In recent months, several court decisions have highlighted the split in federal courts over the scope of the anti-retaliation provision of the Dodd- Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd- Frank). In particular, courts have disagreed on whether the anti-retaliation provision of Dodd-Frank protects employees who report alleged violations of federal securities laws “internally” to their employers, without also providing information “externally” to the Securities and Exchange Commission (SEC). The continued uncertainty over the scope of Dodd-Frank’s anti-retaliation provision has significant consequences for employers, both in terms of the potential volume and expense of defending against retaliation claims, and in terms of the impact that anti-retaliation protections may have on employees’ willingness to cooperate with employers’ internal compliance processes.
The Statutory Language of Dodd-Frank
It is well-settled that the whistleblower protections of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) apply regardless of whether an employee reports to the SEC.1 However, courts disagree about whether an employee qualifies as a whistleblower under Dodd-Frank if the employee only internally discloses the alleged violations. This debate over the scope of Dodd-Frank’s anti-retaliation provision stems from an apparent inconsistency in the language of Dodd-Frank. In one subsection, entitled “Protection of whistleblowers,” Dodd-Frank permits a civil action for an adverse employment action injuring a whistleblower who (i) provides certain information to the SEC; (ii) assists the SEC in an investigation or action relating to the information provided; or (iii) makes “disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 … and any other law, rule, or regulation subject to the jurisdiction of the [SEC].” 15 U.S.C. § 78u-6(h)(1)(A). While subsections (i) and (ii) clearly entail direct interaction with the SEC, subsection (iii), read alone, appears to incorporate categories of internal reporting and other communications that are not necessarily made to the SEC, as long as the disclosures are required by mandates subject to the jurisdiction of the SEC. However, in a separate, prior subsection, Dodd- Frank defines a “whistleblower” as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the [SEC], in a manner established, by rule or regulation,by the [SEC].” Id. at § 78u-6(a)(6). If this definition applies to the entirety of Dodd-Frank, then an employee cannot qualify as a whistleblower unless the employee provides information to the SEC.
The SEC’s recommendation for resolving this apparent inconsistency is found in Rule 21F-2, which the SEC adopted in May 2011 along with other regulations implementing its whistleblower “bounty program.”2 While Rule 21F-2(a) incorporates Dodd- Frank’s narrow definition of “whistleblower,” Rule 21F-2(b) provides a more expansive definition of whistleblower “[f]or purposes of the anti-retaliation protections.” Thus, the SEC rejects the view that Dodd-Frank’s narrow definition of “whistleblower” governs its anti-retaliation provision, and believes that the anti-retaliation provision in subsection (iii) of 15 U.S.C. § 78u-6(h)(1)(A) should be given independent and expansive force.
Divergent Rulings Among Federal Courts
To date, the United States Court of Appeals for the Fifth Circuit is the only federal appellate court to address whether external disclosure is necessary for anti-retaliation protection under Dodd-Frank. Last year, in Asadi v. GE Energy (USA), LLC., 720 F.3d 620 (5th Cir. 2013), the Fifth Circuit held that providing information to the SEC was a prerequisite to Dodd-Frank whistleblower protection, noting that if an employee merely reports within the company, such as to a supervisor or through an internal compliance program, the employee is not covered by the statute. According to the Fifth Circuit, “[u]nder Dodd-Frank’s plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.” Id. at 625. Moreover, because the Fifth Circuit did not find the statutory language ambiguous, the court had no basis to defer to the SEC’s interpretation, and further noted that the SEC may not, by regulation, extend a statute’s reach. Id. at 629-30.
A number of district courts have reached determinations consistent with the Fifth Circuit.3 Most recently, in Englehart v. Career Education Corporation, No. 8:14-CV-444-T-33 EAJ, 2014 WL 2619501 (M.D. Fla. May 12, 2014), the district court cited Asadi in dismissing with prejudice a former employee’s Dodd-Frank claim, holding that the employee was not a “whistleblower” within the meaning of Dodd-Frank because the employee did not provide information regarding a securities law violation to the SEC. Like the Fifth Circuit,the district court concluded that it is not the role of the court “to second guess the reasoning or providence of unambiguous statutory language or expand explicit definitions within a statute to reach a desired result.” Other district courts in this camp have pointed out that in the context of implementing the SEC’s bounty program, limiting Dodd-Frank’s anti-retaliation protections to employees who have reported to the SEC is consistent with the statutory scheme. Moreover, they note that the Fifth Circuit’s interpretation does not leave internal reporters without a remedy, as these individuals would still have a claim under Sarbanes-Oxley.
A greater number of district courts, however, have reached conclusions contrary to that of Asadi.4 According to these courts, Dodd-Frank does not unambiguously limit whistleblower protection to individuals who report violations to the SEC. In light of the perceived ambiguity, many of these courts have deferred to the SEC’s interpretation of Dodd- Frank under Chevron.5 These courts note that Rule 21F-2 provides a reasonable reading of Dodd- Frank that resolves the statute’s linguistic tension, whereas Asadi’s interpretation would effectively moot subsection (iii) of 15 U.S.C. § 78u-6(h)(1)(A).Additionally, because Dodd-Frank was intended to expand upon the protections of Sarbanes-Oxley, it is unproblematic that an employee who reports internally might still have a similar claim under Sarbanes-Oxley.
Recently, in Bussing v. COR Clearing, LLC, 8:12- CV-238, 2014 WL 2111207 (D. Neb. May 21, 2014) motion to certify appeal granted, 8:12-CV-238, 2014 WL 3548278 (D. Neb. July 17, 2014), the District Court of Nebraska ruled on the internal disclosure issue as a matter of first impression in its jurisdiction. Unlike the other district courts, which have commonly relied on SEC deference or statutory construction as the primary rationale for their holdings, the District Court of Nebraska set forth a rationale based on policy and statutory purpose, in addition to a conclusion based on statutory construction.6 In terms of policy, the court first noted that excluding employees who disclose only internally would push the “majority of whistleblowers” outside the protection of Dodd-Frank, including “those who are most vulnerable to retaliation.” This is because empirically, employees tend to report matters internally before complaining to the SEC,7 and employers are much more likely to be aware of an employee’s reporting activities if the employee reports internally. Second, and more importantly, the court noted that Asadi would “discourage internal reporting” and undermine the significant benefits that internal reporting provides to both employers and the SEC. Such benefits include: allowing companies to remedy improper conduct at an early stage, perhaps before it rises to the level of a violation; encouraging whistleblowers to participate in internal compliance programs; preventing simple misunderstandings (such as where the employee is mistaken about alleged misconduct) from transforming into investigations that waste corporate and government resources; and vetting tips to the SEC so that it receives fewer and higher quality reports from whistleblowers. On July 17, 2014, the district court in Bussing granted the defendant’s bid to pursue an interlocutory appeal to the Eighth Circuit on whether the plaintiff qualifies as a whistleblower under Dodd-Frank, despite having never provided information to the SEC. It remains to be seen whether the Eighth Circuit will permit the appeal.
In addition to the potential for a plaintiff-friendly ruling by the Eighth Circuit in Bussing, a circuit split on this issue may emerge if the Second Circuit reaches a conclusion contrary to Asadi. This past June, the Second Circuit heard oral argument in the appeal of Liu v. Siemens A.G., 978 F. Supp. 2d 325 (S.D.N.Y. 2013). In support of the plaintiff’s appeal, the SEC filed an amicus brief on the issue of whether internal disclosures are afforded anti-retaliation protection under Dodd-Frank. In its brief, the SEC asserted that 15 U.S.C. § 78u-6(h)(1)(A) “best reads as an implied exception to the definition of whistleblower,” and that this interpretation avoids discouraging individuals from internal reporting, which the SEC encourages as one of its core objectives. Notably, all district court decisions within the Second Circuit have interpreted Dodd-Frank expansively, extending its anti-retaliation protections to those who disclose only internally. However, because the district court’s dismissal in Siemens focused on whether Dodd- Frank’s anti-retaliation provisions extend to overseas whistleblowers, the Second Circuit may not reach this issue in deciding the appeal.
Requiring employees to report to the SEC as a pre- condition to receiving anti-retaliation protection under Dodd-Frank has significant implications for employers.To be sure, Sarbanes-Oxley addresses much of the same conduct as Dodd-Frank, and because Sarbanes-Oxley’s anti-retaliation provision already protects internal reporters from retaliation, employers may face whistleblower retaliation liability for internal reporters regardless of whether other appellate courts follow the ruling in Asadi.
However, if either the Second or the Eighth Circuit do decide to extend Dodd-Frank’s anti-retaliation protections to those who report only internally, this may equip a new class of individuals with a more powerful cause of action than what is available under Sarbanes-Oxley. This is because relative to Sarbanes-Oxley, Dodd-Frank provides significantly greater remedies for retaliation, and also offers significantly greater financial incentives under its bounty program. For instance, whistleblowers under Dodd-Frank are entitled to two times the amount of back pay owed, doubling the amount of back pay available under Sarbanes-Oxley. Dodd-Frank also allows plaintiffs to bring claims directly in federal court, without first filing with the Occupational Safety and Health Administration (OSHA), as Sarbanes-Oxley requires. Further, Dodd-Frank offers a substantially longer statute of limitations than Sarbanes-Oxley.8 In addition, Dodd-Frank created a bounty program backed by a $450 million Investor Protection Fund, from which the SEC can make awards ranging from 10 to 30 percent of the monetary sanctions collected in a successful enforcement action, provided the sanctions exceed $1 million. These plaintiff-friendly aspects of Dodd-Frank may in turn affect the frequency with which employees file whistleblower retaliation claims, if another appellate court addresses the internal reporting issue and finds in favor of more expansive anti-retaliation protection.
Regardless of how the court split is resolved, the outcome may yield a double-edged sword for employers. On the one hand, decisions consistent with Asadi may encourage savvier employees to bypass internal reporting mechanisms (or at least to simultaneously report to the SEC) to ensure anti- retaliation protection under Dodd-Frank. This may in turn reduce the efficacy of employers’ compliance programs, and limit an employer’s ability to correct potential wrongdoing internally, before an SEC investigation begins. In addition, to the extent Asadi and similar decisions incentivize reporting to the SEC, employers may confront greater risk of enforcement action, which may have financial and reputational consequences for the employer. On the other hand, a stronger Dodd-Frank anti-retaliation provision increases employer vulnerability to retaliation claims, and raises the cost of litigating those claims when they do arise. In either case, however, employers may benefit from implementing compliance programs that strongly encourage internal reporting, while simultaneously promoting policies and practices to reassure employees that internal disclosures will not result in adverse employment action against the disclosing employee.