Retaliation claims against employers are increasingly prevalent. They can be particularly challenging to defend and can expose financial institutions and other employers to substantial potential liability. The growth in retaliation claims has been spurred by recent United States Supreme Court and other cases that have expanded what constitutes protected activity in a retaliation case involving circumstantial evidence. Courts continue to determine the specific types of activities protected under the numerous federal and state laws that contain anti-retaliation provisions which enable whistleblowers to file claims against their employers if the employer takes an adverse action as a result of the employee’s protected activity.

Dodd-Frank is one such law. Section 922 of Dodd-Frank provides significant monetary awards to successful whistleblowers, who are defined 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” Securities and Exchange Commission (“SEC”). Dodd-Frank also protects whistleblowers against retaliation. The law states: “No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower” in providing information to the SEC, participating in any investigation or action of the SEC, or making any disclosures that are required or protected by law.

Recent cases have examined whether a whistleblower under Dodd-Frank must report alleged securities laws violations to the SEC to engage in protected activity or whether merely reporting such a violation internally to an employer is sufficient. In Asadi v. G.E. Energy (U.S.A.), L.L.C.,1for instance, the United States Court of Appeals for the Fifth Circuit held that the whistleblower protection provision in Dodd-Frank protects only individuals who disclose information regarding potential securities law violations directly to the SEC, and not those who report such information internally to their employer. Asadi claimed to have reported information regarding a potential Foreign Corrupt Practices Act violation to his supervisor. Thereafter, his employer, G.E., gave him an unexpected negative performance review, and demoted and eventually fired him. Asadi sued G.E., claiming that he had been terminated in retaliation for his internal report in violation of Section 922 of Dodd-Frank. The Fifth Circuit upheld the dismissal of his claim on the grounds that Asadi had not engaged in activity protected by Dodd-Frank because he did not disclose information directly to the SEC.

The Fifth’s Circuit’s holding in Asadi is contrary to several district court holdings and is a double-edged victory for employers: on the one hand, it was a favorable ruling, in that it limits the scope of retaliation claims available to whistleblower employees; on the other hand, it encourages employees to go directly to the SEC rather than first pursue possible violations internally.

The SEC opposed the Fifth Circuit’s interpretation of Dodd-Frank in Asadi in an amicus brief recently filed with the United States Court of Appeals for the Second Circuit in the Liu Meng-Lin v. Siemens AG case.2 In its brief, the SEC states it expressly intended its rules to support existing internal reporting procedures rather than replace them. For example, the SEC retains discretion to increase a monetary award to a whistleblower who first reports a potential violation internally, thereby decreasing the chance that the whistleblower would be dissuaded from first utilizing internal reporting channels due to a concern about possibly foregoing the chance to receive a monetary award from the SEC.

While the law regarding the precise scope of protected activity under Dodd-Frank and other laws continues to evolve, employers should adopt and implement best practices to prevent, manage and defend retaliation claims arising from reporting alleged securities law violations and other possible protected activity, such as:

  • Establishing a policy that prohibits all forms of retaliation;
  • Providing multiple avenues for reporting to trained and impartial personnel;
  • Requiring employees to sign a written document acknowledging receipt of internal reporting and anti-retaliation policies and procedures; and
  • Conducting regular training to educate employees about the avenues for reporting suspected violations.

Once an employee has internally reported a possible securities law violation, best practices to avoid liability for retaliation claims include:

  • Conducting prompt, thorough and fair investigations and resolution of allegations;
  • Monitoring treatment of the whistleblower, touching base periodically to update him/her regarding actions taken;
  • Discussing the claim and the consequences of retaliation with the whistleblower’s supervisor;
  • Counseling co-workers regarding retaliatory conduct and claims, if appropriate;
  • Establishing an appropriate plan and timeline for reporting possible violations to the SEC, if not resolved internally and warranted; and
  • If disciplinary or other corrective action is necessary, consider using an independent panel to evaluate the nature and scope of the adverse action to be taken.

By taking such proactive steps, financial institutions and other employers not only will be adopting and implementing effective policies and practices, but they also will be helping to avoid significant risk and exposure from retaliation claims.