Whistleblowers Can Be Forced to Arbitrate Dodd-Frank Claims, Holds Wisconsin Federal Court

August 9, 2017
Joseph E. Abboud

In the wake of the 2007-2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, instituting myriad new financial regulations in an effort to prevent future economic disasters. One such prophylactic mechanism was to enhance protections for whistleblowers, empowering corporate insiders who want to report violations of securities laws but fear retaliation from their employers.

Dodd-Frank increased protections against retaliation in two ways. First, it strengthened the whistleblower protections already provided by the Sarbanes-Oxley Act of 2002 (SOX). SOX enables employees of publicly traded companies who suffer retaliation for providing information about certain violations of law to take legal action against their employers by filing a complaint with the Department of Labor, waiting 180 days, and then proceeding to federal court. 18 U.S.C. § 1514A. Dodd-Frank bolstered SOX’s whistleblower protections by allowing whistleblowers more time to file a complaint, guaranteeing a right to a jury trial, and preventing the enforcement of arbitration agreements against SOX claims. In addition, Dodd-Frank created a new cause of action for corporate whistleblowers, which is similar to the SOX whistleblower provision but allows whistleblowers to recover higher damages while forgoing SOX’s administrative exhaustion requirements. 15 U.S.C. § 78u-6(h).

Despite its many enhanced protections, Dodd-Frank is replete with drafting problems, which have caused much confusion in the legal and business communities. The U.S. Supreme Court is poised to resolve one of Dodd-Frank’s most consequential ambiguities in Digital Realty Trust v. Somers during its upcoming term, regarding whether a whistleblower who only complains about fraud to her employer, rather than to the SEC, is entitled to protection under Dodd-Frank. Another unfortunate quirk in Dodd-Frank’s drafting played a crucial role in a recent decision by a federal court in Wisconsin. Wussow v. Bruker Corp., No. 16-CV-444-WMC, 2017 WL 2805016 (W.D. Wis. June 28, 2017).

The Facts of Wussow

Plaintiff Michael Wussow worked as a director of product line management for Bruker Nano, Inc., a subsidiary of the publicly traded Bruker Corporation. During his employment, Wussow allegedly discovered revenue recognition practices that potentially violated company policy and federal law. Wussow repeatedly discouraged his coworkers from engaging in these practices, reported his concerns to his superiors, and adamantly refused to participate in what he believed were fraudulent schemes. In response, the company allegedly stripped Wussow of significant job responsibilities and eventually terminated his employment. Believing himself the victim of unlawful retaliation, Wussow filed a SOX complaint with the Department of Labor and eventually filed a federal lawsuit claiming violations of the whistleblower protection provisions of both SOX and Dodd-Frank.

Although Wussow’s allegations were sufficient to state a claim under both laws, he ran into a procedural problem. Upon beginning his employment at Bruker, Wussow had signed a very broad arbitration agreement, which provided that any legal claims arising out of his employment must be pursued in binding arbitration, not in court. Unlike court proceedings, which offer plaintiffs a public venue to pursue their rights and avenues of appeal as a matter of right if the trial court makes an adverse decision, arbitration is confidential and provides little recourse for plaintiffs to challenge the decision of the arbitrator.

As soon as Wussow filed his complaint in federal court, the defendants moved the court to compel Wussow to submit his Dodd-Frank claim to arbitration. As a general matter, under the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., and Supreme Court decisions interpreting it, an agreement to arbitrate claims is enforceable unless the statute creating the claim at issue prohibits arbitration.

The Legal Issue

Here is where Dodd-Frank’s unfortunate drafting came into play. In enhancing the SOX whistleblower provision, Dodd-Frank added a provision to SOX that specifically rendered arbitration agreements unenforceable for any claims “arising under this section.”  18 U.S.C. § 1514A(e)(2). This anti-arbitration provision ensured that SOX plaintiffs could pursue their claims in open court, free from the restrictions of arbitration.

However, Congress inexplicably neglected to include the same anti-arbitration provision in Dodd-Frank’s newer, stronger whistleblower retaliation cause of action. The defendants in Wussow, relying on the absence of an anti-arbitration provision in Dodd-Frank and the FAA, which creates a presumption in favor of enforcing arbitration agreements, argued that the court was required to enforce the arbitration agreement and send Wussow’s Dodd-Frank claim to arbitration. The defendants further argued that while the arbitrator decided the Dodd-Frank claim, the court should stay Wussow’s SOX claim pending the outcome of arbitration.

Wussow basically argued that the whistleblower protection provisions of SOX and Dodd-Frank are so substantially similar that SOX’s anti-arbitration provision should also apply to Dodd-Frank claims. More specifically, Wussow relied on a lone decision from the District of Connecticut which held that, because Dodd-Frank incorporates the definition of protected activity from the whistleblower protection provision of SOX, a Dodd-Frank claim “arises under” SOX, triggering the SOX anti-arbitration provision in 18 U.S.C. § 1514A(e)(2).

The Court’s Decision

Although the Wussow Court recognized the lack of clarity in Dodd-Frank’s drafting and the policy arguments in favor of conferring the same protections to both SOX and Dodd-Frank whistleblowers, the Court ultimately concluded a literal reading of SOX’s anti-arbitration provision, limiting its applicability to claims “arising under this section,” which dictated that the anti-arbitration provision did not apply to Dodd-Frank claims. The Court’s decision followed the trend among other federal courts, including the Third Circuit Court of Appeals in Khazin v. TD Ameritrade Holding Corporation, 773 F.3d 488 (3d Cir. 2014), holding that agreements to arbitrate Dodd-Frank claims are enforceable.

Despite its decision to compel Wussow to submit his Dodd-Frank claim to arbitration, the Court refused to stay Wussow’s SOX claim pending the outcome of arbitration. The Court reasoned that the spirit of SOX’s anti-arbitration provision would be undermined if the Dodd-Frank arbitration were allowed to conclude before the Court decided the SOX claim. Because both claims involve the same set of facts and legal issues, the first claim to reach a final decision would have a preclusive effect on the other claim. In an effort to protect the integrity of SOX’s anti-arbitration provision, the Court even noted that it would expedite the court proceedings if necessary to resolve the SOX claim before the Dodd-Frank arbitration concluded.

Lessons from Wussow

Wussow shows that whistleblowers who have agreed to arbitrate disputes with their employers face complicated legal obstacles when trying to vindicate their rights under SOX and Dodd-Frank. While the Dodd-Frank whistleblower provision provides several benefits over the SOX whistleblower provision, anyone with an arbitration agreement who pursues a Dodd-Frank claim risks losing her day in court because of Congress’ inexplicable failure to include an anti-arbitration provision in the Dodd-Frank whistleblower provision. Although the Wussow Court exercised its discretion to allow the SOX claim to proceed quickly to trial, there is no guarantee that every court will do the same, and that solution will not enable Wussow to obtain the enhanced remedies available under Dodd-Frank.



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