On February 21, 2018, the U.S. Supreme Court, in Digital Realty Trust, Inc. v. Somers, held that the anti-retaliation provisions of Dodd-Frank do not apply to an individual who has not reported securities law violations to the Securities and Exchange Commission.
The Dodd-Frank Act includes provisions aimed at encouraging whistleblowers to report possible violations of the securities laws to the Commission through a combination of measures, including financial rewards, confidentiality protections and prohibitions on employer retaliation. The definition of a whistleblower is “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.” (15 U.S. Code § 78u-6(a)(6).)
The Commission adopted Rule 21F-2, which provides that in order for a person to be eligible for an award, he or she must report information relating to a possible violation of the securities laws to the Commission. However, under Rule 21F-2, a person need not report the information to the Commission to be covered by the Dodd-Frank anti-retaliation protections. For example, if a person reported the information to an internal supervisor, he or she would be protected by the anti-retaliation provisions.
Paul Somers was a Vice President of Digital Realty Trust, Inc. from 2010 to 2014. In a suit he brought in the United States District Court for the Northern District of California, he alleged that he was terminated shortly after he reported to senior management suspected violations of the federal securities laws by Digital Realty; among other claims, he alleged this constituted whistleblower retaliation under Dodd-Frank. Digital Realty sought dismissal of the complaint on the grounds that Somers was not a whistleblower under Dodd-Frank because he had not reported the suspected securities law violations to the Commission. The District Court denied Digital Realty’s motion, after finding the statute ambiguous and according deference to Rule 21F-2. The Ninth Circuit affirmed the judgment.
Resolving a split among circuit courts, and reversing the Ninth Circuit judgment, the Supreme Court held that Dodd-Frank’s definition of a “whistleblower” was clear and conclusive in requiring that an individual must report information about suspected securities law violations to the Commission in order to be covered by Dodd-Frank’s anti-retaliation provision. Because of the clear statutory definition of “whistleblower,” deference was not accorded to the contrary view in Rule 21F-2.
There were no dissenting opinions, though several justices filed concurring opinions concerning the issue of whether it was appropriate to rely on a U.S. Senate Report in interpreting the statute.
This e-Bulletin was prepared by William Ross, of counsel to Hirschfeld Kraemer LLP, where he represents clients on corporate matters. Mr. Ross practices in Santa Monica, California.