U.S. Supreme Court Narrows Scope of “Whistleblower” Under Dodd-Frank

Yesterday, February 21st, the United States Supreme Court ruled in Digital Realty Trust, Inc. v. Somers that employees must complain to the Securities and Exchange Commission (SEC) in order to qualify as “whistleblowers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). In so doing, the Court rejected the majority opinion around the country that Dodd-Frank protected internal whistleblowers as well (those who only complained internally to the company, rather than externally to the SEC).

A little* backstory….

*It’s not little. Grab coffee and/or stretch before proceeding

Let’s start with the Sarbanes Oxley Act of 2002 (SOX). SOX contains a provision, 18 U.S.C. § 1514(a), that prohibits publicly-traded companies from retaliating against their employees for providing, causing to be provided, or assisting in investigating information:

[R]egarding any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, or any rule or regulation of the Securities Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to…a person with supervisory authority over the employee.

18 U.S.C. § 1514A(a)(1).

So far, so good, but now it gets messy.

Dodd-Frank added Section 21F to the Securities Exchange Act of 1934, 15 U.S.C. 78a, et seq. (“Exchange Act”). 15 U.S.C. § 78u-6(a)(6) defines “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.” However, 15 U.S.C. § 78u-6(h)(1)(A), which defines protected activity under Dodd-Frank’s anti-retaliation provision, is more broad, incorporates protected activity under 18 U.S.C. § 1514A(a), and states, in part:

No employer may discharge, demote…or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower…(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002…, this chapter, including section 78j-1(m) of this title, section 1513(e) of title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

15 U.S.C. § 78u-6(h)(1)(A).

The “mess” is that 18 U.S.C. § 1514A(a) does not require an employee to report information to the SEC to be protected, but rather, in part, protects disclosures to “a person with supervisory authority over the employee.” 18 U.S.C. § 1514A(a)(1).

The vast majority of courts that tackled this issue recognized ambiguity in the statute and gave Chevron deference to the SEC’s final rule (essentially deferring to the SEC’s opinion) regarding Dodd-Frank’s anti-retaliation provision. In its comments to that final rule, the SEC stated that Dodd-Frank protected internal whistleblowers as well, not just those that complain to the SEC, so that was good enough for them.

For its part, the Ninth Circuit in Somers v. Digital Realty Trust Inc., 850 F.3d 1045, 1049 (9th Cir. 2017) (the case decided on appeal by the Court), cut a different path by finding that Dodd-Frank was not ambiguous in reaching the same conclusion that Dodd-Frank applied to internal whistleblowers.

At the circuit level, only the Second, Ninth, and Fifth Circuits had addressed the issue prior to the Court’s ruling yesterday. The Second Circuit shared the majority’s view that Dodd-Frank’s anti-retaliation provision contains ambiguity warranting Chevron deference to the SEC’s final rule. If you were paying attention and read this whole thing, you know the Ninth Circuit found no ambiguity, but held that Dodd-Frank’s “anti-retaliation provision unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally.” On the other side of the aisle was the Fifth Circuit’s decision in Asadi v. G.E. Energy (USA), L.L.C., which held that Dodd-Frank “unambiguously requires individuals to provide information relating to a violation of the securities laws to the Securities and Exchange Commission to qualify for protection from retaliation.”

At the district court level, only 3 courts followed the minority view in Asadi, while the rest followed the majority view that internal complaints were protected.

In ending the discussion and finding that Dodd-Frank applies solely to those employees who complain to the SEC, the Court stated that a statute’s explicit definition controls, even if it varies from the term’s ordinary meaning. Here, even though there appeared to be ambiguity between Dodd-Frank’s provisions, the provision defining “whistleblower” (15 U.S.C.§ 78u-6(a)(6)) is controlling and it says that to be a “whistleblower,” you have to provide “information relating to a violation of the securities laws to the Commission in a manner established, by rule or regulation, by the Commission.”

Deep breath and long exhale, especially those of you in the C-suite.