Somers v. Digital Realty Trust, Inc., __ F.3d __, No. 15-17352 (9th Cir. Mar. 8, 2017), held that the Dodd-Frank Act allows a "whistleblower" to sue his or her employer for retaliatory termination even if he or she did not report the alleged violation to the Securities and Exchange Commission. This has three immediate consequences:
- It broadens the exposure for public companies and professional firms working with them (such as auditors, accountants and attorneys) based in the Ninth Circuit, which covers nine US states including California
- It increases the incentives to put systems in place to prevent retaliation against whistleblowers and
- It widens a split between the courts on interpreting the Dodd-Frank Act, which increases the probability the Supreme Court will address the issue.
The Sarbanes-Oxley Act (SOX) includes provisions facilitating the reporting of potential securities law violations involving public companies through internal channels. For example, public companies Audit Committees must maintain internal compliance systems that include procedures for employees to anonymously report concerns, and the SEC issued rules requiring internal reporting by lawyers working for public companies. SOX also protects employees who report violations.
In Lawson v. FMR LLC, 134 S.Ct. 1158 (2014), the Supreme Court held that the term "employee" in SOX applies not only to employees of public companies, but also covers employees of private contractors and subcontractors that perform services for public companies. This ruling provided a strong incentive for private employers that provide services to public companies to put systems in place to prevent retaliation against whistleblowers.
The Dodd-Frank Act, enacted in 2008, expanded upon SOX by adding Section 21F to the Securities Exchange Act of 1934. Subsection (h) of Section 21F, "Protection of Whistleblowers," prohibits employers from discharging, demoting, suspending, threatening, harassing, or otherwise discriminating against a whistleblower for taking certain lawful acts. An individual alleging discharge or other discrimination in retaliation for taking any of these acts may sue in federal court and obtain broad relief.
The Somers decision
Somers was a vice president of a public company who allegedly reported possible securities law violations to senior management. One of the acts conferring Dodd-Frank whistleblower protection under Section 21F is making the disclosures required by SOX, which protects those reporting securities laws violations through internal channels. But Section 21F also defines the word "whistleblower" to require a person to provide information about a violation to the SEC, and Somers had not done that before being fired. Thus, the issue was whether the fact that the plaintiff did not report to the SEC meant he was not a "whistleblower" and hence could not sue under Dodd-Frank.
A divided Ninth Circuit held that reporting to the SEC is not required. The majority opinion reasoned the case "must be seen against the background of twenty-first century statutes to curb securities abuses," starting with SOX. The anti-retaliation provision in Section 21F refers to SOX disclosure requirements and protections, and thus necessarily covers those persons who report violations to the boss or through other internal channels as encouraged by SOX, even if those "whistleblowers" do not also report the violations to the SEC.
As the court put it: "Leaving employees without protection for that required preliminary step would result in early retaliation before the information could reach the regulators," which would not make sense. Allowing such a person to sue under the Dodd-Frank Act would not render the preexisting SOX remedies superfluous, as some employees might be better off suing under SOX rather than under Dodd-Frank.
Under SOX and Lawson, public companies and the private employers that provide services to public companies already have incentives to put systems in place to prevent retaliation against whistleblowers. As a result of Somers, those employers based in the Ninth Circuit now have an even greater incentive to maintain such systems: the Dodd-Frank Act also applies where, as is common, an employee reports potential violations internally but does not go to the SEC.
This expansion of potential liability is important because Dodd-Frank presents greater exposure than SOX in two respects: a substantially longer statute of limitations and greater damages. A SOX plaintiff may recover back pay and all relief necessary to make the employee whole, while Dodd-Frank allows recovery of double back pay.
Somers also widens a split among the courts on the issue of whether the Dodd-Frank Act requires an employee to report a violation to the SEC in order to sue the employer. The Second Circuit and Fifth Circuit already had reached different outcomes on this issue. The Ninth Circuit reached the same outcome as the Second Circuit, but on a different legal rationale. The legal issues here involve complex matters of statutory interpretation and deference to administrative agencies that cut across ideological lines and are difficult to predict.