When Can Whistleblowers Get Dodd-Frank Protection: The Supreme Court Takes on a Circuit Split

Tuesday, October 31st, 2017 at 9:34 pm by Bethany Clarke

What are the boundaries of Dodd-Frank’s whistleblower protection provisions – is internal reporting enough, or does the Act only cover individuals who report directly to the SEC? The answer to this question hinges on how you define ‘whistleblower,’ and the Courts of Appeals cannot agree on a common understanding. The standard may finally be clarified now that the Supreme Court has granted certiorari in Digital Realty Trust v. Somers, two years after the lower courts first split on the issue.

Competing Definitions in Section 21F of Dodd-Frank

Passed in 2010, Dodd-Frank proposed sweeping reforms to the United States’ financial regulatory system. Section 21F of the Act established a whistleblower protection scheme under which the SEC rewards individuals who alert the Commission to previously-undiscovered violations of the federal securities laws.

However, courts have struggled to agree on the scope of the scheme’s protections. The disagreement stems from conflicting uses of the term ‘whistleblower’ throughout the text of Dodd-Frank. Section 21F(a)(6) of the Act defines a whistleblower as “any individual who provides…information relating to a violation of the securities laws to the Commission.” However, in Section 21F(h)(1)(A) the act prohibits retaliation against whistleblowers who make reports that are “required or protected under the Sarbanes-Oxley Act.” Sarbanes-Oxley unambiguously covers individuals who make internal reports.

The SEC Tries to Clarify

The SEC has published its own stance on the issue several times since it emerged. The Commission published a set of interpretive guidelines when the courts first split in 2015, clarifying that it understood the anti-retaliation provisions as extending to cover individuals who make internal reports.

In its 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program, the SEC again acknowledged the circuit split and argued that ensuring individuals receive protection of the Act­—whether they report internally or externally­—is “critical to the SEC’s enforcement efforts.” If individuals are not assured protection, the Commission reasons, they are less likely to report issues internally, thus undermining the utility of internal compliance programs designed to catch irregular and/or illegal behavior. 

A Circuit Split Emerges

The issue of the scope of Dodd-Frank whistleblower protections has been the subject of a circuit split since the Second Circuit’s 2015 ruling in Berman v. Neo@Ogilvy LLC. In Neo@Ogilvy, the Second Circuit found the Act’s definition of whistleblower to be ambiguous, and opted to defer to the SEC’s interpretation. Its approach contradicted that of the Fifth Circuit, which held in Asadi v. G.E. Energy (U.S.A.), L.L.C. that the anti-retaliation provisions applied only to whistleblowers who make direct reports to the SEC.

The Supreme Court Decides to Intervene: Digital Realty Trust v. Somers

On June 26, 2017, the Supreme Court granted certiorari in Digital Realty Trust v. Somers.  Plaintiff Somers was terminated from his position at Digital Realty after he reported potential securities law violations to senior management. Somers did not take these reports to the SEC before his termination, which he alleges was a breach of Section 21F of Dodd-Frank. The Ninth Circuit, siding with the Second Circuit, held that Section 21F “expressly and unambiguously” protects individuals who make report up internally. The case was appealed to the Supreme Court by Digital Trust, which focused on the circuit split as a compelling reason for the Court to take the case.

Potential Implications of a SCOTUS Ruling

According to the SEC’s 2016 Annual Report to Congress, almost 65 per cent of individuals who received an SEC reward after whistleblowing were insiders or employees of the entity on which they reported. Of that 65 per cent, almost 80 per cent of award recipients raised their concerns internally before reporting the wrongdoing to the Commission. In a system where just over half of all reports are made internally in the first instance, the prospect of limiting coverage to reports made directly to the SEC is likely to have a significant impact. If the Supreme Court errs on the side of the SEC, Second Circuit, and Ninth Circuits’ interpretations, the broad scope of protection is likely to encourage whistleblowing and the continued airing of securities violations.

A second potential impact of the Supreme Court’s ruling concerns not Dodd-Frank, but Sarbanes-Oxley. Prior to Section 21F, whistleblowers were protected under the anti-retaliation provisions of the Sarbanes-Oxley Act. However, the protective provisions of Sarbanes-Oxley are much more limited than those offered by Dodd-Frank. For example, the statute of limitations to bring a claim is 180 days under Section 1514A(b)(2)(D) of Sarbanes-Oxley, compared to as long as 10 years under Section 21(F)(h)(1)(B)(iii) of Dodd-Frank. If the Supreme Court permits internal whistleblowers to invoke Dodd-Frank protection, it seems likely that the corresponding Sarbanes-Oxley provisions will become obsolete. It is also worth noting that if the Supreme Court instead limits Section 21F protection to whistleblowers who ‘report out,’ individuals who ‘report up’ would still have a protective recourse in Sarbanes-Oxley.

Finally, in Digital Realty the Supreme Court has a chance not only to clarify Dodd-Frank, but also to revisit the Chevron doctrine, since both the Second and Ninth Circuit opinions rest on a deference to the SEC’s interpretation. The doctrine refers to the Supreme Court’s ruling in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. that courts should defer to agency interpretation of statutes requiring agency action, unless the interpretation is unreasonable. Chevron is a contested issue among conservative legal thinkers, and now that Judge Gorsuch is on the bench, the Court may be in a position to update its thinking on the doctrine. If the Court does endorse a new approach regarding judicial deference to agency interpretations of statutes, the impact of Digital Realty will be felt well beyond the limits of securities law.