The impact of Digital Realty

OCTOBER 2017 TERM

On Wednesday, the U.S. Supreme Court held that Dodd-Frank's whistleblower anti-retaliation provisions apply only to individuals who report misconduct to the Securities and Exchange Commission, and not to those who report misconduct internally to their employers. Digital Realty Tr., Inc. v. Somers, 2018 DJDAR 1591 (Feb. 21, 2018). Federal protections for whistleblowers today are less robust today than they were last week, at least in the 9th and 2nd U.S. Circuit Courts of Appeals. The Supreme Court's "plain-text reading of the statute undoubtedly shields fewer individuals from retaliation than the alternative" interpretation.

As the lower courts have observed, there was a tension between the type of conduct protected by Dodd-Frank's anti-retaliation provisions and its statutory definition of whistleblowers. The Supreme Court's decision provides a clear answer.

Congress passed the Sarbanes-Oxley Act in 2002 to "safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation." One of Sarbanes-Oxley's stated goals was to "disturb[] the corporate code of silence" by protecting whistleblowers who report corporate misconduct internally to their employers. (Sarbanes-Oxley grants protections for reporting to any "person with supervisory authority over the employee").

In 2010, Congress passed the Dodd-Frank Act, which sought to promote financial stability "by improving accountability and transparency in the financial system." To that end, Dodd-Frank strengthened the SEC's ability to "identify[] securities law violations" by creating a "new, robust whistleblower program designed to motivate people who know of securities law violations to tell the SEC." Dodd-Frank then defined a 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." (Emphasis in original.)

Dodd-Frank laid out anti-retaliation provisions for the protection of "whistleblowers." Under the relevant provision, "whistleblowers" are protected when they engage in certain types of conduct, including when they "mak[e] disclosures that are required or protected under" the Sarbanes-Oxley Act. Confusion arises because Dodd-Frank's anti-relation provision seemed to incorporate the protections of Sarbanes-Oxley, which did protect individuals who reported internally as whistleblowers. The SEC itself promulgated a rule stating that individuals who report internally are protected by these anti-retaliation provisions.

The Supreme Court held that Dodd-Frank's express statutory definition of a whistleblower governs, "even if [that definition] varies from a term's ordinary meaning." As Justice Elena Kagan put it at oral argument, "[Y]ou have this definitional provision, and it says what it says." The definition provides an "unequivocal answer": An individual is a whistleblower only if he has provided information "to the Commission."

The Supreme Court noted that Dodd-Frank's statutory definition of whistleblower "describes who is eligible for protection -- namely, a whistleblower who provides pertinent information 'to the Commission.'" (Emphasis in original.) In contrast, the whistleblower anti-retaliation clauses "describe what conduct, when engaged in by a whistleblower, is shielded from employment discrimination." (Emphasis in original.) An individual who "falls outside the protected category of 'whistleblowers' is ineligible to seek redress under the statute, regardless of the conduct in which that individual engages."

The Supreme Court further explained that its interpretation is consistent with Dodd-Frank's stated objective to grant the SEC more tools and resources to regulate the financial markets. The statutory definition -- which focuses on protecting those who report information specifically to the SEC -- is in keeping with that purpose. And as for the SEC's contrary rule, that rule is afforded no deference under Chevron because "Congress has directly spoken to the precise question at issue."

The Impact

Limited federal protection for whistleblowers:

Dodd-Frank still provides meaningful protections to those who have reported conduct to the SEC. Those protections are significant because the goal of Dodd-Frank was to enhance the knowledge and regulatory power of the SEC.

Likewise, Sarbanes-Oxley still provides meaningful protection to a broader category of individuals -- but it also imposes a more stringent process to obtain a remedy. Enforcement of the anti-retaliation provisions in Sarbanes-Oxley is more time-sensitive, less public, and offers less damages. As the Supreme Court noted, Sarbanes-Oxley has more onerous procedural requirements, including an administrative exhaustion requirement, a 180-day administrative complaint filing deadline, and a limitation to actual damages. An individual who fails to follow the procedural requirements (such as the respondent in this case) can be left without a claim under federal whistleblower laws. Dodd-Frank, in contrast, has a "generous" statute of limitations (at least six-years), allows suits to be brought in federal court, and grants the right to request double back-pay.

Varied state protection:

The level of protection for individuals who report internally to their employers will depend on the state in which they work. Some states, such as California have protections for whistleblowers in addition to those afforded by Sarbanes-Oxley and Dodd-Frank, including protection for individuals who report internally to their employers. Cal. Lab. Code Section 1102.5.

Administrative options:

As described above, Dodd-Frank's definition of whistleblower is "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." (Emphasis added.) The highlighted portion of this definition emphasizes another key point: The SEC can make the rules about the "manner" in which an individual must communicate the information to the SEC in order to qualify as a whistleblower. That "manner" is currently limited, per the SEC's own rules. An individual must report to the SEC online or through a specified written forum.

But the SEC, through its rule-making function, could expand whistleblower protection under Dodd-Frank by relaxing or broadening the manner in which in which an individual can communicate information to the SEC in order to qualify as a whistleblower. Put another way, "[n]othing in today's opinion prevents the agency from enumerating additional means of SEC reporting." Whether the agency will do so remains to be seen.