The Dodd-Frank Act prohibits employers from retaliating against employees who act as whistleblowers by providing information related to a violation of the securities laws to the Securities and Exchange Commission (SEC) in a manner established by the SEC. Dodd-Frank Act, 15 U.S.C. § 78u-6(h)(1). The jurisdiction and scope of this law have been tested recently in the U.S. Courts of Appeals for the Second and Eighth Circuits. In the Eighth Circuit, the court was asked to take up an interlocutory appeal to determine whether individuals who do not provide information directly to the SEC qualify as “whistleblowers” under Dodd-Frank. The Eighth Circuit declined to take up the appeal. The Second Circuit also was asked to weigh in on whether whistleblowers are protected if they report violations only internally, but the court did not need to reach that question. Instead, the Second Circuit held that Dodd-Frank does not apply extraterritorially, and because the plaintiff failed to allege that any of the events took place within the United States, Dodd-Frank did not apply. Liu v. Siemens AG, Docket No. 13-4385, (2d Cir. Aug. 14, 2014).
In Liu v. Siemens AG, the Second Circuit was presented with multiple issues, including whether the Dodd-Frank Act applied outside of the United States and whether Dodd-Frank’s definition of whistleblower included an individual who reported violations only internally, within his or her company. The court did not need to reach the internal reporting issue, as it followed the Supreme Court’s decision in Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), in concluding that the Dodd-Frank Act was not intended to apply extraterritorially. Morrison stands for the proposition that a law will not be applied extraterritorially unless Congress affirmatively indicated that the law was meant to be so applied. Id. at 265. Relying on this precedent, the Second Circuit rejected Liu’s arguments that the broad language of the Dodd-Frank Act could be read to imply extraterritorial application. The Second Circuit held that “there is no explicit statutory evidence that Congress meant for the antiretaliation to apply extraterritorially . . . . Thus ‘we must presume [that the antiretaliation provision] is primarily concerned with domestic conditions.’ ” Liu, Docket No. 13-4385, at 20 (quoting Norex Petroleum Ltd. v. Access Industries, Inc., 631 F.3d 29, 32 (2d Cir. 2010)
By affirming the lower court on the extraterritoriality question, the Second Circuit did not reach the issue of whether the Dodd-Frank Act protects would-be “whistleblowers” who do not report violations directly to the SEC. While Liu did not result in an opinion on that subject, the proceeding did provide insight into the SEC’s point of view, as the SEC filed an amicus brief urging the court to defer to the SEC’s interpretation of Dodd-Frank’s whistleblower protection, discussed in additional detail on this blog. In its brief, the SEC argued that Dodd-Frank’s anti-retaliation provisions apply to any individual engaging in protected whistleblowing activities, including reporting internally to the company as Liu did. The SEC reasoned that it had crafted its rules to provide “strong incentives” to report internally in the first instance, and pointed out that “if internal compliance and reporting procedures are not utilized or working, our system of securities regulation will be less effective.”
The Eighth Circuit also had the opportunity to address the internal reporting question in Bussing v. COR Clearing, LLC. In Bussing, the district court denied COR Clearing’s motion to dismiss a former executive’s claim under the Dodd-Frank Act based on retaliatory termination after the executive reported potential violations to COR Clearing’s top executives and to FINRA, but not to the SEC. COR Clearing argued that because the executive did not report directly to the SEC, Dodd-Frank did not apply. U.S. District Court Judge John Gerrard rejected this argument but allowed COR Clearing to pursue an interlocutory appeal to the Eighth Circuit. The court of appeals did not take COR Clearing up on its invitation and the case presumably will proceed at the district court level.
With the Second Circuit sidestepping the issue and the Eighth Circuit refusing to take it up, the Fifth Circuit, in Asadi v. G.E. Energy (USA) LLC, 720 F.3d 620 (5th Cir. 2013), is the only appellate court to have spoken on the issue, holding that the Dodd-Frank Act’s protection of whistleblowers does not apply to individuals who do not provide the SEC with information relating to securities law violations. While not binding outside the Fifth Circuit, the court’s opinion in Asadi is at least persuasive, and at odds with the SEC’s point of view as articulated in its amicus brief in Liu. Against this backdrop, an employee seeking to guarantee protection under Dodd-Frank should provide information of securities violations directly to the SEC. In addition, employers should assume that an employee reporting internally also will be making a report with the SEC, and the employer should act quickly to investigate the claims. Employers should take great care when dealing with potential whistleblowers to avoid any actions that may appear to be retaliatory in nature, particularly in light of the SEC’s view.