Why it matters
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) does not protect internal whistleblowers who do not report their concerns to the Securities and Exchange Commission (SEC), the Supreme Court has ruled, settling an issue that split the circuits. Paul Somers shared with senior management his suspicions that a supervisor was violating the Sarbanes-Oxley Act. He was fired shortly after and then sued for retaliation under Dodd-Frank. His employer moved to dismiss the action, arguing that Somers was not entitled to protection from alleged retaliation because he had not reported his concerns to the SEC, as required by Dodd-Frank. A district judge denied the motion, and the U.S. Court of Appeals for the Ninth Circuit affirmed. But in an opinion authored by Justice Ruth Bader Ginsburg, the Supreme Court reversed. Dodd-Frank’s antiretaliation provision does not extend to those who have not reported the violation to the SEC, the justices held. Therefore, an individual like Somers, who only reported his concerns internally, is ineligible to seek redress under Dodd-Frank. While a victory for the employer, the decision could lead to more whistleblowers reaching out to the SEC with their concerns.
Enacted in 2010, Section 78u-6(a)(6) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) defines a whistleblower as “any individual who provides or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”
The statute provides employees with a private right of action against employers who retaliate against the whistleblower for engaging in certain protected activity. While two subsections specifically reference working with the SEC, the third provides protections more generally “in making disclosures that are required or protected” under the Sarbanes-Oxley Act, the Securities Exchange Act, “and any other law, rule, or regulation subject to the jurisdiction of the Commission.”
Dodd-Frank also affords covered whistleblowers incentives, with an award program operated by the SEC that will pay 10 to 30 percent of the monetary sanctions collected in an enforcement action and offers the possibility of double back pay with interest for a prevailing whistleblower. These aspects of Dodd-Frank stand in contrast to the whistleblower provisions found in Sarbanes-Oxley, which contains an administrative exhaustion requirement, allows a shorter time period in which to file suit and limits recovery to actual back pay with interest.
Complicating the issue further, the SEC promulgated Rule 21F-2, which provides antiretaliation protection without requiring the whistleblower to provide information to the SEC, provided the whistleblower provides information in a manner shielded by one of three clauses in the rule.
With that background, the Supreme Court considered the case of Paul Somers, a former vice president at Digital Realty Trust. Somers claimed that over the four years he worked for the company, he made several reports to senior management regarding possible securities law violations and was fired as a result.
Somers sued Digital Realty, alleging violations of various state and federal laws, and seeking the protections afforded to whistleblowers under Dodd-Frank. Digital Realty moved to dismiss, arguing that because Somers reported the alleged violations only internally and not to the SEC, he was not a “whistleblower” pursuant to Dodd-Frank.
The district court denied the motion, and the U.S. Court of Appeals for the Ninth Circuit affirmed.
In a unanimous opinion authored by Justice Ruth Bader Ginsburg, the Court reversed. The fact that the statute includes an explicit definition of a “whistleblower” resolved the question, the justices said.
“Our charge in this review proceeding is to determine the meaning of ‘whistleblower’ in Section 78u-6(h), Dodd-Frank’s anti-retaliation provision,” Justice Ginsburg wrote. “The definition section of the statute supplies an unequivocal answer: A ‘whistleblower’ is ‘any individual who provides … information relating to a violation of the securities laws to the Commission.’ Leaving no doubt as to the definition’s reach, the statute instructs that the ‘definition shall apply’ ‘[i]n this section,’ that is, throughout Section 78u-6.”
The “purpose and design” of Dodd-Frank corroborates this understanding of Section 78u-6, the Court said, as the “core objective” of the statute’s “robust whistleblower program, as Somers acknowledges, is ‘to motivate people who know of securities law violations to tell the SEC.’” By enlisting whistleblowers to assist the government in identifying and prosecuting those who violate securities laws, Congress attempted to improve SEC enforcement and facilitate the Commission’s recovery of money for the victims of financial fraud, the Court added.
Dodd-Frank’s incentives—the whistleblower award program, longer statute of limitations, lack of administrative exhaustion and opportunity for double back pay—encourage SEC reporting, particularly in contrast with Sarbanes-Oxley, which has less robust rewards and no SEC reporting requirement.
“In sum, Dodd-Frank’s text and purpose leave no doubt that the term ‘whistleblower’ in Section 78u-6(h) carries the meaning set forth in the section’s definitional provision,” the Court wrote. “The disposition of this case is therefore evident: Somers did not provide information ‘to the Commission’ before his termination … so he did not qualify as a ‘whistleblower’ at the time of the alleged retaliation. He is therefore ineligible to seek relief under Section 78u-6(h).”
Justice Ginsburg rejected Somers’ and the Solicitor General’s arguments to adopt an “ordinary sense” definition of “whistleblower” without any SEC reporting requirement. While the plain-text reading adopted by the Court “undoubtedly” shields fewer individuals from retaliation, this did [ is there a “not” missing?] produce anomalous results or create obvious incongruities, she wrote.
Overlooked in these arguments “is Dodd-Frank’s core objective: to prompt reporting to the SEC,” the justices said. “In view of that precise aim, it is understandable that the statute’s retaliation protections, like its financial rewards, would be reserved for employees who have done what Dodd-Frank seeks to achieve, i.e., they have placed information about unlawful activity before the Commission to aid its enforcement officers.”
Justice Sonia Sotomayor (joined by Justice Stephen Breyer) and Justice Clarence Thomas (joined by Justices Samuel Alito and Neil Gorsuch) filed concurring opinions, disagreeing with how the Court should rely on legislative history, as the majority did with regard to the purpose of Dodd-Frank.
To read the opinion in Digital Realty Trust, Inc. v. Somers, click here.