On February 21, in Digital Realty Trust v. Somers, the U.S. Supreme Court issued a unanimous opinion holding that the whistleblower antiretaliation provisions of the Dodd-Frank Act apply only to employees who report alleged misconduct to the SEC. Those who report their concerns only internally, such as on a company hotline, do not enjoy certain special rights afforded in Dodd-Frank. The Sarbanes-Oxley Act also contains antiretaliation provisions. However, to invoke their right to recover under SOX in the event of retaliation, whistleblowers must first go through an administrative process involving presentation of their retaliation claim to the Department of Labor. In contrast, Dodd-Frank permits a whistleblower to sue a current or former employer directly and permits a court to award double back-pay, with interest. Most whistleblowers (and their lawyers) would of course prefer to have the leverage afforded by an immediate option to sue for damages, rather than to become enmeshed in a DOL administrative proceeding.
By limiting the more favorable treatment of retaliation claims to those who do so, the Digital Reality decision adds an incentive for employees with concerns about company conduct to report their suspicions immediately to the SEC, rather then just internally. Companies prefer that whistleblowers report internally and delay going to the SEC because it affords the company more latitude in addressing the issue before the government becomes aware of the problem and minimizes the risk of an SEC investigation.
Prior to the Digital Realty decision, delayed reporting seems to have been the norm. According to the SEC’s 2017 Annual Report to Congress on its whistleblower program, of the 46 individuals who have received monetary awards under the SEC’s program since its inception, 83 percent of those recipients who were current or former employees of the entity that was the subject of their whistleblower claim “raised their concerns internally to their supervisors, compliance personnel, or through internal reporting mechanisms, or understood that their supervisor or relevant compliance personnel knew of the violations, before reporting their information of wrongdoing to the Commission.” As a result of the Supreme Court’s decision, whistleblowers (or their lawyers) may re-think whether it is prudent to report internally without simultaneously bringing their concerns to the SEC’s attention in order to facilitate the ability to recover damages in the event that the company takes action against them that could be construed as retaliation.
Comment: Under the Sarbanes-Oxley Act, audit committees are responsible for establishing procedures for the receipt of complaints regarding accounting, internal accounting controls, or auditing matters. As a result of Digital Realty, audit committees should assume that complaints submitted through the process they oversee have also been brought to the attention of the SEC. Complaints should be taken seriously and internal investigations, where appropriate, should be conducted in a thorough and professional manner. Also, audit committees need to be vigilant for company conduct that could be characterized as retaliation against the whistleblower, regardless of whether the individual has reported to the SEC.