The “Securities Whistleblower Incentives and Protection” section of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“DFA”) is an integrated scheme designed to encourage individuals to complain to the SEC of securities law violations by offering bounties and protection against retaliation.  The two components of this section are:  (i) a whistleblower bounty program; and (ii) a prohibition on retaliation against individuals who blow the whistle on violations of securities laws.

There’s much controversy over who is protected under the DFA anti-retaliation provision.  On the one hand, the DFA unequivocally defines “whistleblower” as a person or persons who report a violation of securities laws to the SEC.  15 U.S.C. § 78u-6(a)(6) (emphasis added).  But the following protective text in the same section, which prohibits retaliation for “any lawful act done by the whistleblower” has created confusion, as it encompasses: “disclosures … required or protected under [The Sarbanes Oxley Act] …, the Securities Exchange Act of 1934 …, including section 10A(m) of such Act …, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.” 15 U.S.C. § 78u-6(h)(1)(A)(iii).  

The SEC regulations for the implementation of the DFA whistleblower protection provisions (as well as the corresponding comments) distinguish the definition of “whistleblower” under the DFA anti-retaliation provision and the bounty program, noting that the definition under the former is broader, as it includes possible violations of Section 806 of the Sarbanes Oxley Act (“SOX”).  See 17 CFR §240.21F-2 (2012); see also 17 CFR Part 200 cmt. at 17 (2012).

How Courts Have Addressed The Purported Contradiction

Three courts have squarely addressed this issue and concluded that individuals need not report original information to the SEC to be protected by the DFA’s anti-retaliation provision:

  • Egan v. Tradingscreen, Inc., No. 10-cv-8202, 2011 U.S. Dist. LEXIS 47713 (S.D.N.Y. May 4, 2011) (“Egan I“):  Finding that the seeming contradiction between the definition of “whistleblower” and the text of the anti-retaliation provision is “best harmonized” by construing the provisions not requiring reports to the SEC as a “narrow exception” to the definition.  Also finding that the plaintiff’s cooperation with the law firm was a sufficient basis for invoking DFA, provided that the firm contacted the SEC.
  • Noller v. Southern Baptist Convention, Inc., Nos. 12-cv-00040 & 00043, 2012 U.S. Dist. LEXIS 46484 (M.D. Tenn. April 3, 2012):  Finding that DFA anti-retaliation provision could apply to disclosures not made to the SEC, referencing 15 U.S.C. § 78u-6(h)(1)(A)(iii).
  • Kramer v. Trans-Lux Corp., No. 11-cv-1424 (D. Conn. Sept. 25, 2012) (rejecting argument that claim failed because plaintiff did not provide information to the SEC “in the manner required by the SEC,” concluding it would “dramatically narrow” protections to whistleblowers and was generally contrary to the goals of the DFA.

Employers Should Continue to Pursue This Defense

Notwithstanding those decisions, employers should continue to pursue dispositive motions where plaintiffs seek to invoke “whistleblower” status under the DFA’s anti-retaliation provision even though they failed to provide information to the SEC.  In doing so, employers should consider focusing on the following arguments, which the foregoing cases either gave short shrift or did not consider:

  • The Supreme Court requires courts to follow explicit statutory definitions, and the definition of “whistleblower” in 15 U.S.C. § 78u-6(a)(6) as a person or persons who report to the SEC could not be more explicit.  See, e.g., Burgess v. U.S., 553 U.S. 124, 130 (2008) (citing Stenberg v. Carhart, 530 U.S. 914, 942 (2000)).
  • Likewise, principles of statutory construction require statutes to be construed in a manner that prevents any words from being rendered superfluous (TRW, Inc. v. Andrews, 534 U.S. 19, 31 (2001)).  Therefore, courts should not read the phrase “to the Commission” in the definition of “whistleblower” out of the statute.
  • Courts should heed the greater context of the Securities Whistleblower Incentives and Protection section of the DFA in which the anti-retaliation provision appears.  See Davis v. Mich. Dep’t of Treasury, 489 U.S. 803, 809 (1989) (“It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme”).  It is no coincidence that Congress included these hand-in-glove provisions in the same section and at the same time it created the SEC Office of the Whistleblower – which is empowered both to enforce the anti-retaliation provision and to administer the bounty program.  The interconnectedness of these provisions becomes apparent when one considers Congress’ goal of giving whistleblowers a monetary incentive to report violations of securities laws to the SEC without fear of retaliation.  Moreover, Congress could have expanded the definition of whistleblower to include individuals who complain to agencies other than the SEC if that was its intention.
  • Accepting the reasoning of Egan I, Noller and Kramer nullifies Section 806 of SOX.  If an employee can engage in protected activity under the DFA anti-retaliation provision simply by making an internal report of one of the categories of fraud in Section 806 of SOX, then he or she could qualify as a DFA whistleblower simply by virtue of being a SOX whistleblower and pursue an action directly in federal court without exhausting administrative remedies.  If this were the case, individuals would bring SOX whistleblower claims under the DFA instead of SOX because the DFA offers twice as much backpay and a much longer statute of limitations.  It is unrealistic to assume that Congress intended such an extreme and anomalous result.  Indeed, rather than doing away with SOX’s requirement that complaints be initially filed with the Department of Labor, Congress instead amended SOX to increase the time for whistleblowers to file such complaints (from 90 days to 180 days after the employee became aware of the violation).