The U.S. Supreme Court, with an opinion in the case of Digital Realty Trust, Inc. v. Somers, narrowed the definition of employees classified as “whistleblowers” and protected by anti-retaliation measures of the Dodd-Frank Act. The ruling places limitations on the Securities and Exchange Commission’s whistleblower program, requiring reporting to the Commission before receiving its protections and incentives.
“The Supreme Court followed the plain meaning of Dodd-Frank: that whistleblowers are those who report to the SEC,” says Anne Patin, a partner at Seward & Kissel. “In doing so, the Court explained that the purpose of the statute was to aid the SEC’s enforcement efforts by protecting those who report to the SEC.”
Endeavoring to root out corporate fraud, Congress passed the Sarbanes-Oxley Act of 2002 and the 2010 Dodd-Frank Act. Both Acts shield whistleblowers from retaliation, but they differ in important respects, the Court wrote. Sarbanes-Oxley applies to all “employees” who report misconduct to the Securities and Exchange Commission, any other federal agency, Congress, or an internal supervisor.
Dodd-Frank defines a “whistleblower” as “any individual who provides information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”
A whistleblower is eligible for an award if original information provided to the SEC leads to a successful enforcement action. Sarbanes-Oxley’s anti-retaliation provision contains an administrative-exhaustion requirement and a 180-day administrative complaint-filing deadline, whereas Dodd-Frank permits a whistleblower to sue an employer directly in federal district court, with a default six-year limitation period.
The SEC’s regulations implementing the Dodd-Frank provision contain two discrete whistleblower definitions. For purposes of the award program, Rule 21F–2 requires a whistleblower to “provide the Commission with information” relating to possible securities law violations. For purposes of the anti-retaliation protections, however, the rule does not require SEC reporting.
In the Supreme Court case at hand, Respondent Paul Somers alleged that petitioner Digital Realty Trust, Inc. terminated his employment shortly after he reported to senior management suspected securities law violations by the company. Somers filed suit, alleging, a claim of whistleblower retaliation under Dodd-Frank. Digital Realty moved to dismiss that claim on the ground that Somers was not a whistleblower because he did not alert the SEC prior to his termination.
The court held that Dodd-Frank’s anti-retaliation provision does not extend to an individual, like Somers, who has not reported a violation of the securities laws to the SEC.
“The Supreme Court followed the plain meaning of Dodd Frank: that whistleblowers are those who report to the SEC. In doing so, the Court explained that the purpose of the statute was to aid the SEC's enforcement efforts by protecting those who report to the SEC.”
Anne Patin, Partner, Seward & Kissel
“The question presented: Does the anti-retaliation provision of Dodd-Frank extend to an individual who has not reported a violation of the securities laws to the SEC and therefore falls outside the Act’s definition of ‘whistleblower?’ ” said Justice Ruth Bader Ginsburg.
“We answer that question,” she wrote. To sue under Dodd-Frank’s anti-retaliation provision, a person must first “provide information relating to a violation of the securities laws to the Commission,” she explained.
“The Court recognized that its opinion ‘undoubtedly shielded fewer individuals from retaliation,’ but the Court’s ‘function’ is to give the statute the effect its language suggests,” says David Morrison, principal at law firm Goldberg Kohn. “The impact of the ruling can be significant. Federal agencies are authorized to promulgate rules and regulations that implement a federal statute. But that authority does not permit agencies to expand beyond the statute’s protections. Here, the statute expressly delegated ‘authority to the SEC to establish the ‘manner’ in which information may be provided to the Commission by a whistleblower. But, that did not give the SEC the authority to issue a rule that afforded protection to an employee who failed to communicate any information to the Commission.”
When regulations “conflict with the express language in the statute, the statute prevails. When a company is faced with a lawsuit, it should make sure that the regulation does not go beyond the statute’s explicit language,” Morrison says. “If it does, employers should not hesitate to bring the issue to the Court’s attention to defeat the claim.”
“Employers sued by former employees on retaliation claims must evaluate the specific conduct the employee is contending led to the alleged retaliation,” he explains. “Did the employee actually make a report that was protected by anti-retaliation provisions of the law under which the lawsuit was filed? We have won cases for companies by making that very argument—focusing on what was actually reported and to whom—and lining up those facts with the specific protections afforded by the law. Well-managed companies promote an environment that encourages disclosure and prohibits retaliation. But that does not empower an employee to sue his or her company when the law provides limited anti-retaliation protections.”
The government argued on behalf of the Respondent and the interpretation that would have granted whistleblower anti-retaliation protection. “This is likely due, at least in part, to the public policy of promoting internal reporting, investigation, and remediation, and thereby potentially avoiding or minimizing the need for the SEC to investigate every instance of suspected securities law violations,” says Steven Paradise, a partner at Richards Kibbe & Orbe. “Companies advocated for incentivizing employees to first report suspected violations internally, so as to provide companies an opportunity to investigate first to determine whether—and to what extent—additional measures, including self-reporting to the SEC, are required.”
Don Falk, a partner at Mayer Brown, says the unanimous decision shouldn’t come as a surprise “in holding that the Dodd-Frank provision defining ‘whistleblower’ as ‘a person who provides information to the SEC’ means what it says.”
“There was no support at all for the SEC’s rule that turned one definition into two: one that tracked the statute and applied cash awards for information leading to successful enforcement actions, and a far broader definition that would allow employees to sue under the anti-retaliation provision even if they had provided information only internally and not to the SEC,” Falk says. “This was a clear case of regulatory overreach where an agency decided to implement its own view of sound policy despite directly contrary statutory language.”
Of further interest, he says, was the dialogue between members of the court on the utility of legislative history in statutory interpretation.
Although the opinion was unanimous in most respects, Justices Thomas, Alito, and Gorsuch did not join in the parts of the opinion that relied on the purpose of Dodd-Frank as expressed through the Senate report, commenting (in a short concurrence by Justice Thomas) on the perceived shortcomings of committee reports as a barometer of congressional intent. “It appears that there is now a substantial three-Justice minority that will consistently reject legislative history—a mark of Justice Scalia’s continuing influence,” Falk noted.
On the one hand, the decision is a win for employers, because it will make it much harder for an individual to establish a whistleblower retaliation claim under Dodd-Frank. On the other hand, compliance officers around the United States and the world “have reason for serious concern, because this decision will almost certainly compel individuals to bypass internal compliance programs and go directly to the SEC,” says Greg Keating, chair of the whistleblower group at Choate Hall & Stewart and former management representative on the Whistleblower Protection Advisory Committee.
The potential adverse effects of this from a compliance perspective are potentially quite meaningful, he says.
“There is a very real potential that some number of individuals will decide not to complain internally. That’s the bad news,” Keating says. The deal for clients: get some protection for 180 days under Sarbanes-Oxley, or report to the SEC for six years of protection under Dodd-Frank.
“Compliance departments have meaningful reasons to request more resources,” Keating says. “The only way to confront this problem is to make sure you have a workplace environment where an individual will not fear retaliation. Step up efforts to take a hard look at your internal complaint procedures and your investigation protocols. By all means, double down on training of front-line managers.”