Supreme Court Upholds Definition of 'Whistleblower' Under Dodd-Frank
The Supreme Court of the United States recently reversed the decision of the Ninth Circuit Court of Appeals in finding that the anti-retaliation provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) does not extend to individuals who do not report a securities law violation to the Securities and Exchange Commission (“SEC”). Digital Realty Tr., Inc. v. Somers, No. 16-1276, 2018 WL 987345, at *13-14 (U.S. Feb. 21, 2018). Dodd-Frank defines ‘whistleblower’ as “any individual who provides . . . information relating to a violation of the securities laws to the [SEC], in a manner established, by the rule or regulation, by the [SEC].” 15 U.S.C. § 78u-6(a)(6). Therefore, in order to receive protection from retaliation under Dodd-Frank, an attempted whistleblower must alert the SEC of the alleged violation. This position is in sharp contrast to the legislative scheme established under the Sarbanes-Oxley Act and its related interpretation.1
Petitioner Digital Reality Trust, Inc. (“Digital Realty”) terminated Respondent Paul Somers shortly after Somers alerted senior management of alleged securities violations by the company. Prior to his termination, Somers did not report his suspicions to the SEC or file an administrative complaint. Instead, Somers brought suit in the United States District Court for the Northern District of California against Digital Realty, asserting a claim of whistleblower retaliation under Dodd-Frank. The parties argued over what definition of ‘whistleblower’ was controlling; 15 U.S.C. § 78u-6(a)(6) (requiring individuals to report to the SEC) or 17 C.F.R. § 240.21F-2 (offering protection from retaliation even without reporting to the SEC). The District Court found the Dodd-Frank statute 15 U.S.C. § 78u-6(a)(6) to be ambiguous on the definition of ‘whistleblower’ and retaliation protections. Therefore, the District Court deferred to the SEC definition in 17 C.F.R. § 240.21F-2 and found in favor of Somers. On appeal, the majority in the Ninth Circuit held the definition of ‘whistleblower’ was clear in the statute, but found that requiring SEC reporting would absurdly narrow the protections for potential whistleblowers. The Ninth Circuit therefore affirmed and Digital Realty submitted a writ of certiorari to the Supreme Court of the United States. Due to the prominent circuit split on the definition of ‘whistleblower,’ certiorari was subsequently granted.
The definition of ‘whistleblower’ drafted by Congress in 15 U.S.C. § 78u-6(a)(6) is stated as “any individual who provides . . . information relating to a violation of the securities laws to the [SEC], in a manner established, by the rule or regulation, by the [SEC].” Digital Realty followed this definition, asserting Somers failed to qualify as a whistleblower because he did not report any alleged securities violations to the SEC. Somers cited 17 C.F.R. § 240.21F-2, promulgated by the SEC, which provides two different definitions of ‘whistleblower’ in the contexts of monetary awards for reporting violations and retaliation protection respectively. Under 240.21F-2(b), anti-retaliation protections apply “whether or not you satisfy the requirements, procedures and conditions to qualify for an award.” Therefore, attempted whistleblowers need not formally alert the SEC to qualify for protections. Somers asserted he was therefore considered a whistleblower, subject to protection from retaliation, and wrongfully fired from his employment.
The Supreme Court of the United States, in an opinion authored by Justice Ginsburg, began by distinguishing Dodd-Frank from the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). While both acts offer protection against retaliation for whistleblowers, Sarbanes-Oxley applies to “all ‘employees’ who report misconduct to the [SEC], any other federal agency, Congress, or an internal supervisor.” See Somers, 2018 WL 987345, at *1 (citing 18 U.S.C. § 1514A(a)(1)). Furthermore, Sarbanes-Oxley requires individuals to exhaust administrative remedies before filing a private cause of action and contains a complaint-filing deadline. The broad purpose of Sarbanes-Oxley, created in the aftermath of the Enron Corp. collapse, aims to encourage employees to report corporate misconduct in any appropriate manner. Dodd-Frank, contrastingly, restricts the definition of ‘whistleblower’ to those providing information on violations to the SEC. Dodd-Frank also permits a direct causes of action for retaliation without exhausting administrative remedies, has a longer statute of limitations, and offers the possibility of recovering double back pay.
The narrower purpose of Dodd-Frank, created after the 2008 financial crisis, aimed to promote transparency and oversight of financial systems by requiring reporting to the SEC. Dodd-Frank’s narrower purpose and greater flexibility distinguish it from Sarbanes-Oxley and suggest that reporting to the SEC is required under Dodd-Frank.
The Court found that the definition of ‘whistleblower’ in 15 U.S.C. § 78u-6(a)(6), which required reporting to the SEC, was intended to apply to the entirety of the Dodd-Frank act. The following clauses merely describe the protected conduct a whistleblower may engage in. Individuals who do not report alleged violations to the SEC are not, by definition, whistleblowers and therefore are ineligible for retaliation protections. This reading is supported by other provisions of Dodd-Frank. The Consumer Financial Protection Bureau, also created under Dodd-Frank, bars discrimination against a “covered employee” who provides information on misconduct to any number of overseeing authorities. In addition to following the plain definition provided, the Court also notes that these disparate provisions both contained within the Dodd-Frank framework reveal that Congress intended a difference in meaning and scope. Because the statute 15 U.S.C. § 78u-6(a)(6) was not ambiguous, Congress’s explicit directive supersedes the contrary provisions in 17 C.F.R. § 240.21F-2 authored by the SEC. Therefore, attempted whistleblowers must actually report suspected violations to the SEC in order to qualify for protection against retaliation.
Finding that the overall purpose of Dodd-Frank is to motivate individuals to report to the SEC to prevent misconduct in securities, the Supreme Court reversed for Petitioner Digital Realty. Respondent Paul Somers did not qualify as a whistleblower due to his failure to report to the SEC. The decisions of the Northern District of California and Ninth Circuit Court of Appeals were therefore overturned.
For further information about this case and other employment issues, contact John F. Fatino at 515-288-6041. Jackson G. O’Brien, J.D. candidate, assisted in the drafting of this article.
1For more information on the Sarbanes-Oxley Act’s whistleblower provisions, see Fatino, “The Sarbanes-Oxley Act of 2002 and the New Prohibition on Employer Retaliation Against Whistleblowers,” 51 South Dakota Law Review 450 (2006).