Supreme Court to Answer Whether Dodd-Frank Protects Internal Whistleblowing

July 19, 2017
Alexis Ronickher

In its next term, the Supreme Court will decide whether the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 protects internal whistleblowers who have not reported alleged misconduct to the U.S. Securities and Exchange Commission (SEC). This question has divided the lower courts, and the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers will resolve the circuit split between the Fifth Circuit, which has held that Dodd-Frank only protects whistleblowers who have reported misconduct to the SEC, and the Second and Ninth Circuits, which have held that it protects internal whistleblowers as well.

Statutory and Regulatory History

Congress enacted Dodd-Frank in 2010 at least in part in response to the financial improprieties that contributed to the Great Recession. A high-profile and significant part of the Act created the SEC whistleblower program. In the whistleblower section, Congress also created an employment retaliation claim, in part to protect participants in the SEC whistleblower program.

This anti-retaliation provision prohibits an employer from retaliating against “a whistleblower” for engaging in protected activity. 15 U.S.C. § 78u-6(h)(1)(A). The statutory definition of “whistleblower” is “any individual who provides…information relating to a violation of the securities laws” to the SEC. 15 U.S.C. § 78u-6(a). This narrow definition, however, is in tension with one of the types of protected activities listed in the statute. Specifically, the Act shields making disclosures protected by the Sarbanes-Oxley Act (SOX), but SOX protects internally reporting violations of certain federal fraud statutes and SEC rules and regulations. This tension gave rise to the question: Since SOX protects internal reporting, does Dodd-Frank also?

In 2011, the SEC sought to clarify this ambiguity. It issued a final rule stating that an individual qualified as a “whistleblower” for coverage under Dodd-Frank’s anti-retaliation provision provided that the individual engaged in at least one of the statute’s enumerated types of protected activity, including making a disclosure protected under SOX. 17 C.F.R. § 240.21F-2.

Judicial Interpretations

Despite the SEC’s regulation, employers who were sued for retaliation defended themselves in court by asserting that the employee did not qualify as a “whistleblower” when the employee had only reported internally. The Fifth Circuit was the first circuit court to rule on the issue in 2013, in the case of Asadi v. G.E. Energy (USA) LLC, 720 F.3d 620 (5th Cir. 2013). The Asadi court sided with the employer and rejected the SEC’s interpretation, holding that the statutory language is clear and Dodd-Frank protections do not extend to employees who had not reported their concerns to the SEC.

District courts, however, did not uniformly adopt Asadi and decisions interpreting the statute became unpredictable. Further complicating the issue, in 2015 the Second Circuit rejected the Fifth Circuit’s reading of the statute and came to the opposite conclusion on the scope of coverage. In Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015), the Second Circuit held that Dodd-Frank did protect whistleblowers who only reported violations internally. The court based its holding on its determination that the statute was sufficiently ambiguous to require the court to give deference to the SEC’s reasonable interpretation of the statute.

For almost two years following Berman, district courts outside of the Fifth and Second Circuits rendered decisions on both sides of the issue. Then, on March 8, 2017, the Ninth Circuit  sided with the Berman court in Somers v. Digital Realty Trust Inc., 850 F.3d 1045 (9th Cir. 2017). The Somers court, however, went further by holding that the statutory text itself should be read to protect internal reporting, regardless of the SEC’s interpretation. Following the Ninth Circuit’s ruling, Digital Realty filed a petition for a writ of certiorari on April 25, 2017, which the Supreme Court granted on June 26, 2017.

What are the Stakes for Employees and Employers?

While it might seem that it would be a win for employers if the Supreme Court holds that Dodd-Frank does not protect internal whistleblowers, such an outcome would be a loss for both employees and employers. Employers may be eager to be rid of the enhanced protections Dodd-Frank provides to whistleblowers – such as the availability of double back pay for successful litigants, direct access to federal court, and a statute of limitations of at least three years. Eliminating those protections, however, comes at a great price. Publicly traded companies have fought hard to bolster their internal compliance reporting programs, which they assert allow them to immediately address misconduct, but also allow them to minimize liability. If internal whistleblowers are excluded from Dodd-Frank coverage, they will have a strong incentive to opt out of internal reporting in favor of going directly to the SEC and thereby ensuring protection from retaliation under Dodd-Frank.

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