The 5th Circuit Court of Appeals has limited the application of the whistleblower protections under the Dodd-Frank Act of 2010 (Dodd-Frank) to only those employees who file complaints directly with the Securities and Exchange Commission (SEC). The court ruled that an employee who complains to a supervisor or by using an internal whistleblower hotline, and not to the SEC, is not protected under Dodd-Frank. Although the decision can be considered pro-employer in the short term, the court's ruling may encourage employees to forego internal reporting mechanisms in favor of making external agency complaints, resulting in greater risks of regulatory investigations or lawsuits for employers.
In Asadi v. G.E. Energy United States, L.L.C., 2013 U.S. App. LEXIS 14470 (5th Cir. July 17, 2013), an employee assigned to the employer's Amman, Jordan, location alerted his supervisor and the corporate regional ombudsperson to potential violations of the Foreign Corrupt Practices Act. The employee then received a poor performance appraisal and was terminated within one year of making the internal reports. The employee filed a lawsuit against his employer, citing violations of Dodd-Frank's whistleblower protections.
The lower court dismissed the case, explaining that Dodd-Frank's whistleblower protections did not apply to employees or activities outside of the US. The employee appealed.
In reviewing the case, the 5th Circuit focused on Dodd-Frank's legal definition of whistleblower, which means "any individual who provides . . . information relating to a violation of the securities laws to the [SEC]." 15 U.S.C. § 78u-6. The court ruled that this definition was the most important factor in determining the legal meaning of whistleblower and rejected the contrary guidance contained in the SEC's own regulations.
In reaching its decision, the 5th Circuit also rejected the legal interpretations of various federal district courts. These lower courts had ruled that Dodd-Frank's whistleblower protections apply to employees who make internal reports regarding securities violations, even if they do not make disclosures to the SEC.
It remains to be seen whether other circuit courts will follow the 5th Circuit's reading of Dodd-Frank's definition of whistleblower. In addition, the court did not resolve the issue of whether Dodd-Frank's whistleblower protections apply to employees or activities outside of the US.
Because Dodd-Frank's provisions allow for whistleblowers to reap bounties (a court award of 10 to 30 percent of any monetary penalties collected), employers will likely continue to defend against employee lawsuits and agency probes. Based on these liability risks, employers should continue to stress the integrity and efficacy of internal compliance programs.