Reversing 9th Circuit, Supreme Court rules narrowly on whistleblower definition under Dodd-Frank

In a 9-0 ruling Wednesday, the U.S. Supreme Court interpreted protection for whistleblowers narrowly under Wall Street reform legislation, reversing a split decision from the 9th U.S. Circuit Court of Appeals.

Last year the 9th Circuit held that the 2010 Dodd-Frank legislation protected a corporate employee who made internal complaints about possible securities violations, but who did not report such activity to the government.

In an opinion written by Justice Ruth Bader Ginsburg, the high court held that the Dodd-Frank Wall Street Reform and Consumer Protection Act's anti-retaliation protection does not extend to individuals who do not actually bring information about illegal activity to the U.S. Securities and Exchange Commission.

Ginsburg noted that the Dodd-Frank definition of whistleblowers expressly requires they make their complaints to the regulatory body to be considered as such, which prevented the courts from expanding the legislation's purview to include internal corporate complainants. Digital Realty v. Somers, 16-1276.

The high court decided to hear the case after a split panel of the 9th Circuit affirmed the dismissal of a request for summary judgment in a lawsuit filed by Paul Somers, a former vice president at Digital Realty Trust Inc. He sought Dodd-Frank protection after being terminated from Digital Realty; he said he complained internally about possible securities violations.

Adopting a view of the law promulgated by the 2nd Circuit, 9th Circuit Judge Mary M. Schroeder wrote that Congress intended to protect internal complainants when it passed the bill.

9th Circuit Judge John B. Owens dissented, writing that the 5th Circuit's interpretation of the question, which did not provide protections for internal complainants, was correct under the law.

The 2nd Circuit applied the Chevron doctrine, which requires courts to defer to agency interpretations of law, in the ruling the 9th Circuit viewed as persuasive. Prior to the litigation, the SEC had issued guidance saying that Dodd-Frank protected whistleblowers who did not report to the government.

Some court watchers believed the case would provide an opportunity for Justice Neil Gorsuch to address Chevron deference, of which he was highly critical while sitting on the 10th Circuit. But the court's narrow ruling, which focused primarily on the textual definitions provided in the law, stayed clear of a merits debate on the Chevron question.

Corporate securities lawyers were unsurprised by the ruling, which several described as "expected."

"This is a clear statute," said Daniel J. Tyukody, who co-chairs Greenberg Traurig LLP's securities class action practice. "A 'whistleblower' under Dodd-Frank is defined as someone who reports to the SEC."

The decision could help to weed out complaints from corporate employees who try to abuse whistleblower protections after being fired for unrelated reasons, Tyukody added.

The court's decision was constrained, others said.

"In some ways, where this is most notable, is what the court didn't do," commented Jonathan A. Shapiro, a securities defense partner at Baker Botts LLP, who chairs the firm's Northern California litigation department. "This decision is comforting for the business community because the Supreme Court unanimously declined to expand what many considered to be a clear statute beyond what the words actually say."

But plaintiffs' lawyers who regularly advise whistleblowers said that the decision could cause a decrease in complaints that expose corporate malfeasance.

"The court has an unusually strict reading of the statutory language," said Wayne T. Lamprey, an attorney at Constantine Cannon LLP who regularly represents whistleblowers.

The decision could result in more SEC filings, Lamprey said, noting that individuals considering making complaints will now have more of an incentive to notify the government. This point was noted by the Supreme Court in its opinion.

But Lamprey said that employees who are unaware of the precedent and don't have legal counsel before making internal complaints, could "fall through the cracks."

"This is a trap for the uninformed," Lamprey commented.

In her opinion Ginsburg noted that the Sarbanes-Oxley Act of 2002 does provide protection for individuals like Somers, but those safeguards are far less generous than the benefits enumerated under Dodd-Frank.

Sarbanes-Oxley provides a 180-day window for whistleblowers to file an administrative complaint -- which can come only after administrative options are exhausted -- and allows individuals to recoup actual damages. But Dodd-Frank allows those who take their complaints to the government and suffer adverse employment actions to file lawsuits in federal court immediately and establishes a six-year statute of limitations to regain double back pay.

Keeping alive the eternal debate over the bounds of textualism, the court's conservative wing, consisting of Justices Clarence Thomas, Gorsuch and Samuel Alito, wrote separately to criticize the majority for considering legislative history in its analysis.

Justice Sonia Sotomayor, joined by Justice Stephen Breyer, wrote separately to defend that process.

The Trump administration supported Somers before the high court in the case. The Solicitor General's office briefed and argued the case in tandem with Somers, arguing that the SEC's interpretation of the law was correct.