for more extensive relief. As the Fifth Circuit noted in Asadi, “construing the Dodd-Frank whistleblower- protection provision to extend beyond the statutory definition of ‘whistleblowers’ renders the SOX anti- retaliation provision, for practical purposes, moot. Such a construction has this impact because an individual who makes a disclosure that is protected by the SOX anti-retaliation provision could also bring a Dodd-Frank whistleblower-protection claim on the basis that the disclosure was protected by SOX. It is unlikely, however, that an individual would choose to raise a SOX anti-retaliation claim instead of a Dodd- Frank whistleblower-protection claim” – because of the advantages Dodd-Frank has over SOX. 720 F.3d at 629-30.