Yesterday, in addition to hearing oral argument regarding state court jurisdiction over ’33 Act class actions (see this PubCo post), SCOTUS also heard oral argument in a second case, Somers v. Digital Realty Trust. This case addressed the split in the circuits regarding the application of the Dodd-Frank whistleblower anti-retaliation protections: do the protections apply regardless of whether the whistleblower blows the whistle all the way to the SEC or just reports internally to the company? Here is a link to the transcript of the oral argument for Digital Realty, which is discussed below.

Somers v. Digital Realty Trust

In this case, the 9th Circuit had refused to dismiss Somers’ whistleblower claim brought under Dodd-Frank’s anti-retaliation provision, even though he had failed to report the violation to the SEC. As you may recall, Dodd-Frank added Section 21F to the Exchange Act, establishing new incentives and protections for whistleblowers, including monetary awards for reporting information, confidentiality provisions and employment retaliation protections. The statute defines “whistleblower” as a person who reports potential violations of the securities laws to the SEC; however, in promulgating rules under the statute, the SEC distinguished the whistleblower anti-retaliation provisions from the award provisions, applying a broader definition in the context of anti-retaliation that would not require reporting to the SEC.

Background: Somers, formerly a vice-president of the company, was terminated by the company and claimed that his termination was a result of his reports to senior management regarding possible securities law violations. However, he did not make any disclosure of the alleged misconduct to the SEC. Somers sued, claiming that Digital had retaliated against him as a whistleblower in violation of the whistleblower protection provisions of Dodd-Frank. Digital argued that, because he did not report to the SEC, Somers was not a “whistleblower” as defined in Dodd-Frank, which, Digital contended, expressly applies only to “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.” As a result, Digital maintained, Somers was not entitled to the protection of the Dodd-Frank anti-retaliation provisions.

After analyzing the statute, the 9th Circuit panel concluded that the definition of “whistleblower” as an employee who reports to the SEC “should not be dispositive of the scope of [Dodd-Frank’s] later anti-retaliation provision”; the term “whistleblower,” the panel held, did not limit protections to persons who alerted the SEC regarding alleged unlawful activity, but also protected persons who were terminated after making internal disclosures.

In addition, the panel noted that Rule 21F-2, adopted by the SEC, expressly supported that interpretation. (That rule provides that “[t]he anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.”) The 9th Circuit panel agreed with the 2d Circuit that, “even if the use of the word ‘whistleblower’ in the anti-retaliation provision creates uncertainty because of the earlier narrow definition of the term, the agency responsible for enforcing the securities laws has resolved any ambiguity and its regulation is entitled to deference.” (See this PubCo post for a discussion of the 2d Circuit case.) In contrast, the 5th Circuit has interpreted the statute to protect only to those who report to the SEC.

SideBar

The allusion of the panel above to agency deference is a reference to the “Chevron doctrine,” a two-step test used to determine whether deference should be accorded to federal administrative agency actions interpreting a statute, first articulated by SCOTUS in 1984 in Chevron v. Natural Resources Defense Council. Generally, the doctrine established in that case mandates that, if there is ambiguity in the language of a statute, courts must accept an agency’s interpretation of a law unless it is arbitrary or manifestly contrary to the statute. For example, in a decision last year, Monica Lindeen v. SEC, the D.C. Circuit applied Chevron to uphold the SEC’s rules adopted under Reg A+ against a challenge by two state securities regulators. And, as another example, the D.C. District Court applied Chevron in initially upholding the SEC’s conflict minerals rules in 2013 in Nat’l Ass’n of Mfrs. v. SEC. National Association of Manufacturers v SEC, which was subsequently reversed on other grounds.

Question presented: The question presented for review was “[w]hether the anti-retaliation provision for ‘whistleblowers’ in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 extends to individuals who have not reported alleged misconduct to the Securities and Exchange Commission and thus fall outside the Act’s definition of a ‘whistleblower.’”

Oral argument: Digital argued that by

“its plain terms, the statutory definition [of whistleblower] applies to the entirety of the section, including the anti-retaliation provision. Far from being absurd, that plain text interpretation is entirely consistent with the history and the structure of the whistleblower provisions and with Congress’s overarching objective of promoting reporting to the SEC…. As to the history, perhaps the most telling fact is the fact that an earlier version of the anti-retaliation provision reached all employees. Congress then amended the provision to apply to a narrower set of individuals, whistleblowers.”

If an employee reports internally, but not to the SEC, and then suffers retaliation, Digital maintained, SOX would provide protection. And that could very well happen, Digital acknowledged, because reports to the SEC are confidential, and, as a result, the reason for the retaliation may not be the report to the SEC, but rather an internal report. (According to the amicus brief of the U.S., around 80% of persons who report to the SEC also report internally.)

One problem raised was what to make of other provisions in the prohibition that would seem to be substantially narrowed if that statutory definition were to apply. For example, Justice Sotomayor inquired about clause (ii), which provides that “[i]t protects from discrimination an employee who’s been fired for initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission.” Under Digital’s reading, that employee may not be protected, she noted. Digital responded that that was clearly the intent of Congress, given the intentional change in the text from “employee” to “whistleblower”; Congress sought “to provide broad protection to individuals who report securities law violations to the SEC, whatever the reason for the retaliation.” Justice Sotomayor observed that the SEC contends that the term “whistleblower” should be “given a natural reading.” However, Digital argued, while there might be an ordinary meaning to the term “whistleblower,” as one who reports misconduct, even that definition encompassed reporting to a governmental authority.

Justice Kagan was somewhat perplexed by Digital’s interpretation, particularly because of the potential absence of a nexus between the SEC report and the retaliation:

“A typical anti-retaliation provision, you would think, well, if I report internally and I’m fired for it, then I get my protection. But here you’re saying they don’t get protection, except if they do something completely unrelated, they might have made a report to the SEC about a completely different topic, they might have made it 10 years earlier, and that’s going to give them protection even though they haven’t been fired for anything remotely to do with that.… There are two employees, and they both internally report, and they’re both fired. And one of them, tough luck, but the other one is going to get protection because he’s filed a report with the SEC about some different matter entirely 10 years earlier.”

Digital responded that its “core submission… is that this is a very specific subset of cases that Congress was targeting… in the Dodd-Frank Act.” Moreover, Digital stressed that the language here was unambiguous: “[i]f anything, where Congress provides a specific statutory definition, that ought to be given effect and more respect, rather than less.”

Digital’s other “core submission to the Court is this is a simple case that can be resolved at step 1 of Chevron, the terms and reach of the statutory definition are unambiguous…. If this Court were somehow to get to step 2 of Chevron, we have an argument…that this Court should not afford Chevron deference because the rule-making was procedurally defective….” Digital had argued that the rule adoption was defective because, in the rule proposal, the SEC merely tracked the statutory definition, without providing fair notice that it was contemplating the possibility of dispensing with the SEC reporting requirement.

SideBar

Interestingly, in this Reuters column, Alison Frankel remarked that there is “a landmine buried in a footnote” in Digital’s reply brief. The explosive footnote suggests that “[s]hould the court somehow conclude both that the statutory text is ambiguous and that the procedural defects in the SEC’s rulemaking can be excused, it should order supplemental briefing to consider whether Chevron should be overruled.” In that regard, she observed that at least two Justices might well be interested in that move: “Justice Neil Gorsuch elegantly argued in his previous job as a judge on the 10th U.S. Circuit Court of Appeals that Chevron deference is an unconstitutional abdication of judicial and congressional power under separation-of-powers doctrine. Justice Clarence Thomas was mulling the same constitutional concerns about Chevron even earlier.” The Financial Choice Act of 2017 also seeks to repeal the doctrine by statute. See this PubCo post.

Somers argued that it made no sense to import the word “whistleblower” in one section “to limit what is otherwise a broad and sweeping clause that aligns Dodd-Frank’s amendment with the modern trend of major whistleblowing legislation.” In addition, Somers contended, Digital’s reading would lead to the anomaly that someone could report to the SEC on an unrelated issue and be protected as a “whistleblower” for life. Similarly, if someone were fired and then immediately reported to the SEC, he would not be protected—although, Somers acknowledged under questioning, he would be protected under SOX if within the shorter SOX statute of limitations. Nevertheless, Somers maintained, studies showed that SOX provided relief only in less than 10% of the cases; Congress’s point in the statute was to protect internal whistleblowing, which allows companies an opportunity to remediate the problem, and to enhance SOX protections.

The Justices, however, were largely “stuck on the plain language,” as Justice Gorsuch remarked: “how much clearer could Congress have been than to say in this section the following definitions shall apply, and whistleblower is defined as including a report to the Commission.” In response, Somers contended that the Court must also discern the meaning from the context, purpose and history of the provision, which he maintained were much broader; it makes no sense, he contended, to omit internal whistleblowers from protection. Justice Gorsuch also agreed with Digital’s argument that the absence of notice made the SEC’s procedure defective, undermining any notion of Chevron deference.

The U.S., as amicus, argued that the “statutory definition of whistleblower is tailor-made for the awards program, but it does not fit in the retaliation programs. Giving the term its ordinary meaning in the retaliation context would harmonize the statute and avoid the anomalies that would result from woodenly applying the statutory definition.” In addition, applying the statutory definition, which requires SEC reporting, in some of the statute’s retaliation provisions “would decouple retaliation liability from the act that causes the retaliation; and moreover, would make employers liable for conduct that they don’t know about.” Justice Kagan agreed that, while it’s possible that Congress forgot about the definition and meant to use the term in the more ordinary sense, nevertheless, “there you are, you have this definitional provision, and it says what it says. And it says that it applies to this section.” The anomalies here, she added, are not sufficiently severe (or “absurd,” in Justice Ginsburg’s idiom) to override that. Agreeing, Chief Justice Roberts maintained that the “cases where you’re allowed to move beyond the defined term are when if you stick to it, it really makes a mess of the whole thing.”

While it’s always tricky to try to read the Court’s tea leaves, for the most part, the Justices appeared to be signaling that the plain language of the statute was clear and controlling, thus suggesting that they were likely to interpret the definition of “whistleblower” in the Dodd-Frank anti-retaliation provision narrowly. As a result, the potential “landmine” in Digital’s brief calling for reconsideration of Chevron seems unlikely to explode—for now at least. While a win by Digital would likely limit the liability of companies for retaliation against whistleblowers who do not report to the SEC, ironically, a holding that whistleblowers are not protected unless they report to the SEC could very well drive all securities-law whistleblowers to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor.