Appellate Court Ruling Leaves Compliance Officers Whistling in the Dark

Whistleblowers may have raised their voices on Sept. 10, when a federal appeals court ruled that anti-retaliation protections under the Dodd-Frank Act apply to them even if they don’t file their allegations even if they don’t file a report with the Securities and Exchange Commission.

Compliance officers, on the other hand, are sounding a more sour note.

The decision—Berman v. Neo@Ogilvy, made in the New York-based 2nd Circuit Court of Appeals—creates even more confusion for corporations about who qualifies as a whistleblower and what internal procedures for handling complaints might be affected. The ruling, and its likely appeal to the Supreme Court, could also complicate how the SEC interprets congressional mandates and provide fresh ammunition for those who would challenge its rulemaking.

“As a result of this ruling, we can expect more federal complaints under Dodd-Frank from individuals who do not blow the whistle to the SEC, and more whistleblowers to invoke Dodd-Frank protections rather than those in the Sarbanes-Oxley Act, bypassing the U.S. Department of Labor’s adjudicative scheme, because Dodd-Frank offers greater remedies and a much longer statute of limitations,” says Greg Keating, chair of the whistleblower practice group at law firm Choate, Hall & Stewart.

The case involves Daniel Berman, former finance director at Neo@Ogilvy, a unit of advertising company WPP. Berman claimed that after internally reporting a variety of accounting irregularities, Neo@Ogilvy fired him in April 2013. For six months after his dismissal, he did not report any of his suspicions to the SEC. Then, in October 2013—after the limitations period on one of his Sarbanes-Oxley claims had ended—he provided information to the Commission. In early 2014 sued his former employer, alleging a violation of the whistleblower protection provisions of Section 21F of the Dodd-Frank Act.

A district court judge originally ruled against Berman, saying that a report to the SEC was required for anti-retaliation provisions to apply. Berman appealed and won. His victory, however, creates even more confusion for companies and their compliance teams in doing so.

For starters, this decision conflicts with another made in the 5th Circuit Court of Appeals, Asadi v. GE Energy. That court ruled for strict construction of the Dodd-Frank, and said the statute only provides protections to whistleblowers who complain to the SEC. So now a company doing in Texas, Louisiana, or Mississippi faces a different interpretation of the law and SEC rulemaking than one on the 2nd Circuit’s home turf of New York, Connecticut, and Vermont.

Split decisions at the appellate level generally mean the Supreme Court will intervene. That intervention would need to address ambiguous (and arguably contradictory) language in the Dodd-Frank Act and the SEC rulemaking that the law mandated when addressing anti-retaliation protections.

What’s the problem? At one point, the SEC rule says that to be eligible for a whistleblower reward, “you must submit original information to the Commission.” Other parts of the rule are not so clear. For example, elsewhere the rule says, “For purposes of the anti-retaliation protections… you are a whistleblower if: you possess a reasonable belief that the information you are providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur.”

“Ultimately this issue is going to get to the Supreme Court, because we know Congress isn’t going to rewrite the statute.”
Ken Gage, Chair of Workplace Retaliation and Whistleblower Defense Group, Paul Hastings

“The anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award,” the rule adds.

That ambiguity puts this question in the fast lane for Supreme Court review. “Ultimately this issue is going to get to the Supreme Court, because we know Congress isn’t going to rewrite the statute,” says Ken Gage, chair of the workplace retaliation and whistleblower defense group at Paul Hastings.

Keating expects that in the interim, the 2nd Circuit ruling “is going to open the floodgates to more litigation.” Importantly, it also raises new questions about what constitutes a “complaint.”

In the last few years, Keating says, the Labor Department has done “a 180-degree turn” on what qualifies as protected activity or a complaint under the Sarbanes-Oxley Act—moving from a very narrow standard favoring companies, to “an incredibly broad” definition captured in another decision, Sylvester v. Parexel International.

“I call it the finger-in-the-wind standard now,” Keating adds. “If you come into a room and say, ‘I’m not sure we are doing everything right on this project,’ that’s a complaint now. Once we open these doors and say it is not just going to the SEC that’s protected; it is any internal complaint—we have to acknowledge that is where the bar going to be set for what is a complaint.”

Defining ‘Whistleblower’

The latest case also raises questions for whistleblowers. “If you are a whistleblower, it depends on where you live,” says John Zach, a former federal prosecutor, now a partner at Boies, Schiller & Flexner. “If you live in Texas, you are not getting those SEC protections; if you are in New York ,you are.”

Still, Zach says, the ruling is “a step in the right direction for what the SEC envisioned and will ultimately be helpful for compliance programs.”

CLARIFYING THE SEC’S WHISTLEBLOWER PROTECTIONS

The following is an excerpt from an agency interpretation of the Securities and Exchange Commission’s Section 21F Whistleblower rules.
Notwithstanding our view that Rule 21F-2(b)(1) alone controls in the context of determining the relevant reporting procedures for an individual to qualify as a whistleblower eligible for Section 21F’s employment retaliation protections, the Court of Appeals for the Fifth Circuit expressed some uncertainty about this reading in a recent decision.
Although we appreciate that if read in isolation Rule 21F-9(a) could be construed to require that an individual must report to the Commission before he or she will qualify as a whistleblower eligible for the employment retaliation protections provided by Section 21F, that construction is not consistent with Rule 21F-2 and would undermine our overall goals in implementing the whistleblower program. We reach this conclusion for several reasons.
First, as the text of Rule 21F-2(b)(1) states, “for purposes of Section 21F’s employment retaliation protections,” an individual qualifies as a whistleblower entitled to the employment retaliation protection whenever he or she makes any of the broader array of disclosures specified  in Section 21F(h)(1)(A).
Second, Rule 21F-2(b)(1)(iii) expressly provides that “[t]he anti-retaliation protections apply whether or not an individual satisfies the requirements, procedures, and conditions to qualify for an award.” As Rule 21F-2(a)(2) makes plain, the reporting procedures specified in Rule 21F-9(a) are among the procedures that an individual must follow to recover an award. The contrast between these provisions further supports our interpretation that the availability of employment retaliation protection is not conditioned on an individual’s adherence to the Rule 21F-9(a) procedures.
Finally, our interpretation best comports with our overall goals in implementing the whistleblower program. Specifically, by providing employment retaliation protections for individuals who report internally first to a supervisor, compliance official, or other person working for the company that has authority to investigate, discover, or terminate misconduct, our interpretive rule avoids a two-tiered structure of employment retaliation protection that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the investor-protection and law-enforcement benefits that can result from internal reporting.
Under our interpretation, an individual who reports internally and suffers employment retaliation will be no less protected than an individual who comes immediately to the Commission. Providing equivalent employment retaliation protection for both situations removes a potentially serious disincentive to internal reporting by employees in appropriate circumstances. A contrary interpretation would undermine the other incentives that were put in place through the Commission’s whistleblower rules in order to encourage internal reporting.
Souce: SEC.

“The SEC has very clearly stated that it wants to encourage robust work by compliance programs,” he says. “They want to see compliance programs that employees have faith in, and feel comfortable reporting wrongdoing to. The problem with the prior decision was that it discouraged employees from going directly to their compliance programs because they could be retaliated against. The 2nd Circuit decision balanced things the way the SEC wanted them to be.”

The legal debate over linguistic ambiguities in the SEC rulemaking are far from resolved. The Berman case, in fact, echoes King v. Burwell, where the Supreme Court took it upon itself to “fix” the Affordable Care Act and resolve missing language in the statute regarding tax credits.

The Dodd-Frank Act—ripe with other examples of missing, contradictory, and ambiguous language—could face a fresh round of legal attacks if the Supreme Court goes against the Berman decision.

“Look at the sheer size of Dodd-Frank and how quickly it all came together, and it’s not surprising that there is ambiguity,” says Earl Jones, co-chair of the corporate ethics practice at Littler Mendelson. “What we are seeing is really a debate on how to resolve those ambiguities, and there are fundamentally different legal philosophies in interpreting legislation.”

No matter how it all plays out, “a well-organized company will always want employees to come forward and be able to address remedial measures,” Jones adds.  

Especially if companies do business in the 2nd Circuit (which is pretty much everyone, given New York’s prominence), they need to be apprised of legal developments, Keating says. They should review their internal reporting policies, “and proceed with caution when disciplining or terminating an employee that has raised internal complaints.”

Employers need to examine their existing complaint and investigation protocols and their training for managers (even the C-suite) to make sure that every time something that might be viewed as a complaint arises, it is properly vetted, appropriate action is taken, and the complainant is kept apprised.

Rebecca Katz, lawyer at Kessler Topaz Meltzer & Check and a former SEC enforcement attorney, represents whistleblowers. She echoes that advice and estimates that 98 percent of her clients have gone internally first before going to the SEC. “Companies should want to encourage employees to go internally first before they go to the SEC and the Berman ruling will make them more likely to do that,” she says.