If a whistleblower reports a violation of a federal securities law to her employer, does the Dodd–Frank Act’s antiretaliation provision prohibit the employer from retaliating against her? Put another way, does the Dodd-Frank Act give a cause of action to an employee who has been fired for informing her boss of a co-worker’s illegal activity? According to a recent, unanimous Supreme Court decision, the answer is no, unless the employee reported the information to the SEC prior to the retaliation.
At first glance, this result might seem counterintuitive, given that Congress has steadily worked to expand whistleblower protections in recent decades. For example, consider the 1986 congressional amendment of the False Claims Act, which prohibited the submission of false claims to the United States, thereby guarding against fraud, waste, and abuse in federal spending. The amendment created a new cause of action, so that anyone with knowledge of fraud against the U.S. Government could sue on the government’s behalf (a qui tam suit) and retain anywhere from fifteen to thirty percent of money ultimately recovered by the government (a “bounty”), effectively strengthening whistleblower incentives.
Additionally, in 2002 Congress enacted the Sarbanes–Oxley Act (SOX) in response to several major corporate scandals, including the collapse of Enron, executive officer fraud at Tyco, and the WorldCom bankruptcy. The stated purpose of SOX was to “prevent and punish corporate and criminal fraud, protect the victims of such fraud, preserve evidence of such fraud, and hold wrongdoers accountable for their actions.”[i] In addition to numerous internal corporate reporting and compliance requirements, SOX protects whistleblowers from employer retaliation. Notably, SOX’s antiretaliation protections extend to employees who “report up” illegal activity to their supervisors, as well as those who “report out” such information to the SEC, making it illegal for public companies to “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against” a whistleblower.[ii]
In 2010, in response to the financial crisis of 2007, Congress passed the Dodd–Frank Act in an effort to “promote the financial stability of the United States by improving accountability and transparency in the financial system.”[iii] The Act imposed additional corporate monitoring and compliance obligations and provided more robust protections for whistleblowers, as compared to SOX, in three key respects. First, where SOX contains an administrative-exhaustion requirement, Dodd–Frank grants immediate access to federal court. Second, while SOX requires an administrative complaint to be filed within 180 days, Dodd–Frank provides a six-year statute of limitations. Finally, although SOX remedies are limited to actual damages, Dodd–Frank allows recovery of double backpay.[iv]
Given the apparent congressional intent to incentivize and protect whistleblowing activity, one might expect whistleblower antiretaliation laws to prohibit employers from retaliating against employees for alerting management to illegal activity in the company. Although numerous federal district courts and two federal courts of appeals held that Dodd–Frank shielded such individuals,[v] the Supreme Court reached the opposite conclusion.
The precise textual issue is as follows. On the one hand, the Dodd–Frank antiretaliation provision expressly protects a “whistleblower . . . in making disclosures that are required or protected under the Sarbanes–Oxley Act,”[vi] which itself extends protection to internal whistleblower disclosures.[vii] On the other hand, the Dodd–Frank Act defines the term “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission.”[viii] The statutory definition of a whistleblower thus arguably creates an inconsistency regarding who is a whistleblower, and which disclosures are protected by federal law.
The Second and Ninth circuits determined that this inconsistency rendered the statute ambiguous, and applied Chevron deference to the SEC’s interpretation of the statute, which, in effect, extended Dodd–Frank’s antiretaliation protections to all individuals who make the required disclosures, regardless of whether they are made to an employer or the SEC.
On February 21, 2018, the Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers[ix] effectively overturned the Ninth Circuit’s interpretation, and held that Dodd–Frank protections only extend to whistleblowers who report information to the SEC. The Court found that the statute was not ambiguous because it clearly defined the term “whistleblower” so as to include individuals who report securities law violations to the SEC. Evidently, the Court was not persuaded by arguments that the anti-retaliation provision created sufficient ambiguity to deviate from the congressional definition.[x]
Although the case turned out to be a simple one for the Supreme Court, its holding is likely to have complex effects on corporate compliance efforts. During the 2011 public comment period of the SEC rulemaking process following the enactment of the Dodd–Frank Act, the SEC received hundreds of comments from corporate employers, attorneys, and policy experts, who expressed concerns about the narrow interpretation of Dodd–Frank that was ultimately endorsed by the Supreme Court in Digital Realty Trust. The most common policy arguments against the Supreme Court’s interpretation, and in favor of a broader reading of Dodd–Frank whistleblower protections, were those explaining how the shielding of so-called “internal” whistleblowers from employer retaliation would:
- Allow companies to take appropriate actions to remedy improper conduct at an early stage;
- Allow companies to self-report;
- Avoid undermining internal compliance programs and preserve systems that companies have installed designed to deter, identify, and correct violations;
- Allow the whistleblower program to supplement, rather than supersede the internal control requirements under the Sarbanes-Oxley Act of 2002;
- Allow the SEC to preserve its scarce resources by relying upon corporate internal compliance programs;
- Promote a working relationship between the SEC and companies;
- Allow compliance personnel to address conduct that does not yet rise to the level of a violation or is not a violation (based on a misunderstanding of fact or law);
- Increase the quality of tips the SEC receives; and
- Avoid internal investigations being compromised by unwillingness on the part of whistleblowers to participate.[xi]
After Digital Realty Trust, these policy concerns appear to have been left to the legislative domain. While it is unclear whether Congress will choose to enact further whistleblower antiretaliation measures, the Court’s decision seems certain to incentivize future whistleblowers to bypass internal corporate compliance systems, at least in the first instance, to ensure that they are protected from employer retaliation by the Dodd–Frank Act.
The effect of this potential shift in reporting could be negligible if whistleblowers make near-simultaneous reports to the SEC and their employers. On the other hand, if whistleblowers report potential misconduct exclusively to the SEC, it could frustrate corporate compliance efforts and lead to more government investigations.
After Digital Realty Trust, the Dodd–Frank Act does not protect a whistleblower from employer retaliation unless she reports information to the SEC. Despite the potential ramifications for internal corporate compliance, it is clear that the Supreme Court decided this case correctly. The textual inconsistencies at issue in Digital Realty Trust were likely the product of sloppy legislative drafting, but the Court looked to the legislative history, and adhered to Congress’s definition of the key term at issue in the case. Any concerns remaining after, or resulting from, the Court’s decision in Digital Realty Trust would be most efficiently and effectively addressed through legislative and regulatory processes.
[i] Lawson v. FMR LLC, 134 S. Ct. 1158, 1162 (2014) (quoting S. Rep. No. 107-146, 107th Cong., 2d Sess. 2 (2002)).
[ii] 18 U.S.C. § 1514A(a).
[iii] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, 1376 (2010).
[iv] Digital Realty Tr., Inc. v. Somers, No. 16–1276, slip op. at 5–6 (U.S. Feb. 21, 2018).
[v] See Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015); Somers v. Digital Realty Tr., Inc., 850 F.3d 1045 (9th Cir. 2017).
[vi] 15 U.S.C. § 78u–6(h)(1).
[vii] See 18 U.S.C. § 1514A(a)(1)(C).
[viii] 15 U.S.C. § 78u–6(a)(6).
[ix]See Digital Realty Tr., slip op.
[x] Digital Realty Tr., slip op. at 9 (“When a statute includes an explicit definition, we must follow that definition, even if it varies from a term’s ordinary meaning . . . [t]his principle resolves the question before us.” (internal citation omitted)).
[xi] See Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34,324 (June 13, 2011) (to be codified at 17 C.F.R. pt. 240).