Internal whistleblower reports are protected

This month, a divided panel of the 9th U.S. Circuit Court of Appeals issued a decision finding that a company's retaliation against a whistleblower is actionable under the Dodd-Frank Act, even if the whistleblower reports internally rather than to the Securities and Exchange Commission. Somers v. Digital Realty Trust Inc., 2017 DJDAR 2150 (March 8, 2017). Circuit courts and district courts have disagreed on this issue. In its decision, the 9th Circuit followed a ruling by the 2nd Circuit, which also found in favor of providing protection to employees who make internal reports. In contrast, the 5th Circuit in 2013 held that the whistleblower provisions apply only to employees making disclosures directly to the SEC.

Paul Somers, the plaintiff, alleged that defendant Digital Realty Trust fired him after he reported to senior management possible securities laws violations by the company. Somers sued Digital Realty, arguing that the company had violated various state and federal laws, including the anti-retaliation protections under the Securities Whistleblower Incentives and Protection section of the Dodd-Frank Act. Digital Realty moved to dismiss the claim, asserting that Somers was not a whistleblower under the definition of the act and thus not entitled to the act's protections. The district court denied Digital Realty's motion to dismiss, and the 9th Circuit affirmed the decision.

The dispute in Somers hinged on the Dodd-Frank Act's use of the term "whistleblower." The act defines a whistleblower as "any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission." In contrast, a later subsection of the Dodd-Frank Act prohibits employer retaliation against a whistleblower who (i) provides information to the SEC; (ii) initiates or assists in any investigation or administrative action by the SEC; or (iii) makes disclosures required or protected by the Sarbanes-Oxley Act of 2002. In particular, provisions of Sarbanes-Oxley require that certain categories of employees complete internal reports before they may report externally.

The SEC appeared to recognize the tension between the definitional and anti-retaliation provisions of the Dodd-Frank Act. In issuing rules to implement the whistleblower protections in 2011, the SEC broadly interpreted the definition of "whistleblower" to include employees who file internal reports under Sarbanes-Oxley. In the release adopting such measures, the SEC highlighted its specific intent to prohibit employers from retaliating against "individuals who report to persons or governmental authorities other than the Commission" including (i) a federal regulatory or law enforcement agency; (ii) any member of Congress or committee of Congress; or (iii) a person with supervisory authority over the employee or such other person working for the employer who has authority to investigate, discover, or terminate misconduct." The SEC's amicus brief in Somers advocated that the court adopt this interpretation of whistleblower.

The 9th Circuit held in a 2-1 decision that, although the Dodd-Frank Act includes language describing whistleblowers as individuals making reports to the SEC, this definitional provision should not be interpreted as a limitation on who may be considered a whistleblower under the act. Rather, the court stated, by incorporating Sarbanes-Oxley's disclosure requirements and protections, the Dodd-Frank Act "necessarily bars retaliation against an employee of a public company who reports violations to the boss." Concurring with the 2nd Circuit, the 9th Circuit noted that the Securities and Exchange Act of 1934 requires certain categories of whistleblowers to report internally prior to raising concerns to the SEC, and that the limited reading advocated by the defendant would "do nothing to protect these employees from immediate retaliation in response to their initial internal report."

The court found that the limited reading of the term whistleblower adopted by the 5th Circuit "would make little practical sense and undercut congressional intent." Referencing a point advanced by the 2nd Circuit, the court reasoned that under such an interpretation, "the only class of employees protected would be those who had reported possible securities violations both internally and to the SEC, when the employer ? unaware of the report to the SEC ? fires the employee solely on the basis of the employee's internal report." Stating that such a reading was "illogical," the 9th Circuit found that a limited interpretation of the term whistleblower would effectively read the reference to reports filed pursuant to the requirements of Sarbanes-Oxley out of Dodd-Frank's anti-retaliation provisions.

The majority opinion, written by Judge Mary M. Schroeder and joined by Judge Kim McLane Wardlaw, also rejected the 5th Circuit's position that a broad reading of the term whistleblower would render certain provisions of the Sarbanes-Oxley Act unnecessary. In particular, the court responded to the 5th Circuit's reasoning that if the Dodd-Frank Act protected the same conduct as Sarbanes-Oxley, that the Sarbanes-Oxley enforcement mechanisms would be rendered moot. Citing an argument made in the SEC's amicus brief, the court noted that in some contexts, the Sarbanes-Oxley processes could be "more attractive to the whistleblowing employee" by providing for adjudication through administrative review and compensation for special damages. Based on this reasoning, the 9th Circuit found that these "alternative enforcement mechanisms" are not rendered superfluous by the Dodd-Frank Act's protection for internal reporting.

The 9th Circuit panel's dissenter, Judge John B. Owens, wrote a brief, but colorful, endorsement of the 5th Circuit's holding. Judge Owens objected to the majority's reliance in part on the U.S. Supreme Court's decision in King v. Burwell to find that the same word (in this case, "whistleblower") can mean different things in different contexts. He argued instead that the court should "quarantine King and its potentially dangerous shapeshifting nature to the specific facts of that case to avoid jurisprudential disruption on a cellular level. Cf. John Carpenter's The Thing (Universal Pictures 1982)."

The 9th Circuit ruling tips the scales (at least for now) in the ongoing circuit split so far between the 2nd Circuit's holding in Berman v. Neo@Ogilvy LLC, WPP Group USA, Inc., 14-4626 (2nd Cir. Sept. 16, 2015) and the 5th Circuit's ruling in Asadi v. GE Energy USA LLC, 12-20522 (5th Cir. Jul. 17, 2013). The issue is currently being weighed by the 3rd Circuit in David Danon v. The Vanguard Group Inc., 16-2881 (3rd Cir.). The 6th Circuit considered a similar issue in Verble v. Morgan Stanley Smith Barney LLC, et al., 15-6397 (6th Cir. Jan. 13, 2017), but ultimately did not address the question, ruling that the plaintiff's claims were too vague. Plaintiff in that case has filed a writ of certiorari with the Supreme Court.

The 9th Circuit holding highlights the need to be mindful of the continuing expansion of the application of whistleblower protections and the ramifications this may have with respect to personnel decisions. Companies should closely analyze potential risks of employment actions involving individuals who may have made internal complaints in light of recent and pending court decisions.