Alert February 26, 2018

U.S. Supreme Court Restricts Reach of Dodd-Frank Whistleblower Protections

Summary

The Supreme Court has unanimously decided, in Digital Realty Trust, Inc. v. Somers, No. 16-1276, that the whistleblower protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 are only available to employees who bring information concerning violations of the securities law to the Securities and Exchange Commission, and are not available to employees who only report corporate wrongdoing internally. Following this ruling, employees who report complaints internally, as opposed to the SEC, are excluded from Dodd-Frank’s anti-retaliation protections, which may incentivize employees to forego internal reporting and instead bring information concerning violations of the securities law directly to the SEC.

On February 21, 2018, in Digital Realty Trust, Inc. v. Somers, the United States Supreme Court unanimously ruled that whistleblower protections under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) are only available to employees who bring information of corporate wrongdoing to the Securities and Exchange Commission (SEC). Employees who only internally report to a supervisor or through an internal corporate compliance program are not entitled to the anti-retaliation protections of Dodd-Frank.

The Anti-Retaliation Provisions of Dodd-Frank and SOX

Dodd-Frank created a bounty system designed to reward those who provide information to the SEC when that information leads to monetary penalties. The term “whistleblower” is specifically defined in Dodd-Frank as “any individual who provides . . . information relating to a violation of the securities laws to the [Securities and Exchange] Commission, in a manner established, by rule or regulation, by the [Securities and Exchange] Commission.” Dodd-Frank provides remedies for “whistleblowers” who are subjected to retaliation by their employers.

Eight years before Dodd-Frank was enacted, Congress passed the Sarbanes-Oxley Act of 2002 (SOX). Under SOX, employees of SEC-regulated entities are protected from retaliation if they report violations of securities laws and certain other misconduct to a supervisor, regardless of whether they also make a complaint to the SEC.

SOX differs markedly from Dodd-Frank. Among other differences, an employee who claims retaliation under SOX must file an administrative complaint with the United States Department of Labor within 180 days of the alleged retaliatory action in order to preserve his or her rights. By contrast, an employee who pursues a Dodd-Frank retaliation claim may file a lawsuit within six years of the alleged retaliation, and in some circumstances within an even longer period.

Despite the limited scope of the term “whistleblower” in Dodd-Frank, the SEC had construed Dodd-Frank’s anti-retaliation protections similarly to those of SOX, that is, to apply to individuals who report securities law violations internally, regardless of whether they make a report to the SEC.

Courts had differed concerning whether the SEC’s interpretation of Dodd-Frank’s anti-retaliation protections to apply to employees who make only internal reports was proper. For example, in Berman v. Neo@Ogilvy LLC, the U.S. Court of Appeals for the Second Circuit concluded in 2015 that Dodd-Frank’s protections apply to internal whistleblowers. The U.S. Court of Appeals for the Fifth Circuit, on the other hand, ruled in 2013 in Asadi v. G. E. Energy (USA), L.L.C. that employees must bring a complaint to the SEC to be a “whistleblower” protected by Dodd-Frank. The Supreme Court’s decision resolves the conflict.

The Digital Realty Trust Case

The Digital Realty Trust case arose out of the 2014 termination of Paul Somers (Somers) from employment with Digital Realty Trust, Inc. (Digital Realty), a publicly traded San Francisco-based real estate investment trust, which owns and develops data centers. Somers claimed he was fired in retaliation for an internal complaint he made to the company about a supervisor who had allegedly eliminated certain internal company controls in violation of SOX. Somers did not preserve his rights under SOX by filing the required administrative complaint with the Department of Labor within 180 days. Instead, seven months after the alleged retaliation, Somers filed a lawsuit in the U.S. District Court for the Northern District of California claiming protection under Dodd-Frank’s anti-retaliation provisions.  Predictably, Digital Realty moved to dismiss the complaint on the grounds that Somers was not a “whistleblower” because he never brought any concerns to the SEC.

Somers argued that he was protected under Dodd-Frank’s anti-retaliation provisions, despite having never reported his complaint to the SEC.  In 2017, the U.S. Court of Appeals for the Ninth Circuit agreed in Somers v. Digital Realty Trust, Inc., holding that Somers’ internal reporting entitled him to protection as a “whistleblower” under Dodd-Frank. The Ninth Circuit held that the statute was ambiguous.  In part in reliance on the SEC’s construction of Dodd-Frank, the Ninth Circuit concluded that the term “whistleblower” should be read two different ways, depending on whether the individual was seeking a bounty or was seeking the statute’s protection against retaliation. The Ninth Circuit held that individuals are required to provide information to the SEC to obtain a bounty as a whistleblower, but not to obtain protection from retaliation as a whistleblower.

Digital Realty petitioned for review. The Supreme Court (which granted certiorari to resolve the circuit split), reversed, holding instead that Dodd-Frank’s definition of “whistleblower” was both “clear and conclusive.” Writing for the Court, Justice Ruth Bader Ginsburg stated:  “Somers did not provide information ‘to the Commission’ before his termination . . . , so he did not qualify as a ‘whistleblower’ . . . [and] is therefore ineligible to seek relief.” Justice Ginsburg’s opinion held that this reading fulfilled the “core objective” of Dodd-Frank’s robust whistleblower program, which is “to motivate people who know of securities law violations to tell the SEC.” The Court concluded that SOX had a “more far-reaching objective” of promoting internal reporting. Because the two statutes have such different purposes, the Court concluded, the compass of their anti-retaliation protections is also different. The Court therefore rejected the SEC’s construction and held that Dodd-Frank’s anti-retaliation protections apply only to those who provide information about securities law violations to the SEC.

In reaching this conclusion, the Court rejected a contrary reading of the statute advanced by the United States, which had argued that Dodd-Frank’s whistleblower definition applies only to the statute’s award program, not to its anti-retaliation provision. The Court agreed that its plain-text reading of the statute undoubtedly shields fewer individuals from retaliation than the United States’ proffered reading, but it went on to note that Dodd-Frank nonetheless provides significant protections to internal whistleblowers. Additionally, because it held that “Congress has directly spoken to the precise question at issue,” the Court declined to award Chevron deference to the contrary view of the statute advanced by the SEC.

Implications for SEC-Regulated Entities and Employers

By narrowing the definition of whistleblowers to individuals who bring information to the SEC, the Court has excluded from Dodd-Frank protections the much larger group of employees who report wrongdoing only internally. The Digital Realty Trust ruling may therefore incentivize employees to forego internal reporting and instead bring information concerning violations of the securities law directly to the SEC. This development could deprive companies of the opportunity to address issues internally and increase the likelihood of facing an SEC investigation.

Additionally, by restricting the pool of employees entitled to whistleblower protections under Dodd-Frank, the Digital Realty Trust decision limits the use of Dodd-Frank as a vehicle for pursuing retaliation claims. Depending on when an employee sues and where the employee is located, employees may in some cases be precluded from pursuing retaliation claims. However, the decision should not affect employer conduct. Whistleblowers not covered under Dodd-Frank may remain protected under a variety of other anti-retaliation laws. SOX, as well as a patchwork of federal and state laws, prohibit retaliation for opposing or reporting unlawful activity. As a result, employers should continue to consult with counsel before taking any adverse action against employees who have reported alleged corporate wrongdoing, regardless of whether the report was internal or external.