If you discover that your employer is violating the federal securities laws, and you report this violation to your supervisors, and as a result you are fired, harassed, or otherwise retaliated against, can you bring a lawsuit under the Dodd-Frank Act of 2010? As it stands now, you might. Or you might not. For years, the federal courts have disagreed, casting doubt over whether would-be whistleblowers should report such violations to their supervisors or instead report directly to the U.S. Securities and Exchange Commission (SEC).
On November 28, 2017, the U.S. Supreme Court will hear oral arguments in Digital Realty Trust, Inc. v. Somers, cert. granted, No. 16-1276, an appeal from a recent opinion by the United States Court of Appeals Ninth Circuit, to resolve the question. The Court will resolve conflicting opinions from the Second, Fifth, and Ninth Circuits as to whether Dodd-Frank’s anti-retaliation provision “extends to individuals who have not reported alleged misconduct to the [SEC] and thus fall outside the Act’s definition of a ‘whistleblower.’”
The SEC incentivizes internal reporting
In examining Dodd-Frank’s protections, it’s worth noting that the SEC has historically provided a number of incentives in order to encourage internal reporting.
For background, in 2010, the Dodd-Frank Act established the SEC’s whistleblower program, which encourages individuals to report violations of the U.S. securities laws to the SEC and provides for significant monetary awards for information that leads to a successful SEC enforcement action. To incentivize and protect whistleblowers, Dodd-Frank also includes an anti-retaliation provision. Generally, the Act gives whistleblowers a private right of action against any employers who retaliate against them for providing information to the SEC, or for making disclosures that are required or protected under the Sarbanes-Oxley Act, Dodd-Frank, and any other law or regulation subject to enforcement by the SEC, including the provision of Sarbanes-Oxley that bars retaliation against employees of public companies who provide information regarding a securities violations to their supervisors. Hence, Dodd-Frank was clearly written to protect whistleblowers who report securities violations internally through their company’s established compliance programs.
Given its language and legislative context, it’s apparent that the SEC, in implementing Dodd-Frank, seeks to encourage individuals to report securities violations first internally before approaching the SEC. For example, in determining the amount of an award, the SEC considers the whistleblower’s participation in a company’s internal compliance procedures as a plus-factor. As a further incentive, an internal report made within 120 days of a report to the SEC is treated as if the report to the SEC had been made at the earlier internal reporting date. This also creates an added protection in case another whistleblower makes a submission that causes the SEC’s staff to begin investigating the same matter before the internal whistleblower reports to the SEC.
Dodd-Frank definition vs. SEC interpretation
The primary issue now before the Supreme Court, however, is that although Dodd-Frank clearly extends its protections to internal whistleblowers, another part of that statute defines a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the [SEC].” The question that the trial court faced in Digital Realty was how to interpret these conflicting definitions in Dodd-Frank.
In Digital Realty, a former employee alleged that he had complained to the officers and directors of his company that his supervisor had committed “serious misconduct,” including eliminating internal controls over certain corporate actions in violation of Sarbanes Oxley and hiding seven million dollars in cost overruns on a real estate development in Hong Kong. The plaintiff alleged that he was fired (at least in part) for reporting these violations. The trial court resolved the apparent ambiguity of Dodd-Frank’s language by invoking so-called “Chevron deference,” under which federal courts will defer to an agency interpretation of a statute the agency is intended to implement.
On appeal, the Ninth Circuit addressed the issue of how to interpret Dodd-Frank’s differing definitions of “whistleblower” by relying on the Supreme Court’s opinion in King v. Burwell, which brought into question a similarly differing definition with regards to the Affordable Care Act. In that case, Justice Roberts upheld the ACA, noting that “‘the presumption of consistent usage readily yields to context,’ and a statutory term may mean different things in different places.” (In his famous dissent to Burwell, Justice Scalia called Justice Robert’s approach “interpretive jiggery-pokery.”)
In Digital Realty, the Ninth Circuit cited Burwell in holding that Dodd-Frank “should be read to provide protections to those who report internally as well as to those who report to the SEC.” In yet another entertaining dissent, Judge Owens (apparently sharing Justice Scalia’s concerns in Burwell) wrote that “‘we should quarantine King and its potentially dangerous shapeshifting nature to the specific facts of that case to avoid jurisprudential disruption on a cellular level.’ Cf. John Carpenter’s The Thing (Universal Pictures 1982).”
Protecting whistleblowers is good policy – not “interpretive jiggery-pokery”
Courts have struggled with how to interpret conflicting statutory provisions and the extent they should defer to federal agencies’ (such as the SEC) interpretations of statutes (like Dodd-Frank) they are meant to implement.
Whatever one’s view on these issues, one thing is certain: Would-be whistleblowers considering whether to first report corporate wrongdoing internally to their supervisors or externally to the SEC will be directly affected and influenced by the Supreme Court’s forthcoming opinion. If the Court reverses the Ninth Circuit’s holding in Digital Realty, employees that report violations internally to their employers will have no protection under Dodd-Frank unless and until they also report externally to the SEC.
My view is that the Ninth and Second Circuits reached the correct result by protecting internal whistleblowers, both as a matter of public policy and as intended by Congress in passing Dodd-Frank. As the SEC aptly noted in its recent amicus brief, reading Dodd-Frank’s “anti-retaliation provisions to protect internal and external whistleblowers alike would ‘support, not undermine, the effective function of company compliance and related systems.’” As the SEC noted, whistleblower reporting through internal compliance procedures complements and enhances government enforcement efforts. This ensures the efficient use of private-sector and government resources, and effectuates Dodd-Frank’s purpose—to prevent fraud and other securities-law violations. In contrast, reading the anti-retaliation provisions of Dodd-Frank to protect only those who report to the SEC would defeat the purpose of the legislation.