In a decision issued on February 21, 2018, the United States Supreme Court substantially narrowed the class of employees who may claim whistleblower protection under the anti-retaliation provisions of the Dodd-Frank Act.
The Sarbanes-Oxley Act of 2002 (“SOX”) was passed to protect investors from the possibility of fraudulent accounting activities by corporations. In 2010, Congress amended SOX through the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”); the amendment included several provisions applicable to “whistleblowers.” Dodd-Frank defines a “whistleblower” as “any individual who provides…information relating to a violation of the securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC].” Dodd-Frank provides significant incentives and protections for “whistleblowers.” For example, a whistleblower is eligible for an award if original information he or she provides to the SEC leads to a successful enforcement action. Dodd-Frank whistleblowers also are protected from retaliation (including discrimination and discharge) for making disclosures that are required or protected under SOX.
The breadth of the Dodd-Frank anti-retaliation provision has been debated in the courts, and two contradictory appellate decisions issued in 2013 created a split among the federal circuit courts of appeals. The Fifth Circuit concluded in Asadi v. G.E. Energy (USA), LLC that the term whistleblower applies only to one who has reported his or her concerns to the SEC – not one who reports his or her concerns internally. By contrast, the Second Circuit held in Berman v. Neo@Ogilvy LLC that Dodd-Frank’s retaliation provision is ambiguous and courts should therefore defer to the SEC’s guidance on the scope of the Act’s protection, which provides that internal reports of SOX-prohibited activity may be sufficient to come within the anti-retaliation protections of Dodd-Frank.
The split in authority widened in March 2017 when the Ninth Circuit held in Somers v. Digital Realty Trust that Dodd-Frank’s whistleblower definition should be construed broadly. Paul Somers, an executive of Digital Realty (a real estate investment trust), claimed he was entitled to protection under Dodd-Frank after the company fired him for, he claimed, complaining internally to upper management that a senior vice president had eliminated some internal corporate controls in violation of SOX. Mr. Somers did not report his suspicions to the SEC; his only complaints were internal. Digital Realty moved to dismiss the complaint, claiming that Mr. Somers did not fall within the definition of a “whistleblower” under Dodd-Frank. The trial judge denied Digital Realty’s motion to dismiss. The Ninth Circuit (which hears appeals from, among other jurisdictions, California, where the company was headquartered) affirmed, holding the executive could pursue a claim of retaliation because he engaged in the protected disclosure of information when he complained internally of suspected SOX violations. The company countered that Dodd-Frank was designed to encourage individuals to report violations of securities law to the SEC. Since the executive did not report his concerns to the SEC, he was outside the definition of a “whistleblower” under Dodd-Frank.
In its February 21, 2018 decision, Somers v. Digital Realty, 583 US ___ (2018), the United States Supreme Court agreed with Digital Trust, resolving the Circuit split by concluding that the Dodd-Frank definition of whistleblower must be read narrowly. Strictly construing the language of the statute, the Supreme Court held that only complainants to the SEC are protected by Dodd-Frank’s anti-retaliation measures. In so deciding, the Supreme Court significantly limited the scope of anti-retaliation measures under Dodd-Frank. Only employees who complain to the SEC are eligible for the Act’s anti-retaliation provisions. However, employers subject to SOX and Dodd-Frank should not presume they can discharge employees who raise internal complaints related to potential securities law violations. Many states’ laws prohibit terminating an employee in violation of public policy, which, depending on state law, might include reporting suspected misconduct to a regulatory agency. Moreover, because the decision clarifies that the private cause of action for retaliation is only available to employees who report suspected securities violations to the SEC, the decision may prompt more external reporting by employees. SOX- and Dodd-Frank-covered employers are advised to audit their corporate practices to ensure compliance with SOX and respond promptly to internal complaints to minimize the incentive for employees to report externally.