United States: Supreme Court's Upcoming Whistleblower Decision May Dramatically Impact Compliance Programs

On November 28, 2017, the United States Supreme Court heard oral argument on whether whistleblowers are entitled to protection from retaliation under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act's ("Dodd-Frank") anti-retaliation provision even when they do not report wrongdoing to the Securities and Exchange Commission ("SEC").¹ Because this anti-retaliation provision bolsters the existing patchwork of federal and state laws protecting whistleblowers, the Supreme Court's forthcoming decision may have far-reaching implications on corporate compliance programs.

Background on Digital Realty Trust, Inc. v. Somers

The case before the Court, Digital Realty Trust, Inc. v. Somers, involves an employee who was terminated for reporting to senior management that his supervisor had eliminated internal controls in violation of the Sarbanes-Oxley Act of 2002 ("Sarbanes Oxley").² While the employee reported the alleged violations internally, he did not report them to the SEC. Before the Supreme Court granted certiorari on June 26, 2017, the Ninth Circuit Court of Appeals upheld the employee's ability to bring an anti-retaliation claim against his former employer under Dodd-Frank's anti-retaliation provision even though he only reported internally, stating that the provision "unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally."³ However, other circuit courts, including the Fifth Circuit Court of Appeals, have held that Dodd-Frank's anti-retaliation provision protects whistleblowers only when they report wrongdoing to the SEC.⁴

The disagreement among the circuit courts stems from interpretation of Section 21F(h)(1)(A)(iii) of the Securities Exchange Act of 1934 ("Exchange Act"), as promulgated under Dodd-Frank. This provision prohibits employers from retaliating against "whistleblowers" for, among other things, "making disclosures that are required or protected under" Sarbanes-Oxley, the Exchange Act, 18 U.S.C. § 1513(e), "and any other law, rule, or regulation subject to the jurisdiction of the Commission."⁵ Among other laws, rules and regulations, several provisions of Sarbanes-Oxley require or protect reporting of alleged securities violations internally, without regard to further reporting to the SEC.⁶

At the same time, Section 21F(a)(6) of the Exchange Act limits the definition of "whistleblower" to "any individual who provides . . . information relating to a violation of the securities laws to the Commission."⁷ In reading this definition of "whistleblower" together with Dodd-Frank's anti-retaliation provision, both of which were specifically enacted by the same legislation, some courts have held that whistleblowers who only report internally are not protected under the legislation.

The SEC, however, which issued a rule stating that internal whistleblowers are also subject to protections under Dodd-Frank in 2011, has taken the position that the Dodd-Frank's anti-retaliation protections cover whistleblowers regardless of whether they report to the SEC, and has urged deference to its interpretation because protecting internal reporters from retaliation is viewed as essential to its enforcement efforts.⁸

Justices Signal Strict Interpretation of Dodd-Frank During Oral Argument

Although the Supreme Court is not expected to issue a decision in this case until next year, the Justices' questions during the oral argument signal that they may be leaning towards the more restrictive view of Dodd-Frank's anti-retaliation provisions adopted by the Fifth Circuit and other courts.

During oral argument, Digital Realty Trust argued Dodd-Frank's plain language clearly protects whistleblowers, who are defined under the statute as only those who report wrongdoing to the SEC.⁹ Somers, on the other hand, argued that the SEC's rule deserves deference, that a narrow interpretation of Dodd-Frank's anti-retaliation provision is inconsistent with congressional intent, and that such an interpretation would provide those who report to the SEC with protection—even if the retaliation is unrelated to what they report to the SEC—while others would remain unprotected because they only reported internally.

The Justices focused heavily on the plain language of the statute, suggesting that while it may seem unfair that some employees will be protected simply because they report to the SEC, the plain language of a statute controls even though it leads to an anomalous result. The Justices also expressed some skepticism towards the SEC's rule and seemed critical of the SEC's failure to indicate that it intended to expand the definition of "whistleblower" in its notice of proposed rulemaking. Newly-appointed Justice Neil Gorsuch seemed particularly critical of the SEC's broad interpretation of Dodd-Frank, stating that "I'm just stuck on the plain language here" and asking how Congress could have been clearer in setting the standard for whistleblower protection. Justice Gorsuch also suggested that circuit courts should not have upheld the SEC's rule because doing so "allowed an agency to swallow a large amount of legislative power and judicial power in the process."

Takeaways

A ruling that Dodd-Frank does not protect employees who only report internally would significantly affect internal compliance programs by discouraging employees from reporting misconduct internally. Such a ruling would further incentivize employees to instead report potential misconduct immediately to the government in order to receive anti-retaliation protection as well as a potential bounty from the SEC's Whistleblower Program, which has already awarded more than $179 million to 50 whistleblowers over the past five years.¹⁰

Footnotes

1 Oral Argument, Digital Realty Trust Inc. v. Somers, No. 16-1276 (2017), https://www.supremecourt.gov/oral_arguments/argument_transcripts/2017/16-1276_i426.pdf.

2 Somers v. Digital Realty Trust Inc. et al., No. 15-17352 (9th Cir. Mar. 8, 2017), http://cdn.ca9.uscourts.gov/datastore/opinions/2017/03/08/15-17352.pdf.

3 Id. (emphasis added).

4 Asadi v. GE Energy USA LLC, No. 12-20522 (5th Cir. Jul. 17, 2013), at 15 (emphasis in original), http://www.ca5.uscourts.gov/opinions%5Cpub%5C12/12-20522-CV0.wpd.pdf.

5 15 U.S.C. § 78u-6(h)(1)(A)(iii).

6 See, e.g., Sarbanes-Oxley §§ 307 (requiring disclosures by attorneys to general counsel), 806 (protecting disclosures to a supervisor or compliance officer at a public company).

7 15 U.S.C. § 78u-6(a)(6) (emphasis added).

8 See Brief of the Securities and Exchange Commission, Amicus Curiae in Support of the Appellant and Reversal of the District Court, Verfuerth v. Orion Energy Sys., Inc., No. 16-3502 (7th Cir. May 5, 2017) (Amicus Brief), at 1, https://www.sec.gov/litigation/briefs/2017/verfuerth-vs-orion-energy-050517.pdf.

9 Oral Argument, Digital Realty Trust Inc. v. Somers, No. 16-1276 (2017), https://www.supremecourt.gov/oral_arguments/argument_transcripts/2017/16-1276_i426.pdf.

10 SEC Release, Former Company Insider Earns More Than $4.1 Million for Whistleblower Tip, Immediate Rel. 2017-222 (Dec. 5, 2017), https://www.sec.gov/news/press-release/2017-222.

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