Supreme Court: Does a Whistleblower by Any Other Statutory Definition Still Smell as Sweet?

A unanimous Supreme Court this morning reversed the Ninth Circuit, rejected the SEC’s own regulation and ruled that the whistleblowing protections under Dodd-Frank are not parallel to the whistleblower provisions of Sarbanes-Oxley.   Digital Realty Trust v. Somers, No. 16-1276.   In particular, while the Dodd-Frank statute protects “whistleblowers” from retaliation for activities that are protected under Sarbanes-Oxley, an individual is not a “whistleblower” under Dodd-Frank unless the individual first reported information about securities law violations to the SEC.  In other words, while Sarbanes-Oxley protects internal reports of misconduct by employees to upper management, the SEC, Congress or another federal agency if the employee complies with that statute’s shorter statute of limitations and administrative exhaustion requirements, such activity would not also be protected under Dodd-Frank (with its longer statute of limitations and no administrative exhaustion requirements) unless the individual first reported the matter to the SEC before suffering retaliation.  Accordingly, the employee who was fired allegedly in retaliation for reporting possible illegal activity to senior management and not to the SEC was not a “whistleblower” under Dodd-Frank even though he might have been under Sarbanes-Oxley if he had fist filed a complaint with the DOL within the 180-day statute of limitations.  In short, “[t]o sue under Dodd-Frank’s anti-retaliation provision, a person must first “provid[e] . . . information relating to a violation of the securities laws to the” SEC.

According to the Court’s opinion, the employer REIT employed the plaintiff as a vice president.  He reported to senior management that he suspected that the company was violating certain securities laws.  He never reported this to the SEC and was later fired.  The Court does not describe the amount of time that passed between his report, his termination or his lawsuit.  He never filed an administrative complaint with the DOL.   The employer moved to dismiss because the Dodd-Frank statute only protected employees who blow the whistle to the SEC.  The court found the statute to be ambiguous and deferred to the SEC regulation which did not require whistleblowers to ever contact the SEC under its anti-retaliation provision.   The Court of Appeals affirmed, noting that a contrary holding would nullify the anti-retaliation provisions encompassing Sarbanes-Oxley, etc. However, the Fifth Circuit ruled to the contrary in a similar case, so the Supreme Court agreed to resolve the split of authority.  Justice Ginsburg wrote for the majority, but there were also two concurring opinions which debated whether the Court should focus only on the statute’s language or also consider its legislative history and purpose.

The Court concluded that the case rested on a simple rule: ““When a statute includes an explicit definition, we must follow that definition,” even if it varies from a term’s ordinary meaning.”  Whistleblower was “unequivocally” defined in Dodd-Frank. “Section 78u–6 begins by defining a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C §78u–6(a)(6).   The definition explained “who” was protected and the rest of the statute explained what conduct of that individual was protected.  The anti-retaliation provision, among other things, “protects disclosures made to a variety of individuals and entities in addition to the SEC. For example, the clause shields an employee’s reports of wrongdoing to an internal supervisor if the reports are independently safeguarded from retaliation under Sarbanes-Oxley.”  Importantly, “an individual who falls outside the protected category of “whistleblowers” is ineligible to seek redress under the statute, regardless of the conduct in which that individual engages.”  In contrast, a different anti-retaliation provision in the statute did not require employees to report misconduct to any government agency about matters within the jurisdiction of the Consumer Financial Protection Bureau. 

Requiring reporting to the SEC was core function of Dodd-Frank because it was enacted following the 2008 financial crises, whereas Sarbanes-Oxley was enacted in response to the collapse of Enron.  Dodd-Frank wanted to encourage more government reporting, not more internal reporting, in order to improve the SEC’s enforcement.   Moreover, Dodd-Frank enacted stronger whistleblower protections than Sarbanes-Oxley, eliminating the administrative exhaustion requirement, lengthening the statute of limitations and doubling the back pay recovery, in order to encourage more reporting to the SEC, not less.  As for concerns that employees may suffer retaliation for internal reporting if they were unaware of the requirement to also notify the SEC,

Overlooked in this protest is Dodd-Frank’s core objective: to prompt reporting to the SEC.  . . . In view of that precise aim, it is understandable that the statute’s retaliation protections, like its financial rewards, would be reserved for employees who have done what Dodd-Frank seeks to achieve, i.e., they have placed information about unlawful activity before the Commission to aid its enforcement efforts.

The Court rejected the argument that its strict interpretation would nullify the statute’s prohibition against retaliating against an employee who engages in conduct that is also protected under Sarbanes-Oxley:

With the statutory definition incorporated, clause (iii) protects a whistleblower who reports misconduct both to the SEC and to another entity, but suffers retaliation because of the latter, non-SEC, disclosure.  That would be so, for example, where the retaliating employer is unaware that the employee has alerted the SEC.  In such a case, without clause (iii), retaliation for internal reporting would not be reached by Dodd-Frank, for clause (i) applies only where the employer retaliates against the employee “because of ” the SEC reporting.  §78u–6(h)(1)(A). Moreover, even where the employer knows of the SEC reporting, the third clause may operate to dispel a proof problem: The employee can recover under the statute without having to demonstrate whether the retaliation was motivated by the internal report (thus yielding protection under clause (iii)) or by the SEC disclosure (thus gaining protection under clause (i)).

 . . . The SEC is required to protect the identity of whistleblowers, see §78u–6(h)(2)(A), so employers will often be unaware that an employee has reported to the Commission.  In any event, even if the number of individuals qualifying for protection under clause (iii) is relatively limited, “[i]t is our function to give the statute the effect its language suggests, however modest that may be.”

In light of the clear language of the statute the Court refused to accord any deference to the SEC regulation.  The Obama SEC initially proposed to define “whistleblower” as “as one or more individuals who “provide the Commission with information relating to a potential violation of the securities laws.” The SEC ultimately published regulations defining “whistleblower” differently for the reward and anti-retaliation provisions.  A whistleblower for purposes of obtaining a financial reward from the SEC was essentially the same as initially proposed, but required the information to be provided by fax, mail or through its website.  For the anti-retaliation provision, a “whistleblower” was defined as covering individuals who “possess a reasonable belief that the information you are providing relates to a possible securities law violation” and “[y]ou provide that information in a manner described in” clauses (i) through (iii) of §78u–6(h)(1)(A)” regardless of whether the individual satisfied the requirements of qualifying for a financial reward by reporting the information in a specified manner.  As noted by Justice Ginsburg, the SEC regulation was clear that the whistleblower need not report anything to the SEC in order to be protected by the Dodd-Frank anti-retaliation provisions and reiterated that interpretation in a 2015 interpretative rule:

An individual may therefore gain anti-retaliation protection as a “whistleblower” under Rule 21F–2 without providing information to the SEC, so long as he or she provides information in a manner shielded by one of the anti-retaliation provision’s three clauses. For example, a report to a company supervisor would qualify if the report garners protection under the Sarbanes-Oxley anti-retaliation provision.

The Court agreed that its application of the statutory definition could result in no protection for employees who are fired for testifying, initiating or participating in an SEC investigation if they did not first report the securities law violations to the SEC.  However, it noted that the SEC could easily rectify this by regulation to establish the manner in which whistleblowers could report information to the SEC to include such testimony, etc.   I'm sure that the Trump Administration will get right on that, although it did argue in favor of the employee and the SEC before the Court. 

As for the concurring opinions, Justice Thomas and two other Justices opined that: “Even assuming a majority of Congress read the Senate Report, agreed with it, and voted for Dodd-Frank with the same intent, “we are a government of laws, not of men, and are governed by what Congress enacted rather than by what it intended.”  Justice Thomas then quoted from an amusing Senate debate in which former Senate President Bob Dole admitted that neither he nor any other Senator wrote the Senate Report and that he had never even read it.  Instead, Thomas noted the reports are written by staffers, who are aware that Congress never reads them and that Senators do not even have the authority to amend or modify them.  In contrast, Justice Sotomayor disagreed with that view and asserted that a Senate Report was an appropriate source to consider when interpreting statutory language.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.