On September 10, 2015, the Second Circuit, in Berman v. [email protected] LLC (here), split with the Fifth Circuit regarding the reach of Dodd-Frank’s whistleblower anti-retaliation provisions. The crux of the debate arises from the interplay between the statutory definition of “whistleblower” and the conduct protected in the Act’s anti-retaliation provisions. Specifically,  the Act clearly defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities law to the [SEC].” 15 U.S.C.§ 78u-6(a)(6).  The anti-retaliation provisions of the law, however, prohibit retaliation against “whistleblowers” who participate in the following conduct: (i) who raise complaints relating to lawful acts done by   a whistleblower in providing information to the SEC; (ii) who participate or assist in any investigation of the SEC based upon such information; and (iii) who make disclosures required or protected under the Sarbanes-Oxley Act and any other law, rule or regulation subject to the jurisdiction of the SEC.  See 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii).

One interpretation of the statute — the one ultimately adopted by the Second Circuit — is that because subsection (iii) above does not expressly condition anti-retaliation protection on an employee having complained to the SEC, a complaint to the  SEC is not required by the statute. Under this reading, the protections afforded to a “whistleblower” under subsection (iii) seemingly contradict the clear statutory definition of the term “whistleblower” in the earlier section of the statute, leading a number of district courts, and now the Second Circuit, to conclude that there is sufficient ambiguity in the statute to permit deference to the SEC’s subsequent whistleblower regulations defining the term more broadly. Not surprisingly, the SEC’s position is that an employee need not report to the SEC in order to benefit from the anti-retaliation provisions of Act. In   fact, following oral argument in Berman, the SEC issued an interpretive rule designed to “clarify” that, for purposes of the employment retaliation protections provided by Dodd-Frank, an individual’s status as a whistleblower does not depend on reporting information to the SEC. See Interpretation of the SEC’s Whistleblower Rules Under Section 21F of the Securities Exchange Act of 1934, Exchange Act Release No. 34-75592 (Aug. 4, 2015).

Not all courts agree with this broad reading of the law. The Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C. and a number of district courts have held the statutory definition of “whistleblower” is abundantly clear, and notwithstanding the language in subsection (iii), the anti-retaliation provisions support the conclusion that to be a whistleblower, a person must first complain to the SEC. A majority of the panel in Berman disagreed, describing the central issue as whether the “arguable tension between the definitional subsection [] which defines ‘whistleblower’ to mean an individual who reports violations to the  [SEC], and subdivision (iii) . . ., which, unlike subdivisions (i) and (ii), does not within its own terms limit its protection to those who report wrongdoing to the SEC” creates sufficient ambiguity as to require deference to the SEC’s rule.

The majority began its analysis by highlighting the purported “tension” between the definition of whistleblower and the language of subsection (iii), observing that if subsection (iii) is meant to protect individuals who complain to the SEC, it will protect only those few individuals who make simultaneous complaints to their employer and to the SEC. The Court further observed that there are categories of potential whistleblowers who cannot report wrongdoing to the SEC until after they  have first reported it to their employer (such as auditors and attorneys), and therefore, “apart from the rare example of simultaneous . . . reporting of wrongdoing . . . there would be virtually no situation where an SEC reporting requirement would leave subdivision (iii) with any scope.”  Consequently, the majority opined the central question is “whether Congress intended to add subdivision (iii) . . . only to achieve such a limited result.”  Ultimately, the Court determined that the statutory texts are unclear, and found no legislative history that “even hints at an answer.”  Accordingly, the Court found the “tension” created sufficient ambiguity to allow deference to the SEC’s interpretation of the statute.

In its effort to rationalize the apparent unambiguous definition of “whistleblower” set out in the statute, the majority noted, “[w]e recognize that the terms of a definitional subsection are usually to be taken literally. . . and, pertinent to this case, usually applied to all subsections literally covered by the definition, but we have also recognized that ‘mechanical use of a statutory definition’ is not always warranted.”  That is, even though the statute provides a clear definition of a term that is later used in other sections of the statute, the majority still concluded that the statute was somehow ambiguous.

In his dissent, Judge Jacobs harshly criticizes the majority for re-writing the statute, misreading its clear terms (“a bad misreading, tantamount to a misquotation”) and for placing the Second Circuit on the “wrong side” of a circuit split.  Relying heavily on Asadi, Judge Jacobs observed that “[p]ersons who report certain violations of the securities laws are protected  from retaliation under (at least) two federal statutes.  [SOX] protects employees who blow a whistle to management or to regulatory agencies; Dodd-Frank protects “whistleblowers,” defined as persons who report violations “to the [SEC].” He then criticized the majority for “assum[ing] its own conclusion,” ignoring the distinction between SOX and Dodd-Frank, and for “look[ing] here, there and everywhere — except to the statutory text” for the meaning of the term “whistleblower.” Judge Jacobs next attacked the majority’s conclusion that subsection (iii) would have a limited effect, and more so, for its holding that when a plain reading of a statute gives it an “extremely limited” effect, the statutory provision is therefore “impaired or ambiguous.”

Practice Takeaway:

  • With a clear circuit split, as well as strong dissent in its own Circuit, this issue seems destined for resolution by the Supreme Court.  Indeed, the Second Circuit agreed on October 14, 2015 to put its mandate on hold while [email protected] seeks Supreme Court review.  Until the Supreme Court resolves the circuit split, the broader restriction on retaliation under the Second Circuit’s construction should guide employers’ reaction to “whistleblowers” whether or not they report to the SEC.