Ruling broadens Dodd-Frank protections, creates split

On Sept. 10, a divided panel of the 2nd U.S. Circuit Court of Appeals held that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provides a private cause of action to employees who suffer retaliation after reporting securities violations internally, even if they have not reported the violations to the Securities and Exchange Commission. Berman v. Neo@Ogilvy LLC, 14-4626. In so ruling, the 2nd Circuit arguably broadened Dodd-Frank's protections beyond the statutory language and created a circuit split that suggests the need for U.S. Supreme Court review. It also added to the existing uncertainty facing district courts and employers.

The Statutory Scheme

Dodd-Frank provides whistleblowers reporting alleged securities violations with financial incentives, in the form of potentially substantial monetary rewards in the event of a successful SEC enforcement action, and with a private cause of action in the event of retaliation from their employers. Section 21F(a)(6) of the statute (codified at 15 U.S.C. Section 78u-6(a)(6)) defines "whistleblower" for purposes of both the incentive and retaliation provisions as "any individual who provides ... information relating to a violation of the securities laws to the Commission ." According to this definitional language, a person who reports violations only internally and not to the SEC is not a "whistleblower" under Dodd-Frank.

The retaliation provision in Section 21F(h)(1)(A), however, bars an employer from taking adverse action against a "whistleblower" (as defined in Section 21F(a)(6)) for (i) providing information to the SEC, (ii) initiating or assisting in an administrative action by the SEC based on such information, or (iii) making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002. 15 U.S.C. Section 78u-6(h)(1)(A). Sarbanes-Oxley includes provisions protecting employees from retaliation for purely internal reporting of securities violations.

Thus, viewing these two Dodd-Frank sections together, an individual who makes a purely internal disclosure protected by Sarbanes-Oxley would appear to be protected from retaliation under Section 21F(h)(1)(A)(iii), other than the fact of being excluded from the definition of "whistleblower" (and thus from the protections granted to a whistleblower) by Section 21F(a)(6).

The SEC has previously weighed in on the interplay between these two provisions. In 2011, the SEC promulgated an implementing regulation, Exchange Act Rule 21F-2 (17 C.F.R. Section 240.21F-2). That rule states that, for purposes of the retaliation protections of Dodd-Frank, a "whistleblower" is a person who provides specified information "in a manner described in" the retaliation provisions of that statute. As noted above, that "manner" includes making disclosures that are required or protected under Sarbanes-Oxley. Thus, in the SEC's view, an employee who suffers retaliation based on purely internal reporting is entitled to invoke Dodd-Frank remedies, notwithstanding the definition of "whistleblower" in that statute that requires reporting to the Commission. The viability of this rule was the crux of the issue faced by the 2nd Circuit in Berman.

The Berman Decision

Daniel Berman was the finance director of Neo@Ogilvy LLC (Neo), a media agency. In January 2014, he sued Neo and its parent under Dodd-Frank, alleging that he was discharged in retaliation for his reporting to management of various practices that he claimed constituted accounting fraud. He did not report the alleged violations to the SEC until six months after his termination. The district court granted the defendants' motion to dismiss the Dodd-Frank claims on the ground that, because Berman had not reported to the SEC prior to termination, he was not a "whistleblower" within the definition of Dodd-Frank and was therefore not entitled to sue under that statute.

On appeal, the 2nd Circuit reversed in a 2-1 decision. In reinstating Berman's complaint, the court found that the statute was sufficiently ambiguous to warrant deference to the SEC rule under Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984). The court acknowledged that there is "no absolute conflict" between the SEC reporting requirement in the "whistleblower" definition and the anti-retaliation provision's incorporation of Sarbanes-Oxley reporting, as an employee who reports pre-termination both to management and to the SEC would be entitled to remedies under both Dodd-Frank and Sarbanes-Oxley.

Nevertheless, the majority found a "significant tension" between the two sections because requiring such simultaneous (or near-simultaneous) reporting would give "an extremely limited scope" to the Dodd-Frank retaliation provision. The court reasoned that most whistleblowers will opt to report initially only to their employer rather than go straight to the government. The court also noted that some whistleblowers (including auditors and attorneys) are statutorily barred from reporting to the SEC until after they have reported the wrongdoing to management and the board of directors, and allowed an opportunity for remedial action; requiring pre-termination SEC reporting would leave those categories of employees without Dodd-Frank remedies.

The court found no guidance in the legislative history because Section 21F(h)(1)(A)(iii) - which incorporates Sarbanes-Oxley reporting into the retaliation provision - was added by conference committee just before final passage of the bill. However, the court found it "doubtful" that the conferees who added that section would have expected it to have the "extremely limited scope" it would possess if restricted by the SEC reporting requirement in the "whistleblower" definition. At a minimum, the court found, the statute as a whole was sufficiently ambiguous that the SEC's reasonable interpretation in Rule 21F-2 was entitled to Chevron deference. Accordingly, the court held that Berman was entitled to pursue Dodd-Frank remedies for alleged retaliation after reporting wrongdoing to his employer, notwithstanding his failure to report to the SEC prior to termination.

The Circuit Split

Two years before Berman, the 5th U.S. Circuit Court of Appeals reached the opposite conclusion on similar facts and rejected the SEC rule as inconsistent with the unambiguous language of the statute. Asadi v. G.E. Energy (USA) LLC, 720 F.3d 620 (2013). The Asadi court concluded that there is no conflict between Dodd-Frank's definition of "whistleblower" and the statute's inclusion of Sarbanes-Oxley reporting as one form of protected activity. As the court explained, an employee might report to the SEC and thus qualify as a Dodd-Frank "whistleblower," but be terminated for internal reporting under Sarbanes-Oxley (for example, because the company is not yet aware of the disclosure to the SEC). In the 5th Circuit's view, Section 78u-6(h)(1)(A)(iii) makes Dodd-Frank remedies available to such an employee, but not to an employee who is terminated for internal reporting without having reported to the SEC (and who therefore does not fall within the statute's definition of a "whistleblower").

The Asadi court (and the Berman dissent) rejected the SEC rule as inconsistent with the plain text of the statute. The SEC's construction, according to the 5th Circuit, would strike the words "to the Commission" from Congress' definition of "whistleblower." The court further reasoned that the SEC's view would render the anti-retaliation provisions of Sarbanes-Oxley effectively moot, given that any employee with a Sarbanes-Oxley claim could also bring a Dodd-Frank claim on the basis that the disclosure was protected by Sarbanes-Oxley. (It is unlikely that any employee with such a choice would proceed under Sarbanes-Oxley given that Dodd-Frank includes greater backpay recovery, a longer statute of limitations, and - unlike Sarbanes-Oxley - no requirement of exhaustion of administrative remedies.)

Implications

The diametrically opposed interpretations of the 5th and 2nd Circuits are echoed in the district courts, with inconsistent results abounding. For example, one district court in the Central District of California recently sided with the Asadi approach, Davies v. Broadcom Corp., 2015 U.S. Dist. LEXIS 122812 (C.D. Cal. Sept. 8, 2015), while courts in the Northern District have split on the issue. Somers v. Digital Realty Trust Inc., 2015 U.S. Dist. LEXIS 96479 (N.D. Cal. May 15, 2015) (rejecting Asadi and deferring to SEC's interpretation); Connolly v. Remkes, 2014 U.S. Dist. LEXIS 153439 (N.D. Cal. Oct. 28, 2014) (same); Banko v. Apple Inc., 20 F. Supp. 3d 749 (N.D. Cal. 2013) (following Asadi). The division in these opinions turns on whether a particular court views the Dodd-Frank statutory scheme as ambiguous, warranting Chevron deference to the SEC rule, or unambiguous, warranting adherence to the plain language of the definitional term enacted by Congress over the SEC's more expansive interpretation.

The question of whether purely internal whistleblowers are entitled to Dodd-Frank remedies or are limited to those under Sarbanes-Oxley is ripe for resolution by the Supreme Court, which will have to choose between the policy-driven approach of the 2nd Circuit and the strict textual analysis of the 5th Circuit. Until the split is resolved, and with most Courts of Appeals yet to weigh in on the issue, employers should expect more lawsuits under Dodd-Frank based on internal reporting of potential securities law violations. Employers must also be vigilant in complying with the anti-retaliation provisions of Dodd-Frank, even in the absence of any reporting to the SEC.