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California Court Allows Dodd-Frank Whistleblower Claims to Proceed Despite Absence of Complaint to SEC

In a case of first impression within the Ninth Circuit, the U.S. District Court for the Northern District of California ruled that the whistleblower protection provision in Dodd-Frank protects whistleblowers who report alleged violations both internally and to the U.S. Securities and Exchange Commission.  Connolly v. Wolfgang Remkes, 2014 U.S. Dist. LEXIS 153439 (N.D. Cal. Oct. 28, 2014).  More specifically, in this case, the court determined that a former employee qualified as Dodd-Frank whistleblower (at least for purposes of surviving a Rule 12(b)(6) motion to dismiss) even though she only reported suspected securities law violations within the company.

Background.  Plaintiff alleged that she received and reviewed a file from another financial advisor that contained “actual checks” and that “appeared to be a violation of various FINRA rules.”    Plaintiff was asked to verify this with an internal compliance department and did so.  However, upon reporting this confirmation to her supervisor, Plaintiff alleges that she was instructed to assist in a “cover-up.”  She refused to comply and resigned.  Plaintiff then filed suit in March 2014, under the Dodd-Frank whistleblower protection provision.

Ruling.  The Company moved to dismiss per Rule 12(b)(6), on the grounds that Plaintiff did not disclose any potential wrongdoing to the SEC.  In this regard, the Company championed the line of cases following the Fifth Circuit’s landmark decision in Asadi v. G.E. Energy (USA), L.L.C. (Dodd-Frank requires individuals to provide information relating to a violation of the securities to the SEC to qualify for whistleblower protection).  The court, however, disagreed with the Company, finding that Dodd-Frank was “susceptible to more than one interpretation when read together” and it was unclear whether all whistleblowers had to report violations to the SEC to qualify for protection.  Moreover, the Court deferred to the SEC’s interpretation of Dodd-Frank Act and its position that Asadi was wrongly decided. 

Implications.  Connolly continues the split of authority on the scope of Dodd-Frank’s whistleblower-protection provisions, although Asadi remains the only appellate authority on the topic.  Thus, although employers would be well served by continuing to advance an Asadi-based defense to protected activity, in many cases they will be well served by diversifying their defenses.

© 2019 Proskauer Rose LLP.

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About this Author

Steven J Pearlman, Labor Employment Law Firm, Proskauer Law firm
Partner

Steven Pearlman is a partner in the Labor & Employment Law Department and co-head of the firm's Whistleblowing & Retaliation Group, resident in the Chicago office. Steven’s practice focuses on defending complex employment litigation involving claims of discrimination and harassment, wage-and-hour laws and breaches of restrictive covenants (e.g., non-competition agreements). He has successfully tried cases to verdict before judges and juries in Illinois, Florida and California, and defended what is reported to be the largest Illinois-only class action in the history of the U.S....

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