Recent Decisions Clarify the Scope of Dodd-Frank Protections

September 6, 2017

In July, two federal courts threw out whistleblower suits, both ruling that the plaintiffs did not qualify as whistleblowers under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The question before the courts in both cases was whether the Dodd-Frank Act covered the disclosures made by the plaintiffs and thus extended its whistleblower protections to the retaliation experienced by the former employees. Both decisions narrowly interpreted the Dodd-Frank Act’s whistleblower protections to exclude whistleblowers employed at private companies whose protected activity did not disclose securities fraud by or affecting a publicly traded company.

Congress enacted the Sarbanes-Oxley Act in the wake of accounting scandals at Enron Corp. and Worldcom Inc. to “safeguard investors in public companies and restore trust in the financial markets.” Eight years after SOX, following the global financial crisis of 2008, Congress passed the Dodd-Frank Act. Section 922 of the act bolstered existing protections for whistleblowers, such that if an individual makes a disclosure that is protected by SOX and is terminated from her employment because of that disclosure, the individual can bring an action for retaliation under the Dodd-Frank Act.

The Reyher v. Grant Thornton Case

In Reyher v. Grant Thornton, LLP, filed in the Eastern District of Pennsylvania, Ann Marie Reyher sued her former employer Grant Thornton, a private entity, after it terminated her for raising concerns about potentially illegal behavior of four of her corporate clients. Reyher, a certified public accountant, alleged that, in the first weeks of her employment, she raised concerns with two partners at the firm about financial irregularities and suspected fraud committed by these clients. For example, Reyher alleged that they failed to report their income accurately in tax filings and mingled their personal and business finances. Reyher was fired just seven weeks after commencing her employment with Grant Thornton, which claimed that she was “not a good fit” for its work culture.

The court’s decision in Reyher addresses the limits of the Supreme Court’s 2014 decision in Lawson v. FMR LLC, in which the Court held that the SOX protects employees of private contractors and subcontractors. The Court’s broad reading left many unanswered questions about the precise scope of the protection, and Justice Sonia Sotomayor warned in dissent that this decision would extend whistleblower protection to any employee of private businesses that contract with a public company, such as a babysitter who brings suit against a parent who works at Wal-Mart, a public company, if the babysitter is fired after expressing concern that the parent’s child might have taken part in an Internet purchase fraud. Many employers with long-term contracts to provide legal, accounting or other financial services to a public company were concerned about the ramifications of this decision.

The Lawson Court’s broad interpretation of SOX (and Dodd-Frank) protections left the door open for lower courts to define the contours of the decision more narrowly. For example, the Court did not make clear whether the contractor must be engaged in accounting and financial reporting functions for the publicly traded company, or whether an employee’s protected activity must have some connection to fraud on the publicly traded company’s shareholders. Likewise Lawson did not directly address the viability of the type of claim Reyher asserted against Grant Thornton.

However, the Pennsylvania district court held that Lawson contemplated that Sarbanes-Oxley protection would not extend to a plaintiff who engaged in whistleblowing unrelated to Grant Thornton’s work as a contractor to public companies. While Reyher complained about several accounting irregularities, she did not allege that any of the corporations engaging in this conduct were publicly traded. Instead, she argued she qualified as a protected whistleblower because Grant Thornton was a contractor to public companies, even though her claims related only to conduct by private companies.

The court held this was not sufficient to accord Dodd-Frank protections, noting that “[f]or Reyher, the connection between Grant Thornton and its public company clients is little more than a coincidence[.]” Accordingly, the court dismissed the Plaintiff’s claim for retaliation under the Dodd-Frank Act.

The Boyle v. Evolve Bank Case

In Boyle v. Evolve Bank & Tr., filed in the Western District of Tennessee, Jayme Boyle made numerous internal reports about repeated violations of various banking laws by his employer Evolve Bank, a private entity. Boyle claimed that, in response to his complaints, Evolve Bank harassed and humiliated him, culminating in his forced resignation or constructive discharge. He had complained of “steering, overages, and dual compensation into the stream of commerce and into the hands of uninformed investment banks and unknowing investors in contravention of the intent and specific purpose of the laws enacted precisely to prevent this from occurring.”

Boyle alleged that he was entitled to protection against retaliation under the Dodd-Frank Act because Evolve Bank sold loans to institutional customers regulated by the SEC, even though Evolve Bank itself was not regulated by the SEC. The Western District of Tennessee dismissed Boyle’s reasoning, instead holding that the Dodd-Frank Act required the plaintiff to specifically identify a law, rule, or regulation within the SEC’s jurisdiction under which his complaints were made and that his disclosures were also required or protected by a law, rule, or regulation within the SEC’s jurisdiction.

The banking laws Boyle had cited were not securities laws and therefore did not fall under the purview of the SEC. Similar to Reyher, Boyle argued that the defendants’ customers were “generally” regulated by the SEC. The court noted that the Dodd-Frank Act identifies categories of whistleblowers entitled to protection, and Boyle was not within any of those categories.

Significance of These Decisions

These two decisions indicate that courts are not persuaded by a plaintiff’s arguments that the defendant or its publicly traded clients are generally covered by the Dodd-Frank Act, but rather are looking for a link between the plaintiff’s protected activity – his complaints – and the private employer’s work for a publicly traded company. As courts continue to narrow the scope of covered protected activity by private employee whistleblowers, some private employers could be off the hook for SOX liability. But for many companies, Section 806 continues to provide a viable avenue for protection against retaliation for its employees.

Notably, both Reyher and Boyle only complained internally to their employers about violations, and did not raise their complaints to the SEC. However, both courts refused to address or rule on the question of whether Dodd-Frank’s anti-retaliation provisions apply to whistleblowers who only report securities violations internally, simply noting the current circuit split on this question.

The Third and Sixth Circuit Courts of Appeals, which have jurisdiction over these two district courts, have not yet addressed this question. The district courts thus likely avoided deciding the issue because the Supreme Court recently granted certiorari in Digital Realty Trust, Inc. v. Somers to decide whether internal whistleblowers are protected under Dodd-Frank.

This post was subsequently published in Law360.

Our Offices

Washington, DC
Katz Banks Kumin LLP

11 Dupont Circle NW, Suite 600
Washington, DC 20036

Phone: 202-299-1140
Philadelphia, PA
Katz Banks Kumin LLP

1845 Walnut St., 25th Floor
Philadelphia, PA 19103

Phone: 215-735-2171
San Francisco, CA
Katz Banks Kumin LLP

150 California St., 16th Floor
San Francisco, CA 94111

Phone: 415-813-3260