A federal appeals court in San Francisco ruled that anti-retaliation provisions under whistleblower rules of the Securities and Exchange Commission protected an employee – Paul Somers — who reported possible securities law violations to his company’s senior management and not to the SEC. Mr. Somers’ employer, Digital Reality Trust Inc., had argued that, because of conflicting federal laws – the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 –, such anti-retaliation protections only existed for employees of public companies who reported potential violations internally and also to the SEC. The conflict arises because, under Dodd-Frank, anti-retaliation protection is provided for “whistleblowers” who make disclosures that are required or protected under Sarbanes-Oxley, and whistleblowers are defined as employees who report to the SEC. However, under Sarbanes-Oxley certain employees – auditors and attorneys – must report problems internally, prior to alerting federal agencies. The appeals court held that, as a result, reading the use of the word “whistleblower” in the anti-retaliation provision of Dodd-Frank narrowly would “make little practical sense and undercut congressional intent.” According to the court, a narrow reading would permit an employee of a public company who files an internal report of wrongdoing to be fired for making disclosures mandated by Sarbanes-Oxley because the person has not yet made a filing with the SEC, thus undercutting Dodd-Frank’s anti-retaliation provisions. However, said the court, “[e]mployees are not likely to report in both ways, but are far more likely to choose reporting either to the SEC or reporting internally.” Mr. Somers was fired by his employer after making reports of wrongdoing to management. He then sued his employer in a federal district court under the anti-retaliation provisions of SEC rules adopted pursuant to Dodd-Frank. In response, Digital Trust filed a motion to dismiss saying that Mr. Somers was not a whistleblower under Dodd-Frank. Mr. Somers opposed this motion, prevailed in his argument, and the federal appeals court in San Francisco (Ninth Circuit) upheld the district court’s decision. One other federal appeals court – in New York (Second Circuit) – has ruled similarly, while another – in New Orleans (Fifth Circuit) – has ruled contrariwise.
Legal Weeds: The SEC has recently brought and settled multiple enforcement actions against companies for including in their severance agreements standard language that required employees to waive monetary recovery for discussing any matter regarding their employment with a government agency with jurisdiction over the companies. The SEC claimed that this language violated applicable whistleblower protections under law and its rules. In light of these recent actions, companies that are SEC registrants or SEC regulated, as well as Commodity Futures Trading Commission registrants and entities subject to CFTC rules, are encouraged to review their form employment and severance agreements and employee policies to ensure that they do not contain confidentiality requirements that could be interpreted by the SEC or the CFTC as preventing an employee from making a whistleblower complaint. (Click here for background and more practical advice in a February 23, 2017 Advisory by Katten Muchin Rosenman LLP entitled “Whistleblower Protection: Recent Cautionary Tales and New Best Practices.”)