Split Second Circuit Decision Potentially Sets Stage for SCOTUS Review of DFA Whistleblower Provision
A Second Circuit Court of Appeals ruling on the Dodd-Frank Act (“DFA”) may prompt U.S. Supreme Court review as to when an employee whistleblower is entitled to the benefits of the anti-retaliation provisions of the DFA. In a 2-1 decision, the Second Circuit deferred to the Securities and Exchange Commission’s (“SEC”) interpretation of the anti-retaliation provision of the DFA which finds complaints made by way of the employer’s internal reporting resources sufficient to support a DFA claim. Importantly, however, the majority in Berman v. NEO@OGILVY LLC, 14-4626 (2nd Cir., September 10, 2015) found the anti-retaliation provisions of the DFA to be ambiguous and the SEC’s expansive interpretation to be entitled to deference. While this view is line with a majority of previous district court level decisions, it runs counter to a Fifth Circuit Court ruling which found an individual must meet the statutory definition of a “whistleblower,” by actually reporting the matter to the SEC, in order to fall within the DFA’s protection. The contrasting rulings between the Second and Fifth Circuits potentially set the stage for review of this issue by the United States Supreme Court.
Section 21F of the DFA established an incentive program for individuals who provide information to the SEC that results in successful enforcement actions by the Commission. Under Subsection 21F(a)(6), the term “whistleblower” for purposes of Section 21F is defined as an individual who provides information relating to a violation of securities laws to the SEC.
Section 21F also provides for protection from retaliation for whistleblowers. Specifically, Subsection 21F(h)(1)(A) prohibits retaliation against whistleblowers who (i) provide information to the SEC, (ii) initiate testify or assist in an investigation, judicial or administrative action of the SEC based on such information, or (iii) make disclosures required or protected under the Sarbanes-Oxley Act (“SOX”).
Interpretation of the DFA Anti-Retaliation Provision
In 2011, the SEC issued rules implementing the DFA whistleblower provision. In these rules, the SEC interpreted the prohibition against retaliation to apply to all individuals, regardless of whether or not they qualified for a whistleblower award pursuant to the SEC incentive program.
The judicial precedent interpreting the DFA is split as to whether its anti-retaliation provision requires that an individual actually provides information to the SEC in order to qualify for the statutory protection, or whether Subsection 21F(h)(1)(A)(iii)’s reference to disclosures required or protected under SOX provided serves as a catch-all category of protected activity that would encompass entirely internal reports of securities violations. The majority of district courts has found Section 21F to be ambiguous and therefore gave deference to the SEC’s interpretation that permitted individuals who had no contact with the SEC to avail themselves of the DFA’s anti-retaliation protections. Notably, however, the only Circuit Court to decide this issue held the opposite.
In Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013), the Fifth Circuit held that the plain language and structure of the statute compelled the conclusion that internal communications alone were not protected under DFA. In doing so, the Asadi Court concluded an individual must have provided information to the SEC, i.e. be a “whistleblower” within the meaning of Section 21F, in order to be protected from retaliation under the DFA.
The Second Circuit’s Decision
In Berman, the employer argued before the District Court that the complaint should be dismissed because the plaintiff had not provided any information to the SEC until after his termination, and therefore did not meet the definitional requirements of Subsection 21F(a)(6). The District Court agreed and dismissed the complaint. On appeal to the Second Circuit, the majority found the language of Section 21F to be ambiguous but the Appeals Court determined that the SEC’s interpretation allowing those who only had complained internally to qualify for DFA’s whistleblower protection was an acceptable interpretation to eliminate the ambiguity. Thus, the majority reversed the dismissal of the complaint and remanded the matter to the District Court.
In a strongly-worded dissent, Judge Dennis Jacobs wrote that the Court’s decision altered the language of Section 21F and created a circuit split, with the Second Circuit “firmly on the wrong side of it.” Judge Jacobs found that Section 21F explicitly applies the term “whistleblower” throughout the section and that the majority decision ignored this language in an attempt to provide deference to the SEC interpretation. He further noted that individuals who complain internally are already protected by SOX and thus reading Section 21F as the majority does only extends protection to a limited class of new individuals, giving the statute an “extremely limited” effect.
While Berman follows the majority trend in district court decisions addressing the DFA’s anti-retaliation scope, as noted by Judge Jacobs, it also creates a split between the Fifth and Second Circuits. Although it remains to be seen what lies ahead for the Berman matter, the Circuit split certainly creates the possibility for a petition for certiorari to the U.S. Supreme Court. The split decision of the Second Circuit itself allows for the potential petition for en banc review to the entire Second Circuit. Irrespective of the future of this decision, there is no predictable outcome for this issue. For the meantime, Berman presents an additional hurdle for employers defending against DFA whistleblower claims made by individuals who only make internal reports. The DFA provides for enhanced penalties compared to the SOX whistleblower provision, it does not require the plaintiff to first pursue and exhaust administrative remedies (as does SOX), and DFA has a much longer statute of limitations (10 years from the date of the violation as opposed to 180 days). Unless and until the Supreme Court or the en banc panel of the Second Circuit holds otherwise, the expansive interpretation of the DFA whistleblower provision makes it an appealing option for internal whistleblowers.