The Supreme Court narrowed the definition of the term "whistleblower" and excluded internal whistleblowers from the anti-retaliation protections provided under Dodd-Frank (see previous coverage). In Digital Realty Trust Inc. v. Paul Somers, the Supreme Court resolved a two-year split among Circuit Courts on whether whistleblowers who do not first provide information relating to a securities law violation to the SEC are protected by the anti-retaliation provisions in Dodd-Frank (a position adopted by the Ninth Circuit, Second Circuit and the SEC). The Supreme Court held they are not protected by those anti-retaliation provisions.

Mr. Somers was a former employee of Digital Realty Trust Inc. ("Digital Realty"). He was fired shortly after reporting suspected securities law violations by the company to senior management. He sued the company, alleging a claim of whistleblower retaliation. The company's chief argument was that Mr. Somers was not entitled to protection under Dodd-Frank. Specifically, the company argued that Mr. Somers was not a whistleblower within the meaning of Dodd-Frank's statutory language, which defines a whistleblower as an "individual who provides . . . information relating to a violation of the securities laws to the [Securities and Exchange] Commission" (15 USC 78u-6). Because Mr. Somers reported the alleged violations through internal channels only and did not make any reports to the SEC, the company claimed he was not entitled to protection under the statute.

The Supreme Court opinion, written by Justice Ruth Bader Ginsburg and joined by Justices Roberts, Kennedy, Breyer, Sotomayor and Kagan, relied on what it found to be clear statutory language, and held that the Dodd-Frank definition of whistleblower included only those who directly inform the SEC of potential securities law violations.

Commentary / Lex Urban

The Court read the statute according to its terms. However, the end-result should be fixed by legislation. Employees should be encouraged to first report problems internally. In fact, a large majority of the individuals who have received whistleblower awards from the SEC to date, first reported their concerns internally.

Internal reporting affords employers the opportunity to investigate the claims, assess their legitimacy, and take proactive remedial action where necessary including making self-disclosures to the SEC where appropriate. It seems likely that this process reporting internally first was contemplated by Congress in granting an internally reporting whistleblower 120 days priority from that date to report to the SEC.

The Court's ruling – really the statutory language undermines the benefits of using internal reporting mechanisms first and instead incentivizes employees to go directly to the SEC. As a result, the SEC could be inundated with frivolous or unsubstantiated suspicions of possible violations, companies won't reap the benefits of enhanced compliance programs designed to address whistleblower issues in a fair and legal manner, and employees who internally report possible violations are afforded fewer protections.

This comment was co-authored by Kendra Wharton.

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