Today the Supreme Court held that an individual must report alleged wrongdoing to the Securities and Exchange Commission in order to qualify for protection from whistleblower retaliation under the Dodd-Frank Act.
While both the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) include protections against retaliation, the laws include different requirements for one to qualify as a whistleblower. Sarbanes-Oxley defines “whistleblowers” as individuals who report misconduct to the Commission, other federal agencies, Congress, or an internal supervisor, while Dodd-Frank applies a more limited definition of “whistleblower” to include only persons who provide “information relating to a violation of the securities laws to the Commission.” Dodd-Frank then affords qualifying whistleblowers protection from retaliation in three different circumstances: (i) “in providing information to the Commission in accordance with [the whistleblower provision of Dodd-Frank],”; (ii) “in initiating, testifying in, or assisting in any investigation or . . . action of the Commission based upon” information provided to the Commission in accordance with the whistleblower provision; and (iii) “in making disclosures that are required or protected under” Sarbanes-Oxley, the Securities Exchange Act of 1934, the criminal anti-retaliation prohibition at 18 U.S.C. §1513(e) or “any other law, rule, or regulation subject to the jurisdiction of the Commission.”
Although this third clause protects qualifying whistleblowers from retaliation for disclosures made to authorities other than the Commission, lower courts had been divided over whether the clause effectively expanded the definition of “whistleblower” to include those who reported to authorities other than the Commission. In the instant case, the Ninth Circuit held that applying the narrow definition of a whistleblower would render the third clause absurd, thus the statute should be construed to include two definitions of the word whistleblower: One, for the purpose of granting monetary awards, and the other, for providing protection from retaliation. Previously, the Second Circuit found the language of the statute to be ambiguous and deferred to the definitions of “whistleblower” provided in the Commission’s implementing Rules, which delineated between individuals seeking awards from the Commission and those seeking protection from retaliation.
Rejecting the rationales put forth by those circuit courts, the Supreme Court unanimously agreed that the plain language of Dodd-Frank defines a whistleblower as one who reports to the Commission. Writing for the Court, Justice Ginsberg explained that the definition of a whistleblower identifies who is eligible for protection while the three clauses of the retaliation provision describe from what types of conduct a whistleblower may be protected. “[A]n individual who falls outside the protected category of “whistleblowers” is ineligible to seek redress under the statute, regardless of the type of conduct in which that individual engages.”
Both the Respondent and the Solicitor General, on behalf of the Commission, argued that narrowly construing the definition of “whistleblower” to include only individuals who report to the Commission, for purposes of affording protection from retaliation, would be counter to the Congressional intent and “create obvious incongruities” within the statute. Recognizing that the plain-text reading would limit the number of qualifying whistleblowers, the Court explained that applying the statutory definition of a whistleblower to all three categories of conduct leading to retaliation would still provide protection to individuals who report both internally and to the Commission but who suffer retaliation because of internal reporting; for example, in cases in which the employer is unaware of the whistleblower’s report to the Commission. To this end, the Court noted that approximately 80 percent of whistleblowers who received monetary awards under the Commission’s Whistleblower Program first reported internally.
Comparing the legislative history of the whistleblower provisions within Sarbanes-Oxley to those included in Dodd-Frank, the Court noted that the former were intended to break internal codes of silence that discouraged any reporting of alleged wrongdoing while the latter were specifically intended to motivate reporting to the Commission. The Court explained that these distinct purposes corroborate the different reporting requirements under the two laws. To the extent that individuals who report internally are retaliated against before they can report to the SEC, and thus would not be covered by the safeguards provided in Dodd-Frank, the Court speculated that Congress may have believed those individuals would be sufficiently protected by the anti-retaliation provisions included in Sarbanes-Oxley. Given the objective of Dodd-Frank to encourage reporting to the Commission, the Court found that reserving retaliation protection under that law for individuals who so report would be consistent with Congress’s aim while not disrupting protections that may be available under other laws, including Sarbanes-Oxley.
Internal reporting of potential wrongdoing allows covered entities the opportunity to investigate and mitigate existing violations, as well as to prevent future violations. In light of this decision, it is more important than ever for companies take action to encourage internal reporting by evaluating their existing policies and procedures and updating those plans to incentivize employees to report through internal channels and to ensure them they will not suffer from retaliation. Companies must respond immediately to such reports in order to mitigate penalties that may result from any violations. It also remains critical for companies to encourage a culture of compliance and engage in strong self-policing.