Fifth Circuit’s Recent Dodd-Frank Whistleblower Ruling May Benefit Employers


In Brief

  • Decision contradicts regulatory guidance from the Securities and Exchange Commission and raises the prospect of employers facing fewer frivolous anti-retaliation lawsuits.
  • The ruling, however, may also encourage more employees to report alleged fraud directly to the Commission instead of internally to their employers.

The U. S. Court of Appeals for the Fifth Circuit ruled recently that the Dodd-Frank Act’s anti-retaliation provision protects only those employees who disclose allegedly fraudulent conduct to the Securities and Exchange Commission (“SEC’), not those employees who report alleged fraud internally to their employers.

In the case of Asadi v. GE Energy USA LLC, No. 12-20522 (5th Cir. July 17, 2013), Khaled Asadi, a former GE Energy USA LLC executive, reported allegedly fraudulent conduct to his employer involving a possible securities law violation. Asadi was fired thereafter and filed suit in February 2012. Prior to the suit, Asadi served as GE’s Iraq executive from September 2006 to June 2011. Asadi worked in the city of Amman, Jordan. From there he helped GE to coordinate with Iraq’s central government. In June 2010 Asadi learned that GE had hired an individual who was “closely associated” with Iraq’s senior deputy minister of electricity. Asadi alleged that the hiring had occurred to provide GE with a competitive advantage in its talks to secure a contract with Iraq’s electricity agency. Asadi reported his concerns to his immediate supervisor and to GE’s ombudsman for the region. Thereafter, Asadi received a negative performance review. He was fired in June 2011.

At the lower court, Asadi’s complaint was dismissed on the grounds that U.S. whistleblower legislation did not apply to events that occur overseas. Asadi appealed to the Fifth Circuit. The Fifth Circuit did not decide the issue of extraterritorial application of whistleblower legislation. Instead, the Fifth Circuit questioned whether Asadi could even count as a whistleblower because he had limited his reporting to internal channels.

To resolve this question, the Fifth Circuit looked to the language of the Dodd-Frank Act. The Dodd-Frank Act defines a whistleblower as any individual who discloses potential wrongdoing “to the commission.” A separate anti-retaliation provision of the Dodd-Frank Act, however, allows whistleblowers to sue their employers for retaliation in several situations, including if their activity is protected by the Sarbanes-Oxley Act. This separate anti-retaliation provision does not specifically require that the employee disclose the wrongdoing to the SEC before qualifying for the provision’s protection. The SEC responded to confusion over how these two provisions should be read together by issuing a final regulation. The regulation stated that whistleblowers include individuals who report internally to their employers and those individuals who report to the SEC. At least five federal district courts have ruled on the provision and have followed the SEC’s final regulatory guidance, finding the two provisions to be either ambiguous or conflicting and determining that the broader protection afforded to those reporting internally should control, but the Fifth Circuit ruled to the contrary.

Because the Fifth Circuit’s decision is the first to stray from the SEC’s regulatory guidance and from the decisions of the lower courts on the issue, it raises the possibility of a circuit split. Employees’ and plaintiffs’ attorneys, not surprisingly, favor the trend that appeared to be developing in the district courts, which permitted employees who reported internally to seek the protections of the Dodd-Frank Act. However, employers strongly favor the Fifth Circuit’s ruling, believing that it will stem the tide of frivolous anti-retaliation suits.

In reality, the decision may benefit the SEC despite the fact that it reverses the SEC’s regulatory guidance. The decision may actually encourage whistleblowers to report their conduct directly to the SEC rather than internally to their employers. This will serve the SEC’s goal of ferreting out fraud and corruption.

The case may also make the Dodd-Frank Act less attractive to attorneys seeking recourse for clients who fail to meet the requirements of the Sarbanes-Oxley Act. Sarbanes-Oxley requires a whistleblower to report his or her concerns to the Department of Labor and has a relatively short 180-day statute of limitations. The Dodd-Frank Act’s statute of limitations is 10 years. As a result, many employees who fail to report to the Department of Labor or who fail to meet the strenuous 180-day statute of limitations have sought relief under Dodd-Frank. The Fifth Circuit decision may limit the number of such actions and may make relief under Dodd-Frank and Sarbanes-Oxley more equivalent.

We will continue to report on developments on this issue as additional circuits decide it. The Third Circuit, the Fourth Circuit and other circuit courts in our Northeast footprint have yet to weigh in on the issue. While the trend looks positive for employers, the current state of the law suggests that employees who report internally may still seek relief under Dodd-Frank. Employers must guard against this possibility until such time as the relevant circuit or the U.S. Supreme Court decides the issue.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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