A U.S. district court judge from the District of Connecticut ruled last week that individuals who make disclosures that are required or protected under the Sarbanes-Oxley Act (SOX) or the Securities Exchange Act of 1934 (SEA) may also qualify as whistleblowers under the Dodd-Frank anti-retaliation provisions, regardless of how those disclosures were made. The decision, in Kramer v. Trans-Lux Corp., is one of only a handful of cases that have examined the anti-retaliation provisions in Dodd-Frank, and the ruling seems to be yet another indication that courts will take a broad view of protected activity when it comes to retaliation claims. Looking ahead, we can anticipate an increase in the number of such claims brought under Dodd-Frank, as the Act’s lengthy statute of limitations, double-pay awards and lack of an exhaustion requirement provide an appealing option for plaintiffs who can qualify as whistleblowers under a liberal construction of the term.
The Dodd-Frank Act defines the term “whistleblower” as “any individual” who provides information to the Securities and Exchange Commission (SEC) relating to a securities law violation, “in a manner established, by rule or regulation, by the Commission.”1 In a separate provision, the Act also prohibits employers from retaliating against individuals for disclosures that are required or protected under SOX and the SEA.2 But because the anti-retaliation provision makes no reference to the manner in which disclosures must be made, uncertainty has remained about whether an individual who “blows the whistle” by making a required disclosure must do so in a particular manner in order to be protected.
Until last week, only two courts had attempted to answer that question, and both held that the definition of “whistleblower” under the anti-retaliation provision was broader than it was for the rest of the statute. Seeking to clarify the law, the SEC promulgated a final rule in August 2011 that took a similarly broad view, saying essentially that the anti-retaliation provisions are an exception to the statutory definition.3 Therefore, individuals making required or protected disclosures under SOX or the SEA could still qualify as whistleblowers even for internal disclosures, or those made to the SEC through an unofficial channel.
The Trans-Lux Ruling
The Trans-Lux decision involved a motion to dismiss filed by the defendants, which asserted in part that the plaintiff was not entitled to whistleblower protection because he had not disclosed the alleged violations to the SEC “in a manner established by the Commission.” There are several officially established ways by which an individual may provide information to the SEC, but mailing a regular letter, as the plaintiff had, is not one of them.4 Therefore, the defendants argued, the plaintiff was not a “whistleblower” under the express terms of the statute.
Judge Stefan Underhill rejected Trans-Lux’s arguments, however, finding that the SEC’s construction of the statute was permissible and therefore binding authority. Noting that Trans-Lux’s interpretation would “dramatically narrow the available protections available to potential whistleblowers,” the court found that the Dodd-Frank Act “appears to have been intended to expand upon the protection of Sarbanes-Oxley, and thus the claimed problem is no problem at all.”
Implications for Employers
Because Dodd-Frank has a six-year statute of limitations (compared to SOX’s 180 days), allows for double-pay awards (SOX does not) and allows plaintiffs to file directly in federal court (whereas SOX requires plaintiffs to exhaust administrative remedies first), it offers several attractive advantages for plaintiffs who can qualify as a whistleblower under the Act’s anti-retaliation statute. It stands to reason, then, that a more expansive definition of the term will lead to a greater number of retaliation claims being filed, even those that would otherwise be time-barred or not worth pursuing under other securities laws.
In light of these developments, employers must continue to be vigilant in assessing their compliance with the law and encourage employees to report suspected misconduct internally through established channels. Employees should be reassured that internal reporting is welcomed, and managers trained on what constitutes retaliation and how to avoid disparate treatment of complaining employees. In addition, employers may want to create additional grievance channels to assist employees who feel they have received negative treatment as a result of coming forward with a complaint.
Of course, employers should conduct thorough and unbiased investigations of all credible reports, but also seek ways to improve their overall documentation systems. Given that retaliation claims can be expected to increase in the near future, it will be increasingly important for employers to be able to show that any adverse actions involving a complaining employee were due to legitimate performance issues and not the result of their filing a complaint.
The ruling is available here: