UPDATE: Ninth Circuit Holds Dodd-Frank Protects Internal Corporate Whistleblowers From Retaliation
Published by Brad W. Goldstein and Eric A. Welter on June 27, 2017
The recent decision in Somers v. Digital Realty Trust widens the circuit split on Dodd-Frank’s whistleblower protections.
UPDATE: On Monday, June 26, 2017, the U.S. Supreme Court agreed to review the Ninth Circuit’s decision in Somers.
Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) and the Sarbanes-Oxley Act of 2002 (SOX) in response to financial crises—one in response to the Enron scandal in 2001 and one following the 2009 financial collapse. Both laws include strong incentives and protections for employees who report misconduct. For example, under Dodd-Frank, potential remedies include double back pay. Despite these aims, courts around the country and the SEC have been grappling with the question of what an employee must do to receive this protected whistleblower status.
Although Dodd-Frank and SOX have similar anti-retaliation provisions, Dodd-Frank defines a whistleblower as someone who provides information relating to a violation of the securities laws to “the [Securities and Exchange] Commission.” While this seems straightforward, the anti-retaliation provision of Dodd-Frank cross-references portions of the SOX whistleblowing provisions, which protect internal whistleblowers.
In Somers v. Digital Reality Trust, No. 15-17352 (9th Cir. March 8, 2017), the Vice President of Digital Realty Trust alleged he was terminated after making reports to senior management about potential securities laws violations regarding the elimination of internal controls. Somers did not report this potential violation to the SEC. The court held that a whistleblower does not have to report to the SEC to receive protection from retaliation under Dodd-Frank. The court viewed the statute as ambiguous and deferred to the SEC’s regulation, 17 C.F.R. §, 240.21F-2, which clarified that internal whistleblowers do receive protection under Dodd-Frank. The court interpreted the Dodd-Frank anti-retaliation provision more broadly in an attempt to harmonize the cross-references to the SOX anti-retaliation provision, which covers purely internal complaints to supervisors. The court’s reasoning was that the SEC’s interpretation of the legislative intent of the statute because it would be illogical to cross-reference the SOX whistleblowing provisions but limit protection only to employees who report to the SEC.
Not all courts have shared this interpretation, however. The Second Circuit held that the anti-retaliation provision applies to internal whistleblowers in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Circ. 2015). On the other hand, the Fifth Circuit ruled the opposite in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013). The Ninth Circuit decision widens the circuit split and further increases the likelihood that the U.S. Supreme Court will take on the issue.
Employers should take precautions to avoid retaliatory actions against an employee who makes a disclosure of potential violations of SOX and other law, rules, and regulations, even if that employee has not made any disclosures to the SEC. Employers may be subject to damages, including double back pay, for violations of Dodd-Frank’s anti-retaliation provision. Employers should keep an eye on this issue as the circuit split could result in a U.S. Supreme Court decision on the issue.Topics: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Sarbanes-Oxley Act of 2002, SEC, Somers v. Digital Realty Trust, SOX