Justices can clarify meaning of ‘whistleblower’

OCTOBER 2017 TERM

The U.S. Supreme Court will hear in its coming term Somers v. Digital Realty Trust, Inc., an appeal from the 9th U.S. Circuit Court of Appeals addressing whether the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provides a cause of action to employees who suffer retaliation after reporting alleged securities violations internally, even if they have not reported the violations to the Securities and Exchange Commission. The 9th Circuit, exacerbating an existing circuit split, held that Dodd-Frank’s whistleblower protection extends to employees who engage in purely internal reporting. Because that ruling is diametrically at odds with the plain statutory text and will doubtless result in an exponential and congressionally unauthorized rise in lawsuits under Dodd-Frank, the Supreme Court should reverse.

The Statutory Scheme

Dodd-Frank provides whistleblowers who report alleged securities violations with financial incentives, in the form of potentially substantial monetary rewards (from 10 to 30 percent of the judgment) 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 anti-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 anti-retaliation provision in Section 21F(h)(1)(A), however, bars an employer from taking adverse action against a “whistleblower” for (i) providing information to the commission, (ii) initiating or assisting in an administrative action by the commission 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).

In 2011, the SEC weighed in on the interplay between these provisions by promulgating 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 anti-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 Circuit Split

The 9th Circuit addressed this issue of statutory interpretation and deference to the SEC rule against the background of a preexisting circuit split. In Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013), the 5th Circuit rejected the SEC rule as inconsistent with the unambiguous language of the statute. 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”).

Two years later, a divided panel of the 2nd Circuit reached the opposite conclusion on similar facts in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2015). There, the court found that the statute was sufficiently ambiguous to warrant deference to the SEC’s view of the provisions under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The Berman 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. Accordingly, the court held that the plaintiff 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.

Finally, in Somers, 850 F.3d 1045 (9th Cir. 2017), a divided panel of the 9th Circuit adopted the 2nd Circuit’s approach, disregarding Dodd-Frank’s definitional provision describing “whistleblowers” as employees who report to the SEC. Paul Somers, a former employee of a publicly traded real-estate investment trust, filed suit against his former employer alleging that he was fired after making several internal reports to senior management regarding possible securities laws violations at the company, although he never reported directly to the SEC. In affirming the district court’s denial of Digital Realty’s motion to dismiss, the 9th Circuit concluded that Congress intended to provide broad whistleblower protection under Dodd-Frank and that subdivision (iii) of the anti-retaliation provision “unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally.” The court justified disregarding the statute’s definition of “whistleblowers” as inconsistent with that congressional intent, stating that “[s]tatutory definitions are, after all, just one indication of meaning” and that “[t]he use of a term in one part of a statute ‘may mean [a] different thing[]’ in a different part, depending on context.” (Citations omitted.) Moreover, to the extent that the statute’s definition created uncertainty, the court agreed with the 2nd Circuit that Exchange Act Rule 21-2 was entitled to Chevron deference.

Analysis

The 9th Circuit’s decision ignores both the plain meaning of the statute, which excludes purely internal reporters from the definition of “whistleblower,” and Congress’ intent, which was “to motivate those with inside knowledge to come forward and assist the government to identify and prosecute persons who have violated securities laws and recover money for victims of financial fraud.” S. Rep. No. 111-176, at 110 (2010). In effectively striking the words “to the Commission” from Congress’ definition of “whistleblower,” Somers eviscerates this purpose by allowing any employee who reports internally to reap the same statutory benefits as an employee who reports — as the definitional provision requires — to the SEC. And Chevron deference is unwarranted where, as here, Congress has “directly spoken to the precise question at issue.”

Moreover, as the 5th Circuit recognized in Asadi, ignoring Dodd-Frank’s requirement of external reporting renders the separate 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 the potential for double backpay recovery, a longer statute of limitations (six to ten years as opposed to 180 days), and — unlike Sarbanes-Oxley — no requirement of a time-consuming exhaustion of administrative remedies. It is unlikely that Congress would have enacted Dodd-Frank in such a way as to render the independent protections of Sarbanes-Oxley effectively obsolete.

The 9th Circuit’s unjustified expansion of an expressly defined term in the statute has significant implications. Extending Dodd-Frank protections to purely internal whistleblowers would not only lead to a proliferation in lawsuits under that statute (as individuals who would otherwise have proceeded under the more cumbersome Sarbanes-Oxley procedural regime would now file directly in federal district court), but would remove the significant additional incentives that Congress created for individuals to report securities law violations to the SEC. Moreover, on a broader level, it creates a precedent for judicial statute-rewriting that upsets the Constitution’s balance of powers between Congress and the courts. In his brief dissent in Somers, Judge John Owens — citing John Carpenter’s 1982 film “The Thing” — wisely advocated “quarantin[ing] ... [the] dangerous shapeshifting nature” of this approach in order “to avoid jurisprudential disruption on a cellular level.”