On February 21, the U.S. Supreme Court ruled in favor of a narrow definition of the term “whistleblower,” thereby limiting the scope of anti-retaliation measures available to corporate insiders under the Dodd-Frank Act. In a 9-0 decision, the justices held that the Dodd-Frank Act protects whistleblowers from retaliation only when they have brought information relating to the violation of the securities laws to the U.S. Securities and Exchange Commission (SEC). The ruling settled a circuit split between the Ninth and Fifth Circuits, reversing the Ninth Circuit’s decision that a former Digital Realty executive, Paul Somers, was entitled to Dodd-Frank protection after he informed senior management (but not the SEC) about alleged violations of the Sarbanes-Oxley Act by his supervisor.

Digital Realty, a publicly-traded company that owns and develops data centers, appealed the Ninth Circuit’s decision and argued that the Dodd-Frank anti-retaliation measures, which protect whistleblowers from being fired, demoted, or harassed, do not apply to employees like Somers who fail to report alleged violations to the SEC. In reversing the lower court’s decision, the Supreme Court rejected Somers’s argument that whistleblower protections should extend to those who report wrongdoing internally, but don’t also make a report to the SEC.

The Court looked to the plain language of the statute, which defines whistleblowers as employees who provide “information relating to a violation of the securities laws to the Commission." Accordingly, the Court reasoned that the Dodd-Frank protections do not apply to employees who report alleged wrongdoing internally but fail to report violations to the government. Writing for the Court, Justice Ruth Bader Ginsburg said that “[t]he definition section of the statute supplies an unequivocal answer” and that “[t]he Court’s understanding is corroborated by Dodd-Frank’s purpose and design.” The Court further emphasized: “The core objective of Dodd-Frank’s whistleblower program is to aid the Commission’s enforcement efforts by ‘motivat[ing] people who know of securities law violations to tell the SEC.’”

Notably, the Supreme Court’s decision also rejected SEC Rule 21F-2, which was promulgated by the Commission to implement the whistleblower provisions of Dodd-Frank. In particular, the SEC’s Rule contained two discrete whistleblower definitions — one for purposes of the award program, which defined a whistleblower as a person who “provide[s] the Commission with information,” and a second for purposes of the anti-retaliation protections, which did not contain a government-reporting requirement in the definition. The Supreme Court observed that the statutory definition enacted by Congress specifically identifies those eligible for protection as whistleblowers who provide pertinent information “to the Commission” and stated: “Courts are not at liberty to dispense with the condition — tell the SEC — Congress imposed.” The Supreme Court’s ruling is consistent with a decision by the Fifth Circuit in 2013, Asadi v. G.E. Energy (USA), L.L.C., wherein the Fifth Circuit held that whistleblowers must take their allegations to the SEC to be eligible for protection under Dodd-Frank.

Employees of public companies who report corporate misconduct are still protected by the anti-retaliation provision of the Sarbanes-Oxley Act, which applies to persons who provide information or assistance to a federal regulatory or law enforcement agency, Congress, or any “person with supervisory authority over the employee.” But the recovery procedures under Sarbanes-Oxley, which include an administrative-exhaustion requirement and a 180-day administrative complaint-filing deadline, are more limited than those available to whistleblowers under Dodd-Frank. In particular, Dodd-Frank does not mandate that a whistleblower pursue any administrative remedies prior to filing suit and contains a default six-year statute of limitations.

At first blush, the Supreme Court’s decision appears to be a victory for employers, as it excludes from Dodd-Frank protections employees who only report wrongdoing internally. And historically, the number of employees who report internally has constituted a much larger category than those who report to the SEC. It remains to be seen whether the decision will have the effect of pushing whistleblowers to go to the SEC and ignore the company’s internal compliance function. Regardless, the opinion is a reminder that as part of a robust corporate governance program, employers should ensure they have good internal reporting systems with broadly-publicized, and scrupulously-enforced, non-retaliation provisions to encourage internal reporting.