Fifth Circuit Narrowly Construes the Definition of a Whistleblower under Dodd Frank

by NAVEX Global
Contact

Underscoring the Importance of Robust Internal Reporting Programs

Since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010, the compliance, finance and legal communities have carefully watched and dissected the law’s follow up rules and judicial rulings. This is especially true as they relate to:

  • the definition of who is a “whistleblower” and whistleblower protections; and
  • reporting rules for securities violations.

A major concern for employers was that whistleblower allegations under Dodd-Frank would spike as underperforming employees sought to prevent terminations for cause by seeking to trigger the protections of the whistleblower law.

The early rounds and five previous district courts had ruled that the definition of “whistleblower” under Dodd-Frank could apply to employees who only reported the securities violations to their employer and did not follow up with a report to the U.S Securities and Exchange Commission (SEC).

Recently, the U.S Court of Appeals for the Fifth Circuit disagreed.

So Will Dodd Frank Whistleblower Claims Decline?

Finally, employers may have a little news to cheer about. The Fifth Circuit ruled in Asadi vs. GE Energy (USA), LLC that because the plaintiff failed to report any information to the SEC, no whistleblower protection would apply to Asadi’s claim of wrongful termination. Asadi reported securities violations only to his employer, who terminated him one year later. 

The Fifth Circuit adopted the literal definition of “whistleblower” under Dodd-Frank. The Court quoted Dodd-Frank, Section 922, codified at 15 U.S.C. § 78u-6, which encourages individuals to provide information relating to a violation of U.S. securities laws to the SEC and:

“encourages such [securities] disclosures through two related provisions that:

(1) require the SEC to pay significant monetary awards to individuals who

provide information to the SEC which leads to a successful enforcement action;

and (2) create a private cause of action for certain individuals against employers

who retaliate against them for taking specified protected actions.”

If adopted by more courts, this stricter limitation on the definition of a Dodd-Frank whistleblower could have significant impact on reducing whistleblower claims under Dodd-Frank.  

The Hand That Giveth, Taketh Away – Will Asadi Erode the Incentive to Report Internally?

While employers may see a potential decline in Dodd-Frank whistleblower claims, there is a countervailing concern.  Will the Fifth Circuit decision provide employees with a clear incentive to skip internal reporting programs and proceed directly to the SEC?

Commissioner Troy Paredas highlighted the problem during a November 3, 2010, SEC meeting: "What will be the net impact on corporate conduct and legal compliance if individuals bypass a corporation's internal procedures for identifying, investigating and sanctioning unlawful activity in favor of reporting alleged violations to the SEC?" he said. "It would be unfortunate if, as result of the Dodd-Frank whistleblower program, effective corporate compliance programs were thwarted."

And what if Asadi Does not Carry the Day?

It remains to be seen if the Asadi decision will truly shift the tide in terms of the bar that is being set for plaintiffs on Dodd-Frank retaliation claims.  If other courts or the rule-making bodies side with the more expansive definition of whistleblower, employees may continue to seek to file claims with Dodd-Frank instead of the Sarbanes-Oxley Act of 2002 (SOX) under which many of these claims were previously filed.

For employees, if the broader interpretation continues, more whistleblower claims may be brought under Dodd-Frank which, for a whistleblower, has the benefit of:

  • providing 2x back pay (SOX is only 1x);
  • substantially longer statute of limitations for bringing claims (years versus days under SOX);
  • jurisdiction is in the federal district court versus state court; and
  • no requirement to first file with the Secretary of Labor and wait 180 days for a final decision.

Best Practices Regardless

Regardless of how the legal landscape shakes out, from a practical perspective, employers should be asking themselves what they can do to both help insulate their organizations from whistleblower claims under Dodd-Frank, as well as to continue to encourage early, internal reporting.         

  • Maintain a strong, effective  compliance program with regular communications to employees about:
    • their duty to speak up and report suspected misconduct
    • the organization’s commitment to address problems early on, and
    • The organization’s zero tolerance for retaliation.
    • Develop and communicate a Securities Policy and provide regular and impactful employee training;
    • Ensure that the company maintains a robust employee reporting system or helpline designed to identify and collect issues, especially securities violations, from employees, contactors, etc.
    • Have a helpline investigation and response plan to ensure that any terminations, especially securities violations, are not related to any retaliatory claims

Potential whistleblowers and employers alike will continue to closely monitor this development to see if it is an aberration or a trend toward further limits on the Dodd-Frank whistleblower law.

The practical reality is that most employees who perceive retaliation and bring claims against their organization – whatever the avenue – are not focused on the intricacies of the law or the continual directional shifts of the courts.  They are seeking relief and restitution, and escalating claims of retaliation have a devastating impact on workplace culture and drain precious internal time and resources.

Contributing Author: Randy Stephens

Written by:

NAVEX Global
Contact
more
less

NAVEX Global on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.