Supreme Court Limits Scope of Anti-Retaliation Protections for Whistleblowers Under Dodd-Frank: Rules That Protections Only Apply to Whistleblowers Who First Report Directly to the SEC
On February 21, 2018, in Digital Realty Trust, Inc. v. Somers,1 the United States Supreme Court (the "Court") unanimously held that whistleblowers are not protected by the anti-retaliation provision and thus not entitled to the related incentives of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") unless the whistleblower first reports the securities law violation directly to the Securities and Exchange Commission (the "SEC"). The Court ruled against an employee who reported to senior management but did not file an administrative complaint or report to the SEC directly, which would have earned him anti-retaliation protection under Dodd-Frank. The Court’s decision resolves a split among the Second, Fifth and Ninth Circuits.
Paul Somers was an employee of Digital Realty Trust, Inc. who alleged that he was fired after reporting possible securities law violations to the company's senior management; he did not report his concerns to the SEC before he was terminated.2 He sued the company in federal court, arguing that his firing violated the anti-retaliation protections of Dodd-Frank. Digital Realty asserted that Somers was not a "whistleblower" as defined by Dodd-Frank and thus was not entitled to Dodd-Frank’s protections because he only reported the alleged violations internally but not to the SEC.
The decision turned solely on the definition of "whistleblower" in the anti-retaliation provision of Dodd-Frank. In reaching its decision, the Court determined that the definition of “whistleblower" under Dodd-Frank "supplies an unequivocal answer" to the question of who is entitled to the whistleblower protections and incentives under Dodd-Frank: "any individual who provides . . . information relating to a violation of the securities laws to the Commission"3 (emphasis added).4 The Court further concluded that this reading is consistent with Dodd-Frank's "core objective" of assisting the SEC in identifying violations of the securities laws.
Practical Considerations and Observations
This decision could have important implications for both companies and internal whistleblowers
The ruling limits Dodd-Frank protections for whistleblowers and prevents employees from arguing that they were Dodd-Frank whistleblowers after merely having discussed or reported a securities law violation internally.
The ruling arguably incentivizes employees to bypass companies' internal compliance systems (which allow a company to investigate and correct the irregularities internally and possibly self-report before the government gets involved) and report potential violations directly to the SEC rather than risk being fired while reporting internally and losing the anti-retaliation protections of Dodd-Frank.
Importantly, the Court's decision makes clear that, even if a company is unaware that an employee has reported to the SEC at the time it takes an adverse employment action against such employee, or if the action is not motivated by such disclosure, the company may still be considered to have violated the Dodd-Frank whistleblower protections if the employee reported to the SEC.
In light of this ruling, companies may wish to review and revise their internal reporting systems and related policies in order to encourage and incentivize employees to promptly report potential violations internally. Companies should also consider reinforcing the methods through which employees may report alleged violations and republishing the options for making such reports so that they will be easily accessible to employees, while regularly monitoring those reporting mechanisms and taking appropriate next steps. Companies should also ensure that they maintain robust anti-retaliation policies.
Companies should remain mindful that employees who report misconduct internally remain protected from retaliation under Sarbanes-Oxley, which defines a "whistleblower" more broadly than Dodd-Frank to include employees who report internally only.5 In addition, even individuals who do not qualify as whistleblowers under either statute may have claims against their employers arising from retaliation under other legal theories grounded under state law.
1 Available here.
2 Somers did not file an administrative complaint within 180 days of his termination, as required by the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), and therefore did not fall within the scope of Sarbanes-Oxley's whistleblower protections.
3 15 U.S.C. § 78u–6(a)(6)
4 15 U.S.C. § 78u–6(a)(6). Importantly, the SEC's implementing rule, Rule 21F-2, does not include a direct reporting requirement.
5 The remedies available under Sarbanes-Oxley are somewhat more limited than those under Dodd-Frank – including, as noted above, a requirement that retaliation claims be brought through administrative proceedings within 180 days of the alleged adverse employment action.