Supreme Court Narrows Scope Of Federal Whistleblower Law
This past February, the U.S. Supreme Court issued a long-awaited decision under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). In Digital Realty Trust Inc. v. Somers, the Court unanimously held that in order to be protected from retaliation for reporting an alleged violation, an employee must make a report to the Securities and Exchange Commission (“SEC”) and not just to his or her employer.
The Somers decision was not surprising, as the holding rests on a straightforward interpretation of the text of the Dodd-Frank law. Nonetheless, the decision is likely to have important implications for would-be whistleblowers and their employers.
Sarbanes-Oxley, Dodd-Frank, And Whistleblowers
The Somers decision arose against the backdrop of the two most important federal financial reform measures of the last 20 years.
First, the Sarbanes-Oxley Act of 2002 (“SOX”) was passed in the wake of several high-profile corporate and accounting scandals, with the intention of “safeguard[ing] investors in public companies and restor[ing] trust in the financial markets following the collapse of Enron Corporation.” Among other things, the legislation increased financial oversight and imposed stiffer penalties for corporate fraud. Importantly, SOX protects whistleblowers – defined as employees who report misconduct to the SEC, Congress, any federal agency, or an internal supervisor – from retaliation.
Dodd-Frank, enacted in 2010, had its origins, in large part, in the crash of the subprime mortgage market in 2007, the banking crisis in 2008, and the ensuing widespread financial downturn. As with SOX, Dodd-Frank’s reforms were extensive, aimed at “promot[ing] the financial stability of the United States by improving accountability and transparency in the financial system.”
Also like SOX, Dodd-Frank provides for whistleblowers to be protected from retaliation. However, Dodd-Frank defines a whistleblower more narrowly than SOX, as “any individual who voluntarily provides original information to the [SEC] that leads to the successful enforcement of a covered administrative action.”
Through Dodd-Frank, Congress authorized the SEC “to issue such rules and regulations as may be necessary or appropriate to implement” the law’s whistleblower provisions. However, in exercising this rulemaking authority, the SEC appears to have strayed from Dodd-Frank’s text, creating two separate definitions of “whistleblower” – one for purposes of determining eligibility to receive a financial award, and the other for purposes of protection from retaliation. As to the latter of these, the SEC’s Final Rule defined a whistleblower as encompassing some situations in which an employee makes a report to a company supervisor but not to the SEC.
By presenting a situation in which an “internal” whistleblower who had not reported his company to the SEC claimed retaliation under Dodd-Frank, Somers provided the proper set of facts for the Supreme Court to address the apparent conflict between the text of Dodd-Frank and the SEC’s Final Rule.
From 2010 until 2014, Paul Somers worked as a Vice President of Digital Realty Trust, Inc. (“DRT”), a real estate investment trust. When Mr. Somers suspected DRT of securities fraud, he reported these suspicions to senior management. Soon after this report, and without Mr. Somers’s having also reported the suspected fraud to the SEC, DRT terminated Mr. Somers’s employment.
Because he did not file an administrative complaint within 180 days of his termination, Mr. Somers was not covered by the anti-retaliation provisions of SOX. Therefore, relying in part on the SEC’s Dodd-Frank Final Rule, Mr. Somers filed suit against DRT in U.S. District Court, claiming, among other things, retaliation for whistleblowing under Dodd-Frank.
DRT moved to dismiss the lawsuit, arguing that Mr. Somers did not meet the statutory definition of a “whistleblower,” since he had not complained to the SEC. Both the district court and the Ninth Circuit Court of Appeals found in favor of Mr. Somers, holding that the SEC’s Final Rule should be accorded deference, and that, in order to be protected by Dodd-Frank’s anti-retaliation provisions, an individual who has reported a violation internally need not also make a report to the SEC.
The Supreme Court granted certiorari to resolve the issue, noting that two other federal circuit courts had addressed this question, with differing results. Specifically, the Fifth Circuit had concluded that employees must provide information to the SEC to avail themselves of Dodd-Frank’s anti-retaliation protections, while the Second Circuit had reached the opposite conclusion.
Supreme Court’s Decision
In a unanimous ruling – with Justice Ginsburg writing on behalf of a majority of the Justices – the Supreme Court overturned the Ninth Circuit’s holding and concluded that Mr. Somers’s failure to make a report to the SEC was fatal to his case.
The Court found little room for debate, citing the principle that “when a statute includes an explicit definition [the Court] must follow that definition.” The only apparent disagreement between the Justices was the extent to which the Court should rely on legislative history in rendering its ruling. On that point, the majority found it persuasive that one of Congress’s stated purposes in enacting Dodd-Frank was “to motivate people who know of securities law violations to tell the SEC.” Conversely, in a concurring opinion, Justices Thomas, Alito, and Gorsuch argued that the text of the law alone should be used to interpret the term “whistleblower,” and that ancillary materials such as legislative history should not be considered.
In explaining the reasons for the differences between the definitions of “whistleblower” in SOX and Dodd-Frank, the Court indicated that SOX had the broad purpose of “disturb[ing] the ‘corporate code of silence,’” and thus incentivized employees to make either internal or external reports. By contrast, the fundamental purpose of Dodd-Frank was more narrow – to encourage employees to “tell the SEC,” specifically, of illegal activity.
As the Court also noted, Dodd-Frank sought to incentivize reports to the SEC by offering enhanced remedies for whistleblowers, including a six-year statute of limitations (as opposed to 180 days under SOX), direct access to courts (versus SOX’s requirement that administrative remedies first be exhausted), and the opportunity to recover double back pay (as opposed to actual damages under SOX). In exchange for these enhanced incentives, Dodd-Frank considers only employees who report violations to the SEC to be protected whistleblowers.
Determining Which Way The Wind (Or The Whistle) Blows
At first glance, Somers may appear to be a victory for employers, given the Court’s rejection of Mr. Somers’s claim against DRT. However, the Court’s ruling clearly incentivizes would-be whistleblowers to make external reports of corporate impropriety, to the SEC – thereby increasing the risks of costly and invasive SEC investigations.
Along similar lines, employees who suspect that their company may have violated federal securities laws and who wish to take advantage of the enhanced protections offered by Dodd-Frank are left with no “middle course” – i.e., making an initial internal report without providing a nearly contemporaneous report to the SEC. This could potentially lead to either under-reporting – if employees do not want to take the big step of making an SEC report – or over-reporting, if anxious employees find it necessary to report minor suspected violations to the SEC.
Overall, though, the Somers ruling plainly resolves an issue that had been in question. Both employers and employees now have greater clarity as to their respective rights and responsibilities under the Dodd-Frank law.
Recommendations For Employers
Our basic recommendations in the wake of the Somers ruling remain consistent. Employers should review their whistleblower policies frequently, in conjunction with legal counsel, to ensure that employees have multiple avenues to report suspected illegal and/or unethical conduct. Likewise, whistleblower polices should assure employees that such reports will not be met with retaliation.
Additionally, upon learning that an employee has made such a complaint, an employer should promptly consult counsel to determine how best to respond.