Limiting the Scope of Anti-Retaliation Measures: The Supreme Court Narrows the Definition of the term “Whistleblower” Under the Dodd-Frank Act

by Snell & Wilmer

Snell & Wilmer

In a unanimous decision, the Supreme Court stated the “Dodd-Frank’s text and purpose leave no doubt” about who the term “whistleblower” applies to, holding that whistleblower protection in the Dodd-Frank Act only covers employees who first report securities laws violations to the United States Securities and Exchange Commission (“SEC”). Writing for the majority, Justice Ruth Bader Ginsburg referenced the definition section of the statute, stating: “A ‘whistleblower’ is ‘any individual who provides . . . information relating to a violation of the securities laws to the Commission.’” Accordingly, “Dodd-Frank’s anti-retaliation provisions does not extend to an individual . . . who has not reported a violation of the securities laws to the SEC.”

In Digital Realty Trust Inc. v. Somers, plaintiff Paul Somers worked for San Francisco-based Digital Realty Trust, Inc., a real estate investment trust that owns data centers worldwide. Mr. Somers made internal complaints to senior managers, accusing his boss of various securities laws violations, including hiding millions of dollars in cost overruns, granting no-bid contracts, and making payments to friends. Following the allegations, Digital Realty Trust terminated Mr. Somers’ employment. He then filed a lawsuit against Digital Realty Trust, claiming, among other things, that his termination was retaliation in violation of the Dodd-Frank Act. The Ninth Circuit found that Mr. Somers was entitled to protection under Dodd-Frank, even though he did not make complaints to the SEC, because he complained to upper management that his boss eliminated some internal corporate controls, violating the Sarbanes-Oxley Act.

The Supreme Court’s decision settled a circuit split between the Fifth and Ninth Circuit, reversing the Ninth Circuit’s decision. In a similar 2013 case, the Fifth Circuit found that whistleblowers must first take their complaints to the SEC to be eligible for protections under the Dodd-Frank Act.

Implications for Employers and Reporting Employees

Following the 2008 financial crisis, Congress passed the Dodd-Frank Act in 2010 to protect whistleblowers from being fired, demoted, or harassed for reporting legal violations to the SEC. The Court’s ruling significantly limits the scope of whistleblower protection under the Dodd-Frank Act. To be protected by anti-retaliation measures afforded under the Dodd-Frank Act, employees must first bring securities law complaints to the SEC. This means that if the employee “reports up” to their company’s management, but fails to “report out” to the SEC, the employee will not be afforded Dodd-Frank protection.

While employees reporting issues to their company’s upper management are still protected against retaliation under the 2002 Sarbanes-Oxley Act, the Dodd-Frank Act provides broader protections to a whistleblower. For example, the Dodd-Frank Act provides for a longer statute of limitations period (six years after the date the violation occurred, or three years after the date on which the employee knows or reasonably should know that the violation occurred, but under no circumstance may an action be brought more than 10 years after the date of the violation), and allows the employee to bring a retaliation claim directly to a federal district court. The remedies available for a prevailing employee include reinstatement with the same seniority status, double back pay plus interest, litigation costs, expert witness fees, and reasonable attorneys’ fees.

Conversely, the Sarbanes-Oxley Act imposes administrative exhaustion requirements and mandates an employee to file an administrative complaint within 180 days of when the securities violation occurred or after the date on which the employee becomes aware of a securities violation. Further, the Sarbanes-Oxley Act limits the remedies available to an aggrieved employee to make the employee “whole,” including reinstatement with the same seniority status, back pay plus interest, and compensation for any special damages incurred as a result of the discrimination, including reasonable attorney fees, expert fees, and costs.

The case is Digital Realty Trust Inc. v. Paul Somers, case number 16-1276, in the United States Supreme Court.

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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