Rejecting the Securities and Exchange Commission’s (“SEC” or the “Commission”) and the Ninth Circuit’s application of the anti-retaliation provision created by the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the United States Supreme Court on January 21, 2018 issued an opinion in Digital Realty Trust, Inc. v. Somers, No. 16-1276 (583 U.S. __ (2018)), holding that the whistleblower anti-retaliation provisions of Dodd-Frank apply only to those who bring potential securities violations to the SEC. In reversing the judgment of the Ninth Circuit Court of Appeals, the Supreme Court’s ruling resolves a circuit split and incentivizes employees to raise issues with the SEC rather than sounding the alarm internally.
Paul Somers was employed as a Vice President at Digital Realty Trust, Inc. (“Digital Realty”) from 2010 to 2014. Somers, slip op. at 7. Somers alleged that he was fired soon after reporting to senior management suspected securities-law violations by Digital Realty. Id. Somers did not report his concerns to the SEC. Id. at 8. After his termination, Somers sued Digital Realty in the United States District Court for the Northern District of California, alleging, inter alia, a whistleblower-retaliation claim under Dodd-Frank. Id. Digital Realty moved to dismiss the retaliation claim, arguing that Somers did not qualify as a whistleblower under Dodd-Frank because he made no report to the SEC—he only reported possible violations internally. Id. The district court observed that Rule 21F-2—promulgated by the SEC as guidance on Dodd-Frank whistleblower retaliation claims—does not require reporting to the SEC before gaining whistleblower status. Id. Finding the statutory scheme ambiguous, the district court denied the motion to dismiss, affording deference to the SEC’s rule under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837 (1984). Id. Splitting with the Fifth Circuit,1 a divided panel of the Ninth Circuit affirmed the district court’s order. Somers v. Digital Realty Tr. Inc., 850 F.3d 1045, 1051 (9th Cir.), cert. granted, 137 S. Ct. 2300, 198 L. Ed. 2d 723 (2017), and rev’d and remanded, (U.S. Feb. 21, 2018). While acknowledging that Dodd-Frank’s definitional provision describes a “whistleblower” as an individual who provides information to the SEC itself, the majority reasoned that applying that definition to the anti-retaliation provision would narrow it “to the point of absurdity.” Id. at 1049. The Court further determined that the SEC’s resolution of any statutory ambiguity warranted deference. Id. at 1050.
Dodd-Frank was enacted in 2010, in the wake of the financial crisis, to “promote the financial stability of the United States by improving accountability and transparency in the financial system.” 124 Stat. 1376. To increase accountability, Dodd-Frank included “a new, robust whistleblower program designed to motivate people who know of securities law violations to tell the SEC” and afforded protection against employment discrimination for whistleblowers. S. Rep. No. 111–176, pp. 38, 111¬-12 (2010). This protection is found in 15 U. S. C. § 78u-6.
Interpreting the meaning of “whistleblower” under Dodd-Frank, the Supreme Court determined that “[t]he definition section of the statute provides an unequivocal answer: A ‘whistleblower’ is ‘any individual who provides . . . information relating to a violation of the securities laws to the Commission.” Somers slip op. at 9 (quoting 15 U. S. C. § 78u-6(a)(6)). The Court explained that this definition undoubtedly applies to the anti-retaliation provision because the “statute instructs that the ‘definitio[n] shall apply’ ‘in this section,’ that is, throughout 15 U. S. C. § 78u-6.” Id. The Court further explained that the whistleblower definition describes who is eligible for anti-retaliation protection—whistleblowers who provide pertinent information to the SEC—while Section § 78u-6(h)(1)(A) describes the protected conduct of whistleblowers. Id. at 10. But qualifying as a whistleblower is a threshold issue—“an individual who falls outside the protected category of ‘whistleblowers’ is ineligible to seek redress under the statue, regardless of the conduct in which that individual engages.” Id.
The Court cited the purpose and design of Dodd-Frank as corroboration of its interpretation. Id. at 11. Section 78u-6 provides substantial monetary and employment discrimination protection as part of Dodd-Frank’s “core objective”—“to motivate people who know of securities law violations to tell the SEC.” Id. (quoting S. Rep. No. 111–176, at 38 (emphasis added)).2 The Court highlighted the incentives provided by Dodd-Frank reporting—such as “immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double backpay”—that are not available under Sarbanes-Oxley, another statute designed to encourage and protect whistleblowers that does not require reporting to the SEC. Id. at 11.
In reaching its conclusion, the Court rejected concerns raised by Somers and the Solicitor General that applying Dodd-Frank’s “whistleblower” definition to the statute’s anti-retaliation provision would “vitiate much of the [statue’s] protection.” Id. at 13 (quoting Brief for United States as Amicus Curiae 20); see also id. at 13-18. The Court also refused to accord deference to the SEC’s contrary interpretation in Rule 21F-2, explaining that the “statute’s unambiguous whistleblower definition, in short, precludes the Commission from more expansively interpreting that term.” Id. at 19.
Dodd-Frank protections are now limited to whistleblowers who go to the SEC. While Dodd-Frank protections will still be available to those who raise concerns both internally and to the SEC, employees will be protected only if they contact the SEC before retaliation occurs. And no protection will be provided to employees who raise a potential violation solely internally. But Dodd-Frank is not the only law that provides protection to whistleblowers. Sarbanes-Oxley, as well as a patchwork of state and common law, also safeguard those who report misconduct legitimately and in good faith. Modern corporate governance, through formal policies and business culture, provides more protection.
However, the incentives provided in Dodd-Frank may play a role in an employee’s evaluation of how to blow the whistle. For example, under Sarbanes-Oxley, whistleblowers must first seek administrative relief and have a 180-day administrative complaint-filing deadline. See 18 U.S.C. § 1514A(b)(1)(A), (2)(D). And recovery under Sarbanes-Oxley is limited to actual backpay and interest. 18 U. S. C. § 1514A(c)(2)(B). In contrast, under Dodd-Frank, whistleblowers may sue current or former employers in federal court and have six years to do so. See 15 U.S.C. § 78u–6(h)(1)(B)(i), (iii)(I)(aa). Moreover, prevailing parties are entitled to double backpay with interest. 15 U.S.C. § 78u–6(h)(1)(C)(ii).
Ultimately, this decision may affect corporate America’s ability to address concerns in-house. Now more than ever, whistleblowers will be advised to bring their concerns to the SEC rather than raise them internally—or to at least contact the SEC before contacting their employers. This puts a premium on developing a corporate culture that encourages employees to come to the company first when an issue emerges. This type of culture has the added benefit of allowing a company to address concerns and develop any remediation plans internally without the added pressure and expense of an SEC investigation.
1 The Court of Appeals for the Fifth Circuit “has held that employees must provide information to the SEC to avail themselves of Dodd-Frank’s anti- retaliation safeguard.” Somers slip op. at 9 (citing Asadi v. G. E. Energy (USA), L. L. C., 720 F. 3d 620, 630 (2013)).
2 Justices Thomas, Alito, and Gorsuch concurred in the judgment based on the plain-language of the statute but rejected reliance on the Senate Report by the opinion of the Court. Id. at 1 (Thomas, J., concurring in the judgment). Justices Sotomayor and Breyer, in turn, “disagree[d] with the suggestion in [Justice Thomas’s] concurrence that a Senate Report is not an appropriate source for this Court to consider when interpreting a statue.” Id. at 1 (Sotomayor, J., concurring)
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