The Scope of Anti-retaliation Protections for Securities Whistleblowers

By

Jack Russo* and Umeet Sajjan**
Computerlaw Group LLP

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Introduction

            Whether the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) encompasses whistleblower protections for individuals who disclose securities violations internally, but do not report the violations to the Securities Exchange Commission (the “SEC” or the “Commission”), has divided the U.S. Circuit Courts. In 2013, the Fifth Circuit decided in Asadi v. G.E. Energy (USA), L.L.C.[1] that Dodd-Frank does not protect whistleblowers who make internal disclosures without additionally reporting violations to the SEC; whereas, in 2015, the Second Circuit decided the opposite in Berman v. Neo@Ogilvy LLC.[2] Nearly a year ago, the Ninth Circuit followed the Second Circuit’s position in Berman, issuing its decision in Somers v. Digital Realty Trust Inc.[3] This split of decisions set up the Supreme Court’s review.

            In 2014, Digital Realty Trust (“Digital Realty” or the “Company”) terminated Paul Somers after he made multiple internal reports to senior management concerning potential securities violations by the Company. Upon termination, Somers sued Digital Realty under Dodd-Frank’s whistleblower protections. Digital Realty moved to dismiss the case, asserting that Somers was not a “whistleblower” within the statutory meaning of Dodd-Frank because Somers failed to disclose his securities violation concerns externally to the SEC. The District Court denied Digital Realty’s motion to dismiss, and on appeal, the Ninth Circuit affirmed this decision, finding that Somers in fact did qualify as a “whistleblower” within the meaning prescribed by Dodd-Frank. Digital Realty filed a petition for certiorari. The Supreme Court issued its opinion on February 21, 2018.

I.     What is the Definition of a “Whistleblower”? 

Dodd-Frank states in its definition section that a “whistleblower” is someone who provides “information relating to a violation of the securities laws to the Commission. . . .” 15 U.S.C. § 78u–6(a)(6) (emphasis added). At the same time, this definition is followed by a clause permitting whistleblowers to make disclosures that are protected under the Sarbanes-Oxley Act of 2002 (“SOX”). 15 U.S.C. § 78u–6(h)(1)(A)(iii).

Dodd-Frank’s cross-reference to SOX is the root of the controversy: what constitutes a “whistleblower”, goes beyond reports to a federal regulatory or law enforcement agency and a member or committee of Congress, but also to “a person with supervisory authority over the employee.” 18 U.S.C. § 1514(A)(1). In other words, even though Dodd-Frank defines a “whistleblower” as an individual who makes SEC disclosures, Dodd-Frank also cross-references a statute that allows whistleblowers to include internal reporting as well.

While both the Ninth and Second Circuits found that this cross-reference of SOX made Dodd-Frank’s definition of “whistleblower” ambiguous, the Supreme Court disagreed. Relying on the precedent set forth by Burgess v. United States,[4] the Supreme Court found that the definition of “whistleblower” was clear and unambiguous in its limitation to protecting only individuals who make SEC disclosures. In other words, internal reporting alone does not suffice; there must be an external report to the SEC.

II.     Implications for Whistleblowers: Anti-Retaliation Protection.

In the absence of legislation clarifying the scope of Dodd-Frank, the Digital Realty decision makes it clear that in order to qualify for protections under Dodd-Frank, a whistleblower must externally disclose potential securities violations to the SEC.[5] That said, whistleblowers can still seek protection under SOX without making SEC disclosures.[6] However, the procedure for relief and the potential relief itself is distinct. Though SOX does not require an SEC disclosure, a SOX whistleblower has 180 days to file a complaint with the Secretary of Labor. If the Department of Labor has not issued a final decision within the required time, the whistleblower can then pursue the action in federal court for backpay with interest, reinstatement, and attorneys’ fees and costs. On the other hand, the relief under Dodd-Frank permits a six (6) year period to file a complaint in federal court, and can include double backpay with interest as well as reinstatement and attorneys’ fees and costs.[7] Ultimately, whistleblowers are left with a choice that determines the remedies they can seek for anti-retaliation. To disclose to the SEC, or to not disclose to the SEC, that is the question; how individuals choose between the two can make a material difference to the remedies available.

Copyright © 2018 by Computerlaw Group LLP

*Jack Russo, Esq., Managing Partner/**Umeet Sajjan

[1] See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013).

[2] See Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).

[3] See Somers v. Digital Realty Trust Inc., 850 F.3d 1045 (9th Cir. 2017).

[4] “When a statute includes an explicit definition, we must follow that definition.” Burgess v. United States, 553 U.S. 124, 130 (2008) (internal quotations marks omitted).

[5] Additionally, as discussed by the Court in Digital Realty, the SEC is required to protect the identity of whistleblowers who report securities violations to the Commission. 15 U.S.C. 78u–6(h)(2)(A).

[6] See 18 U.S.C. § 1514A(a)–(c).

[7] See 15 U.S.C. § 78u–6(h)(1)(B).

danielle russo