On Wednesday, February 21, 2018, the United States Supreme Court adopted a narrow definition of “whistleblower” in retaliation cases arising under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank), concluding the anti-retaliation provisions of Dodd-Frank only apply to employees who report claims of wrongdoing to the Securities and Exchange Commission (SEC), not to employees who report internally.
In Digital Realty Trust, Inc. v. Somers, the Court reversed a decision by the Ninth Circuit Court of Appeals and resolved a circuit split among the Ninth, Second and Fifth Circuits. At issue was whether an employee who was allegedly fired for internally reporting suspected securities law violations to senior management could sue under Dodd-Frank’s anti-retaliation provision, even though he never reported those suspected violations to the SEC. The Ninth Circuit held in favor of the employee, finding although Dodd-Frank defined whistleblower as someone who made a report to the SEC, the specific anti-retaliation provision under which the employee brought suit,§78u-6(h), appeared to apply to a broader range of scenarios than just reports to the SEC.
In reaching its conclusion the employee was not a whistleblower under Dodd-Frank, and thus not entitled to the Act’s anti-retaliation provision, the Court contrasted the language and intent of Dodd-Frank, passed in 2010 after the 2008 financial meltdown, with the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), enacted after the Enron and Arthur Andersen scandal. Notably, although Sarbanes-Oxley applied to all employees who reported misconduct to the SEC, any other federal agency, Congress or an internal supervisor, Dodd-Frank defined a “whistleblower” as “any individual who provides…information relating to a violation of the securities laws to the Commission, in a manner established by rule or regulation, by the Commission.”
Therefore, unlike Sarbanes-Oxley, the Court found Dodd-Frank explicitly limited its definition of a whistleblower to someone who provided information to the SEC. Because an employee who only internally reported suspected violations was not a whistleblower under Dodd-Frank, the anti-retaliation procedures set forth in §78u-6(h) did not apply.
Moreover, the differing purposes of Dodd-Frank and Sarbanes-Oxley supported the Court’s interpretation limiting a whistleblower under Dodd-Frank to one who provides information to the SEC. Sarbanes-Oxley was enacted in 2002 following the collapse of Enron Corporation to protect investors of public companies, and the act contained safeguards for employees at risk of retaliation for reporting corporate misconduct. Although aggrieved employees could recover damages against employers who retaliated against them for making a protected report, including an internal report, employees were first required to exhaust administrative remedies by filing a complaint with the secretary of labor.
On the other hand, Dodd-Frank was enacted in the wake of the 2008 financial crisis to promote accountability and transparency in the financial system, including by providing additional power and assistance to the SEC to regulate securities markets. Dodd-Frank’s whistleblower program was designed to help the SEC identify securities law violations by motivating individuals who knew of those violations to tell the SEC so that the agency could initiate enforcement proceedings. In that vein, Dodd-Frank whistleblowers who provide information to the Commission are entitled to a cash award of 10 to 30 percent of the monetary sanctions collected in a successful enforcement action. Dodd-Frank also contains an anti-retaliation provision, and allows aggrieved employees to directly sue their employer in federal court.
Thus, the Court found the text and purpose of Dodd-Frank established that only employees who reported suspected securities law violations to the SEC were entitled to the act’s anti-retaliation protections.
Although this decision may provide some support for a narrow reading of other federal anti-retaliation statutes, the Court’s heavy emphasis on the specific language in Dodd-Frank, as well as the purposes behind both that act and Sarbanes-Oxley, means the decision may be of limited application in cases involving other federal laws. This decision also may lead to an increase in the number of employee reports filed directly with the SEC, as opposed to internally. Moreover, employers should continue to investigate internal claims of corporate wrongdoing and instruct managers that retaliation against internal whistleblowers is strictly prohibited.