The Supreme Court of the United States has agreed to review the Ninth Circuit’s decision in Digital Realty Trust, Inc. v. Somers and address the apparent tension between two provisions of the Dodd-Frank Act relating to whistleblowers. Specifically, the Court will decide whether Dodd-Frank protects whistleblowers who report alleged wrongdoing to their supervisors but not to the Securities and Exchange Commission (“SEC”).

While a finding against protection for internal reporters may appear to favor employers, there are potential negative consequences to such a ruling of which employers should take note.

The Provisions

In 2010, Dodd-Frank created a Whistleblower Program, which awards 10-30% of monetary sanctions to a whistleblower who voluntarily provides original information leading to successful enforcement. Since its commencement, the program has generated 18,000 tips, paying 44 individuals a total of $154 million, and collecting nearly $1 billion from alleged violators.

Dodd-Frank prohibits an employer from retaliating against a whistleblower for providing information to the SEC or for making disclosures under Sarbanes-Oxley. 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii). Courts remain divided as to whether this anti-retaliation provision extends to a whistleblower who reports internally, but not to the SEC. The SEC has taken the position that internal whistleblowers are protected, and the agency has already brought three enforcement actions this year penalizing companies that retaliated against internal tipsters.

This tension arises in reading the anti-retaliation provision in tandem with the Dodd-Frank Act’s definition of “whistleblower,” which is “any individual who provides . . . information relating to a violation of the securities laws to the Commission.” 15 U.S.C. § 78u-6(a)(6) (emphasis added). Some courts have found this to indicate clear Congressional intent to protect only those whistleblowers reporting to the SEC, while other courts have found the provisions ambiguous and granted Chevron deference to SEC’s position that internal whistleblowers are also protected.

The Case

This is the central question of Digital Realty Trust, Inc. v. Somers, on which the Supreme Court recently granted certiorari to Digital Realty Trust’s petition.

In 2014, Plaintiff Paul Somers brought suit against his employer, Digital Realty Trust, alleging discrimination for being openly gay and improper termination following complaints to senior management related to violations of the Sarbanes-Oxley Act. In 2015, the District Court for the Northern District of California denied Digital Realty’s Motion to Dismiss, ruling that Somers qualified as a whistleblower under SEC rules despite only having reported internally and not to the SEC. 119 F. Supp. 3d 1088. The decision relied on the SEC’s interpretation of the whistleblower provisions and the deference afforded to the SEC by Chevron.

On interlocutory appeal, a split Ninth Circuit upheld the decision below, noting a “serious split in authority” on the issue. 850 F.3d 1045. At the time of its review, the only other court of appeals to hear the issue was the Fifth Circuit which unanimously held the statute “clearly expresses Congress’ intention to require individuals to report information to the SEC to qualify as a whistleblower under Dodd-Frank.” Asadi v. GE Energy LLC, 720 F.3d 620 (5th Cir. 2013).

While Digital Realty’s appeal was pending, the Second Circuit had the opportunity to weigh in on the question. It found Dodd-Frank ambiguous regarding the protections for a whistleblower who does not report to the SEC. Therefore, the court deferred to the SEC’s position that internal whistleblowers are also protected. Berman v. Neo@Ogilvy LLC, 801 F. 3d 145 (2d Cir. 2015).

Consequences

Although on its face a ruling denying protections for internal whistleblowers could appear a ‘win’ for employers, who might have one less cause of action to face, there may still be a number of negative consequences for them. Should the Court rule that Dodd-Frank does not protect internal whistleblowers, individuals may be discouraged from internally disclosing. This means employees may go straight to the SEC, without first allowing their employer to address an internal report.

Moreover, the differences in statutory protections for whistleblowers may further encourage the savvy whistleblower to jump directly to an SEC report. If Dodd-Frank does not protect an internal tipster, that individual must rely on anti-retaliation provisions of the Sarbanes-Oxley Act for protection. Sarbanes-Oxley provides only 180 days for an employee to bring a retaliation claim and requires arbitration with the U.S. Department of Labor. This is a less desirable provision than that of Dodd-Frank, which gives 6-10 years to file in federal court for double back-pay. If Dodd-Frank is not found to protect internal reporters, employees may likely choose to forego internal reports altogether. Employers must take care to encourage internal reporting, so that they have the opportunity to remedy potential problems before the SEC is involved.

In other words, regardless of the Court’s determination, it is crucial that employers have robust internal reporting systems in place in order to identify and address potential problems before SEC disclosure and government investigation.