As we previously discussed, courts have struggled with determining the scope of the protections in Dodd-Frank’s anti-retaliation provisions. On the one hand, Dodd-Frank defines a “whistleblower” as any individual, or group of individuals, “who provide. . . information relating to a violation of the securities laws to the [SEC], in a manner established by. . . the [SEC].” But, a few subdivisions later, Dodd-Frank prohibits retaliation against a whistleblower “because of any lawful act done by the whistleblower. . . in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002. . . , [the Securities Exchange Act of 1934], section 1513 (e) of title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.” Recently, in connection with Liu v. Siemens A.G., which is pending before the Second Circuit, the SEC filed an amicus brief, arguing that Dodd-Frank’s whistleblower provision “protects any employee who engages in any of the whistleblowing activities specified in [15 U.S.C. § 78u-6(h)(1)(A)], irrespective of whether the employee separately reports the information to the [SEC].” If the SEC so persuades the Second Circuit, we could see a split with the Fifth Circuit’s recent first impression ruling that Dodd-Frank’s anti-retaliation provision only protects whistleblowers who report to the SEC.
In Siemens (previously discussed here) the plaintiff alleged that his former employer retaliated against him in violation of Dodd-Frank’s anti-retaliation provision after he raised concerns about an alleged kickback scheme that purportedly violated the FCPA. The U.S. District Court for the Southern District of New York dismissed the complaint principally on the basis that Dodd-Frank’s anti-retaliation provisions did not apply extraterritorially. And, in dicta, it briefly considered whether the plaintiff qualified as a “whistleblower” under Dodd-Frank since he did not report potential FCPA violations to the SEC until after his employment was terminated. The district court declined to decide the issue of whether the plaintiff qualified as a Dodd-Frank whistleblower. An appeal followed.
SEC Amicus Brief
The SEC filed an amicus brief in support of Liu’s appeal to the Second Circuit, arguing that courts should defer to SEC’s interpretation in Rule 21F-2(b)(1) that Dodd-Frank’s anti-retaliation provisions protect all individuals who disclose activity specified in Dodd-Frank regardless of whether they report directly to the SEC. In support, the SEC attempted to position Rule 21F-2 as a “carefully calibrated” response to concerns that Dodd-Frank’s bounty program undermined internal corporate compliance programs by incentivizing external reporting to the SEC.
At the outset, query whether the Second Circuit will reach this issue since the thrust of the Southern District of New York’s dismissal focused on whether Dodd-Frank’s anti-retaliation provisions extend to overseas whistleblowers. Moreover, by interpreting Dodd-Frank in a manner that protects individuals who never report to the SEC, Rule 21F-2’s “calibration” is at odds with the language in Dodd-Frank defining a “whistleblower” as an individual who provides specified information “to the [Securities and Exchange] Commission.”
The SEC’s amicus brief also asserts that the Fifth Circuit erred in concluding that Rule 21F-2 “renders the SOX anti-retaliation provision, for practical purposes, moot” because Dodd-Frank enables recovery of potentially greater monetary damages (e.g., double backpay), provides a substantially longer statute of limitations, and enables plaintiffs to bypass sue directly in federal court without exhausting administrative remedies. In rejoinder, the SEC contends that many whistleblowers might still prefer to pursue a claim under Section 806 of SOX over Section 922 of Dodd-Frank because of the lower cost and burden associated with SOX’s administrative procedures and the possibility of recovering for “pain and suffering” under SOX. Of course, employers are apt to conclude that the SEC’s interpretation effectively nullifies Section 806 of SOX, as it would enable a suit under Dodd-Frank for a violation of Section 806 of SOX, where one could head straight to federal court without exhausting administrative remedies and enjoy an unusually long statute of limitations and potentially recover double-backpay. What is more, though the SEC has indicated that it can exercise discretion to take internal reports into account in determining the size of a bounty award, the public (and employers in particular) still remains unaware of whether and how the SEC has actually considered internal reports in any of the awards it has issued thus far.
The Road Ahead
To date, the Fifth Circuit is the only federal circuit court to weigh in on whether the Dodd-Frank whistleblower protection provision applies where individuals only report internally. If the Second Circuit focuses on this issue in connection with its review of Siemens, its decision can have significant implications in terms of how broadly courts will interpret the scope of protected activity under Dodd-Frank and we could potentially see a circuit split that may reach the U.S. Supreme Court. Stay tuned.