Second Circuit Holds Dodd-Frank Whistleblower Provision Does Not Apply Extraterritorially

Last week, in Liu v. Siemens, AG, the Second Circuit held that the Dodd-Frank Act’s whistleblower retaliation provision (15 U.S.C. 78u-6(h)(1)) does not apply extraterritorially, in the first Second Circuit decision to address the international scope of Dodd-Frank’s whistleblower protections against retaliation. Liu, a citizen and resident of Taiwan, was a compliance officer for Siemens China Ltd., a wholly owned subsidiary of Siemens AG.  Siemens AG is a German corporation with shares listed on the New York Stock Exchange. Liu claimed Siemens wrongfully terminated his employment in retaliation for reporting that Siemens China Ltd. employees were making improper payments to Chinese officials in North Korea and China in connection with the sale of medical equipment in those countries, in violation of the Foreign Corrupt Practices Act (“FCPA”).

The district court dismissed Liu’s claims based on dual holdings that (1) Dodd-Frank’s whistleblower provision does not apply extraterritorially, and (2) Liu’s reporting of FCPA violations was not “required or protected” under the Sarbanes-Oxley Act. The district court declined to address Siemens’ additional argument (3) that Liu was not a protected “whistleblower” under Dodd-Frank because he only made reports internally to Siemens management and not to the SEC.

On appeal, the Second Circuit affirmed the dismissal of Liu’s complaint exclusively on the ground that Liu sought an extraterritorial application of the Dodd-Frank Act that could not be supported under Morrison v. Nat’l Australian Bank Ltd., 561 U.S. 247 (2010). The court first explained that the facts as alleged by Liu could not be construed to state a domestic application of the Dodd-Frank Act, rejecting Liu’s argument that Siemens’ listing of securities on an American exchange served to establish the requisite domestic link. “Far from helping Liu, Morrison establishes that where a plaintiff can point only to the fact that a defendant has listed securities on a U.S. exchange, and the complaint alleges no further meaningful relationship between the harm and those domestically listed securities, the listing of securities alone is the sort of ‘fleeting’ connection that ‘cannot overcome the presumption against extraterritoriality.’”

The court next analyzed whether Dodd-Frank’s antiretaliation provision had extraterritorial application and held that “there is absolutely nothing in the text of the provision… or in the legislative history of the Dodd-Frank Act, that suggests that Congress intended the antiretaliation provision to regulate the relationships between foreign employers and their foreign employees working outside the United States.” In response to Liu’s argument that the whistleblower bounty provisions of Dodd-Frank apply to foreign whistleblowers and that the retaliation provision should therefore be construed consistently, the Second Circuit explained, “even if we assume that the [SEC] regulations clearly apply the bounty program to whistleblowers located abroad and that some deference would be due such an agency interpretation, it would not follow that Congress intended the antiretaliation provision to apply similarly.”

In resting its holding exclusively on extraterritoriality grounds, the Second Circuit declined to reach at least two other important questions under Dodd-Frank that were raised on the appeal. First, the court did not address whether the district court correctly concluded that SOX’s whistleblower provision does not “require or protect” disclosures of FCPA violations. Second, the court did not weigh in on the much-debated question of whether internal reporting to company management is protected under Dodd-Frank, an issue that has split courts to date and for which the SEC submitted an amicus brief in support of such coverage. These questions will wait for another day.

In all, the Second Circuit’s decision in Liu offers a welcome, though not surprising, interpretation of Dodd-Frank’s whistleblower retaliation provisions for multinational companies doing business in New York that will no doubt influence other circuit courts faced with the issue in the future. While the retaliation protections of Dodd-Frank have been limited by this case, it is important to note that the ability to recover a bounty under Dodd-Frank for reporting wrongdoing to the SEC is not limited to whistleblowers within the United States. As the SEC’s annual reports of whistleblower activity have indicated, more than 10% of the 3,000 + tips received by the Office of the Whistleblower each year come in from whistleblowers located outside of the United States.

 

Topics:  Anti-Retaliation Provisions, Chief Compliance Officers, Dodd-Frank, Extraterritoriality Rules, FCPA, Popular, Sarbanes-Oxley, Siemens, Whistleblowers

Published In: Civil Procedure Updates, Finance & Banking Updates, International Trade Updates, Labor & Employment Updates, Securities Updates

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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