SUPREME COURT CLARIFIES DODD-FRANK ‘WHISTLEBLOWER’ DEFINITION
In an opinion issued February 21, 2018, the United States Supreme Court clarified the class of employees eligible for whistleblower protection under the Dodd-Frank Act. In Digital Realty Trust, Inc. v. Paul Somers, the Court unanimously found that, to qualify as a “whistleblower” protected from retaliation under Dodd-Frank, an employee must have provided information to the Securities Exchange Commission (SEC) relating to a violation of securities laws. The Court’s decision overturns the Ninth Circuit’s ruling, which found Dodd-Frank whistleblower protections applicable to an employee who had reported securities misconduct internally, but who had not provided any information to the SEC.
Somers arises from the termination of Mr. Somers’ employment by his former employer, Digital Realty, allegedly in retaliation for Mr. Somers’ internal reporting of securities law violations by his supervisor. Following the termination of his employment as a Portfolio Management Vice President, Mr. Somers filed a complaint against Digital Reality in Federal District Court. Mr. Somers alleges in his complaint that his termination by Digital Reality amounts to unlawful retaliation in violation of Dodd-Frank’s whistleblower protections. Importantly, Mr. Somers neither provided any information about the alleged misconduct to the SEC, nor did he file an administrative complaint under the Sarbanes-Oxley Act, which offers similar protection for corporate whistleblowers.
Digital Reality moved the District Court to dismiss Mr. Somers’ complaint on the grounds that he does not meet the definition of “whistleblower” set forth in Dodd-Frank because he had not reported any of the alleged misconduct to the SEC – he had only reported the alleged misconduct internally. The District Court denied the motion to dismiss, and the 9th Circuit upheld the lower court’s ruling. The Circuit Court cited its obligation to give deference to regulations adopted by the SEC, which, in the case of Dodd-Frank, set forth a broader definition of ‘whistleblower’ by including individuals protected under the Sarbanes-Oxley Act’s antiretaliatory provisions applicable to internal reporting of misconduct.
The U.S. Supreme Court granted certiorari at Digital Reality’s request in an effort to resolve the inconsistency between the definitions of “whistleblower” set forth in the SEC’s implementing regulations and the statutory text of the Dodd-Frank Act itself. The Court noted that the varying definitions had resulted in a split among the federal circuit courts. A prior Fifth Circuit decision limited application of Dodd-Frank’s whistleblower protection to individuals who have reported misconduct to the SEC, while the Ninth and Second Circuits have both adopted the broader definition found in the SEC’s regulations, as urged by Mr. Somers. Numerous amicus briefs were filed on behalf of both Digital Reality and Mr. Somers. Most notably, the United States Chamber of Commerce and Cato Institute argued in support of the narrower definition favored by Petitioner Digital Realty, while the National Whistleblower Center, Senator Charles Grassley, and the Trump Administration’s Solicitor General supported the broader reading preferred by Mr. Somers.
In delivering the Court’s decision, Justice Ginsburg noted that both the Sarbanes-Oxley and Dodd-Frank Acts protect whistleblowers from retaliation, but the two statutes include important differences. Significantly, where Sarbanes-Oxley protects employees who report misconduct to the SEC, other agencies, Congress, or internally, Dodd-Frank “defines ‘whistleblower’ to mean a person who provides ‘information relating to a violation of the securities laws to the Commission.’” Though Sarbanes-Oxley protects a more expansive class, it also limits litigation by requiring exhaustion of administrative remedies before a civil complaint can be filed and imposing a 180-day limitations period on whistleblower actions. Dodd-Frank, on the other hand, allows plaintiffs immediate access to district court, with a more generous six-year statute of limitations.
The question before the Supreme Court was whether an individual meeting the wider definition of “whistleblower,” as adopted in the SEC regulations, but who did not report any misconduct to the SEC, qualifies as a “whistleblower” under Dodd-Frank. Justice Ginsburg’s opinion unambiguously rejected the SEC’s expanded definition adopted by the Ninth Circuit, in favor of the narrower plain text of the statute. “The definition section of the statute supplies an unequivocal answer,” the Court held, “a ‘whistleblower’ is ‘any individual who provides . . . information relating to a violation of the securities laws to the Commission’. . . leaving no doubt as to the definition’s reach…” And a plaintiff who is not a “whistleblower,” as statutorily defined, may not assert an action under Dodd-Frank, “regardless of the conduct in which that individual engages.”
Whereas the lower courts deferred to the SEC’s regulations under the oft-cited Chevron standard, the Supreme Court found that “Congress has directly spoken to the precise question at issue,” and, therefore, deference to the regulations was unwarranted. “When a statute includes an explicit definition,” Justice Ginsburg noted, “we must follow that definition.” The opinion also finds support for the Court’s conclusion in the Dodd-Frank Act’s legislative history, which specifies that the purpose of the Act’s whistleblower program is “to motivate people who know of securities law violations to tell the SEC.” In his concurrence, Justice Thomas, while agreeing with the result overall, pointedly rejected the use of legislative history in interpreting statutes passed by Congress.
The Court acknowledged an argument, advanced by the Solicitor General, that the narrower definition would “shrink to insignificance the [clause’s] ban on retaliation.” However, the Court emphasized that whistleblower protection remains available under the Sarbanes-Oxley Act and other federal statutes. Further, according to the Court, the Solicitor General’s interpretation “raises an even thornier question about the law’s scope” in that it would potentially provide protection under Dodd-Frank to employees who report information unconnected to securities law. And, as Justice Ginsburg noted in the opinion, “[i]t would make scant sense, however, to rank an FBI drug-trafficking informant a whistleblower under Dodd-Frank, a law concerned only with encouraging the reporting of ‘securities law violations.’”
The Somers decision makes clear that whistleblower protection under Dodd-Frank is only available to individuals who have provided information relating to a securities law violation to the SEC. Importantly, though, a Dodd-Frank whistleblower action may still be pursued based upon adverse action taken by an employer in retaliation for internal reporting, as long as the plaintiff also reported misconduct to the SEC.