Whistleblowers suffered a defeat this week in a decision made the U.S. Court of Appeals for the Fifth Circuit in the case of Asadi v. G.E. Energy (USA), L.L.C. We wrote about this case just over a year ago, after the U.S. District Court for the Southern District of Texas dismissed Khaled Asadi’s case after finding that the whistleblower protection provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) did not apply extraterritorially. The Fifth Circuit did not reach that question; instead, contradicting the decisions of five federal district courts, the Fifth Circuit held that the whistleblower-protection provisions of the Dodd-Frank Act do not apply to whistleblowers who report securities violations internally, and instead protect only whistleblowers who provide such information to the SEC itself.

The case arose after Asadi accepted GE’s offer to serve as its Iraq Country Executive and relocated to Jordan, where Iraqi officials informed Asadi of their belief that GE had hired a woman closely associated with a senior Iraqi official in order to curry favor with that official while negotiating a lucrative joint venture agreement. Concerned this conduct violated the Foreign Corrupt Practices Act (“FCPA”), Asadi reported the issue to his supervisor and to GE’s regional ombudsperson. Shortly thereafter, Asadi received a “surprisingly negative” performance review. GE pressured him to step down and accept a reduced role in the region with minimal responsibility. When Asadi refused to comply, GE fired him.

The question considered by the Fifth Circuit in this case was simple: does Dodd-Frank’s whistleblower-protection provision protect internal reports of securities violations, or must an employee report his concerns directly to the SEC in order to avail himself of Dodd-Frank’s protections against retaliation? The question derives from a seeming contradiction in the statute’s language. On the one hand, in its “definitions” section, the statute defines a whistleblower as “any individual who provides . . . information relating to a violation of the securities laws to the Commission.” (emphasis added). On the other hand, in the subsection of Dodd-Frank entitled “Protection of whistleblowers,” it states that “No employer may . . . discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower . . . (iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002[.]” The Sarbanes-Oxley Act (“SOX”) protects whistleblowers who report their concerns of fraud, including securities fraud, within their companies. Accordingly, there appears to be a conflict between the two sections of the statute.

Contrary to the five district courts that had earlier addressed this question, the Fifth Circuit decided that no such conflict existed. The court found that the “plain, unambiguous language” of the statute could reasonably apply the narrow definition of whistleblower even when it also invoked the broader whistleblower protections of SOX. The court explained that maintaining the narrow definition of a whistleblower did not render the inclusion of the SOX protections superfluous. The court noted, for instance, that the statute afforded protection from retaliation to whistleblowers who reported information to the SEC even when an employer was retaliating against them not for going to the SEC but for reporting their complaints internally. The court also pointed to other reasons, based mostly in statutory construction, for why courts should apply the narrow definition of protected activity under Dodd-Frank.

The most important takeaway from this case is that the first federal court of appeals to examine the question of whether the Dodd-Frank whistleblower protection provision applies to whistleblowers who report their concerns internally has decided that it does not. This represents a significant blow to whistleblowers, just as does any decision which limits the protections afforded to employees who could just as easily stay quiet. The broad protections against retaliation that Congress enacted in Dodd-Frank are an acknowledgment that employees who raise concerns about illegal activity are risking their careers to do so, and they need to be protected against retaliation by their employers.

Moreover, as Debra Katz of the whistleblower law firm Katz Banks Kumin explains, the practical impact of the decision is an outcome that big businesses so publicly fretted over in the wake of the passage of Dodd-Frank. “The defense bar insisted that instituting a whistleblower reward provision was going to cause whistleblowers to run straight to the SEC instead of reporting internally,” said Ms. Katz. “While the defense bar will likely view this result as a win, if the courts begin to interpret Dodd-Frank in such a way that whistleblowers are afforded significantly stronger protections if they report to the SEC than if they report internally, then you are going to create a situation in which you have incentivized employees to do just what corporations were concerned about.”