Ninth Circuit Widens the Circuit Split on Whether Dodd-Frank Protects Internal Whistleblowers

by BakerHostetler
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Last week, a divided panel of the Ninth Circuit Court of Appeals issued an opinion in Somers v. Digital Realty Trust, Inc., No. 15-17352 (9th Cir. March 8, 2017), in which it held that the anti-retaliation protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act apply to employees who have complained internally about potential securities law violations but have not reported that conduct to the SEC. Somers highlights the split among the U.S. courts of appeals, with the Ninth Circuit essentially adopting the reasoning of the Second Circuit in Berman v. Neo@Ogilvy, 801 F.3d 145 (2d Cir. 2015), which in turn contradicts the holding of the Fifth Circuit in Asadi v. G.E. Energy, 720 F.3d 620 (5th Cir. 2013), that the plain text of Dodd-Frank mandates that an employee report a securities law violation to the SEC to be covered by that statute’s anti-retaliation provision.

The inherent contradiction within Dodd-Frank’s anti-retaliation provision

Any discussion of this burgeoning rift between the federal appellate courts starts with the contradictory language of Dodd-Frank’s retaliation provision. Section 21F of the Act defines the term “whistleblower” as any individual who provides “information relating to a violation of the securities laws to the Commission.” 15 U.S.C. § 78u-6(a)(6). Dodd-Frank’s anti-retaliation provision, which appears later in Section 21F, prohibits an employer from retaliating against a “whistleblower” because he or she (i) provided information to the SEC, (ii) initiated or assisted in an SEC investigation or action, or (iii) made any “disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.” 15 U.S.C. § 78u-6(h)(1)(A). Thus, subdivision (iii) (which was added to the bill very late in the process and has no legislative history explaining its purpose) suggests that anti-retaliation protection is extended to any individual protected under SOX. Because SOX protects employees from retaliation for internally reporting potential securities law violations regardless of whether they complain to the SEC, however, subdivision (iii) appears to contradict Dodd-Frank’s more limited definition of whistleblower.

The SEC attempted to address this inconsistency in its final regulations in 2011, which provided that Dodd-Frank’s anti-retaliation provisions apply to employees whether or not they report information to the SEC, so long as they engage in protected activity under SOX. 17 CFR § 240.21F-2(b)(1). Thereafter, the SEC issued interpretive guidance in August 2015 reaffirming that view.

The circuit split

In Asadi, the Fifth Circuit declined to defer to the SEC’s interpretation of Section 21F. In ruling that a company executive who had internally reported his concerns (but had not reported them to the SEC) was not protected by Dodd-Frank’s anti-retaliation provision, the Asadi Court, after carefully examining the text of Section 21F, concluded that under the statute’s “plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.” The Court explained that though the three categories listed in the anti-retaliation provision represent activities that may be protected by the statute, they do not define which individuals qualify as whistleblowers under the unambiguous definition of that term contained in the definitional section of the statute. In other words, whistleblowers (individuals who complain to the SEC) are protected, but only if they engage in one of the three activities listed in the anti-retaliation provision. Notably, the Asadi Court declined to accord Chevron deference to the SEC’s 2011 final regulations construing Section 21F, rejecting the SEC’s “expansive interpretation” of the term whistleblower in light of Congress’ unambiguous statutory definition of that term.

In Berman, a divided panel of the Second Circuit took a decidedly different course. The Court initially framed the dispositive issue as to whether the “arguable tension” between the definition of whistleblower and the scope of anti-retaliation protection in Section 21F “creates sufficient ambiguity … to oblige us to give Chevron deference to the SEC’s rule.” The Court went on to express concern that limiting Dodd-Frank’s whistleblower protections to individuals who report potentially illegal conduct to the SEC would unduly limit the scope of the anti-retaliation provision, which, the Court reasoned, would be inconsistent with congressional intent in prohibiting retaliation against whistleblowers. The Court also noted that the more expansive definition was necessary to protect those individuals (auditors and attorneys) who are prohibited from reporting suspicions of illegal conduct to the SEC until after reporting internally. Ultimately, the Berman majority concluded that in its view, Congress did not intend to limit Dodd-Frank protection only to those individuals who report to the SEC, and that the statute was “sufficiently ambiguous to oblige us to give Chevron deference to the reasonable interpretation” of the SEC.

The Berman panel also supported its holding by comparing the issue it faced in interpreting Section 21F to the situation the Supreme Court addressed in King v. Burwell, 135 S.Ct. 2480 (2015), where the Court, in upholding the Affordable Care Act, concluded that the statutory phrase “established by the State” could be interpreted to mean “established by the State or by the Federal Government” in light of the Court’s view of the overarching intent of Congress in enacting the ACA. Similarly, the Berman Court reasoned that a literal interpretation of the term “whistleblower” would unduly narrow whistleblower protections, which would be contrary to what it believed to be the purpose of Dodd-Frank.[1]

Earlier this year, the Sixth Circuit Court of Appeals expressly declined to address the Asadi/Berman split in Verble v. Morgan Stanley Smith Barney, Case No. 15-6397 (Jan. 13, 2017). In that case, the district court had followed Asadi in dismissing the Dodd-Frank retaliation claim because the plaintiff had not complained to the SEC. The Sixth Circuit chose not to rule on that question, however, instead holding that the district court had properly dismissed the plaintiff’s claim because he had failed to allege sufficient facts to state a plausible claim for relief under Dodd-Frank.

The Somers case

In Somers, the plaintiff, a former executive of defendant Digital Realty Trust, filed a lawsuit under Dodd-Frank’s anti-retaliation provision, alleging that he was terminated for making internal complaints regarding possible securities law violations. Because the plaintiff had not reported his concerns to the SEC, the defendant filed a motion to dismiss the Dodd-Frank claim on the ground that the plaintiff was not a whistleblower under that statute. After analyzing the statutory text and conceding that “it is difficult to find a clear and simple way to read the statutory provisions of Section 21F in perfect harmony with one another,” the district court deferred to the SEC’s interpretation of the statute, denied the defendant’s motion to dismiss and certified the issue for interlocutory appeal. Somers v. Dig. Realty Tr. Inc., 119 F. Supp. 3d 1088, 1104 (N.D. Cal. 2015).

On appeal, the Ninth Circuit acknowledged the circuit court divide and, like the courts preceding it, discussed the contradictory language of Rule 21F. The Court reasoned that the fact that Dodd-Frank’s definitional provision defines “whistleblowers” as individuals who report to the SEC “should not be dispositive of the scope of [Dodd-Frank’s] later anti-retaliation provision.” Citing King v. Burwell, the Somers panel observed that terms can have different operative consequences in different contexts and that, accordingly, the use of a term in one part of a statute may mean a different thing “in a different part, depending on context.” The Somers panel went on to stretch the King rationale almost to the breaking point, ruling that given its view of congressional intent in enacting Dodd-Frank, Section 21F “unambiguously and expressly” protects both those individuals who report to the SEC and those who complain internally. The Court also held that even if the statutory definition of whistleblower “creates uncertainty,” the SEC’s interpretive regulations “resolved any ambiguity” and are entitled to Chevron deference because the SEC’s view is consistent with congressional intent.

In a pithy dissent, Judge John B. Owens cited John Carpenter’s 1982 film The Thing in observing that “we should quarantine King and its potentially shapeshifting nature to the specific facts of that case to avoid jurisprudential disruption on a cellular level.”

Looking ahead

It is unclear whether this split among the federal circuits will find its way to the Supreme Court to resolve.[2] It is even less clear which direction the Court would take if that issue is presented for review. Judge Gorsuch, assuming he is confirmed, has demonstrated that he is no fan of Chevron deference, and his addition to the Court may increase the chance that a majority will interpret Dodd-Frank’s terms consistent with their plain meaning. On the other hand, Chief Justice Roberts and Justice Kennedy (who is widely rumored to be contemplating retirement after this term) sided with the Court’s reliably liberal wing in King, though it is an open question whether they would take a similar view in a case arising in a less politically charged context.

It also remains to be seen whether the SEC will revisit its interpretive guidance on the coverage of Dodd-Frank’s anti-retaliation provision under its new leadership and/or whether legislative attempts to overhaul Dodd-Frank will impact the statute’s whistleblower definition.

Implications for employers

The implications of this issue for employers covered by SOX and Dodd-Frank are decidedly mixed. On the one hand, if the Berman view prevails, employees who complain internally about potential securities law violations but do not report to the SEC will nevertheless be covered by Dodd-Frank’s more employee-friendly features, which include a direct right of action in federal court (as opposed to SOX’s requirement that the administrative remedial scheme first be exhausted), double back pay and a much longer statute of limitations than provided in SOX. On the other hand, if the Asadi view is adopted, employees (particularly those who seek advice of counsel) may be encouraged to report to the SEC to obtain additional Dodd-Frank protections, a circumstance most employers certainly prefer to avoid. Regardless of how this issue ultimately is resolved, employers are advised to continue to ensure that their corporate policies and procedures encourage employees to complain internally about potential unlawful conduct by the company without fear of reprisal and to address those complaints swiftly and effectively before the regulators become involved.


[1] The federal district courts continue to reflect the circuit split. Compare Sykes v. Cooper-Standard Automotive, Inc., 2016 WL 6873395 (E.D. Mich. Nov. 22, 2016) (following Asadi) with Lamb v. Rockwell Automation, Inc., 2016 WL 4273210 (E.D. Wis. Aug. 12, 2016) (following Berman).
[2] The plaintiff in Verble filed a petition for certiorari in late January 2017, which cited the Asadi/Berman split as an issue warranting review. It is unlikely, however, that the Court will elect to hear that case, given that the Sixth Circuit declined to rule on that 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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