In a decision creating a split among federal courts, the 5th U.S. Circuit Court of Appeals held that an employee was not entitled to whistleblower protection under the Dodd-Frank Wall Street Reform and Consumer Protection Act because he reported a possible securities violation internally and not to the Securities and Exchange Commission.
While employed by GE Energy in Jordan, Khaled Asadi learned that Iraqi officials were concerned that the company had hired a woman “closely associated” with a senior official in an attempt to curry favor while negotiating a lucrative joint venture agreement. Asadi, believing the company’s conduct violated the Foreign Corrupt Practices Act, reported the issue to his supervisor and the GE ombudsperson.
But according to Asadi, he then received a “surprisingly negative” performance review and the company began pressuring him to step down from his position. He was terminated one year later.
Asadi filed suit pursuant to the whistleblower-protection provision of Dodd-Frank. GE moved to dismiss the suit, arguing that because Asadi did not report his concerns to the SEC, he did not meet the statutory definition of a “whistleblower.”
The court agreed. “[T]he plain language of the Dodd-Frank whistleblower-protection provision creates a private cause of action only for individuals who provide information relating to a violation of the securities laws to the SEC,” the 5th Circuit concluded. “Because Asadi failed to do so, his whistleblower-protection claim fails.”
The three-judge panel examined two interrelated provisions of the statute. First, § 78u-6(a)(6) 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.”
Separately, § 78u-6(h)(1)(A) provides whistleblowers with a private right of action against employers who take retaliatory actions against the whistleblower for taking certain protected actions, delineated in three subsections. Asadi pointed to § 78u-6(h)(1)(A)(iii), which covers employees that make disclosures that are required or protected under the Sarbanes-Oxley Act, the Securities Exchange Act, and other rules and regulations of the SEC.
Asadi acknowledged that by reporting his concerns internally, he failed to meet the statutory definition of a whistleblower. But he contended that because he made a disclosure pursuant to § 78u-6(h)(1)(A)(iii), he was still entitled to protection under the statute, pointing to decisions from other jurisdictions and an SEC regulation for support.
Relying solely on the statutory language, the court rejected an alternative interpretation. “Under Dodd-Frank’s plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC. The three categories listed in § 78u-6(h)(1)(A) represent the protected activity in a whistleblower-protection claim,” the court said. “They do not, however, define which individuals qualify as whistleblowers.”
The statute is clear and unambiguous, the court added, and the third category of protected activity relied upon by Asadi does not conflict or provide alternative definitions of whistleblowers – the subsections merely describe other protected activity that employees may engage in.
Although the court recognized that employees prefer to file claims under the Dodd-Frank whistleblower provisions when they report violations of Sarbanes-Oxley because they provide greater protections than SOX (recovery of two times back pay under Dodd-Frank versus just back pay under SOX), siding with Asadi would render the SOX anti-retaliation provision moot.
The panel also refused to defer to a final rule adopted by the SEC accepting Asadi’s construction of the Dodd-Frank whistleblower-protection provision. “Simply put, this regulation, instead of using the statute’s definition of ‘whistleblower,’ redefines ‘whistleblower’ more broadly,” the court wrote. “The plain language of § 78u-6 does not support this position. … Because Congress has directly addressed the precise question at issue, we must reject the SEC’s expansive interpretation of the term ‘whistleblower’ for purposes of the whistleblower-protection provisions.”
To read the decision in Asadi v. G.E. Energy, click here.
Why it matters: The 5th Circuit’s decision is a positive development for employers facing the possibility of whistleblower suits, although it sets up a split among the federal courts. U.S. District Courts in Connecticut, New York, and Tennessee all previously ruled for plaintiffs making arguments similar to Asadi’s, supported by the SEC rule. Employees favor filing suit under the Dodd-Frank Act whistleblower provisions, which offer great reward (twice as much potential damages) and fewer hurdles (a longer statute of limitations period). The Asadi decision could result in a decrease in Dodd-Frank suits or a rise in employees reporting their concerns to the SEC.