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March 21, 2019

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Supreme Court Limits Scope of Whistleblower Protections under Dodd-Frank: Items of Note and Potential Impacts

On February 21, 2018, the United States Supreme Court (the “Supreme Court”) resolved a circuit split on the question of whether the whistleblower anti-retaliation provision in Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) extends to individuals who report alleged violations of securities laws within a company but not to the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”).1 In a unanimous opinion authored by Justice Ginsburg, the Supreme Court held in Digital Realty Trust, Inc. v. Somers that “[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 Commission.’”2 This ruling narrows the scope of whistleblower activity protected by Dodd-Frank, and may result in an increase in whistleblowing to the SEC, may increase the cost of regulatory compliance, and may thwart certain pending Dodd-Frank retaliation claims.

Background

The circuit split on this issue arose from several federal appellate courts’ divergent interpretations of two seemingly inconsistent Dodd-Frank provisions regarding whistleblowers. In Section 78u-6(a)(6), Dodd-Frank defines a “whistleblower” as “any individual who provides   . . . information relating to a violation of the securities laws to the Commission.”3 In Section 78u-6(h)(1)(A), however, Dodd-Frank sets forth certain whistleblower anti-retaliation protections which extend to individuals who make reports that are protected under the Sarbanes-Oxley Act (“Sarbanes-Oxley”), the Securities Exchange Act of 1934, and “any other law, rule, or regulation subject to the jurisdiction of the Commission.”4 The latter description suggested a more expansive definition of “whistleblower” than appears in § 78u-6(a)(6) because, for example, Sarbanes-Oxley extends anti-retaliation protection to employees who report misconduct internally.5

In an effort to resolve this apparent inconsistency, in 2011 the SEC promulgated two separate definitions of “whistleblower,” and later explained its position in an August 2015 interpretive rule.  Specifically, the SEC stated that Dodd-Frank “is ambiguous on the scope of the employment retaliation protections afforded thereunder.”6 The SEC went on to note that “[t]he first definition . . . which mirrors the statutory definition of whistleblower . . . applies only to the award and confidentiality provisions [of Dodd-Frank].”7 The second, broader definition in turn applied to whistleblowers seeking protection from retaliation for internal reporting of alleged wrongdoing. The SEC explained that

  • by providing employment retaliation protections for individuals who report internally first to a supervisor, compliance official, or other person working for the company that has authority to investigate, discover, or terminate misconduct, our interpretive rule avoids a two-tiered structure of employment retaliation protection that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardizes the investor-protection and law-enforcement benefits that can result from internal reporting.8

In addressing the apparent statutory inconsistency and the SEC’s resulting rulemaking, the Fifth, Second, and Ninth Circuit Courts of Appeals had come to opposing conclusions, making the question ripe for Supreme Court review. The Fifth Circuit in Asadi v. G.E. Energy (USA) LLC considered the issue first and held that whistleblowers who did not report securities violations to the SEC had no claim for retaliation against their employers under Dodd-Frank.9 The Fifth Circuit focused strictly on the text of the statute and held that the definition of “whistleblower” must be applied consistently throughout the statute, thus requiring whistleblowers to report to the SEC in order to become eligible for anti-retaliation protection. 

In contrast, the Second Circuit rejected that reasoning in Berman v. NeoOgilvy LLC and held that non-SEC reporting whistleblowers are entitled to protection from employer retaliation.10 The Second Circuit applied Chevron deference—judicial deference to reasonable administrative interpretations of ambiguous federal laws—to the SEC’s regulations interpreting the statute, which expanded anti-retaliation protection to employees who failed to report securities violations to the SEC. Finally, the Ninth Circuit in Somers v. Digital Realty Trust, Inc. sided with the Second Circuit and held that Dodd-Frank “unambiguously and expressly protects from retaliation all those who report only to the SEC and who report internally,” and that limiting the anti-retaliation protection to those who report to the SEC would not make practical sense.11 In so ruling, the Ninth Circuit deferred to the SEC interpretation. Digital Realty Trust appealed the Ninth Circuit’s ruling to the Supreme Court, and certiorari was granted. The SEC filed an amicus brief in support of the broader definition of “whistleblower” for anti-retaliation purposes, stating that its interpretation of Dodd-Frank “reflects the underlying statutory objectives to provide broad protection for internal and external whistleblowers alike, to encourage corporate managers to address potential violations in the first instance, and to use government enforcement resources as efficiently as possible.”12

Ruling

The Supreme Court reversed the Ninth Circuit’s holding and instead took an approach more akin to that of the Fifth Circuit. Quoting the unanimous opinion of Burgess v. United States, which Justice Ginsburg also authored, she wrote: “‘When a statute includes an explicit definition, we must follow that definition,’ even if it varies from a term’s ordinary meaning. . . . This principle resolves the question before us.”13 The Court reasoned that the term “whistleblower” is explicitly defined by § 78u-6(a)(6), and the statute states that the term “shall apply” throughout § 78u-6. In the Supreme Court’s view, the statutory text itself is clear that an employee must report to the SEC in order to demonstrate entitlement to Dodd-Frank’s anti-retaliation protections.14

Key Takeaways

It is clear from the face of this ruling that the scope of whistleblower activity protected from retaliation by Dodd-Frank has narrowed. Individuals who report relevant wrongdoing within their own companies, but not to the SEC, are excluded from such protections. Items of note and potential impacts to watch for include the following:

  • Increased whistleblowing to the SEC. Now that the Supreme Court has made clear that internal-only whistleblowers are not afforded anti-retaliation protection under Dodd-Frank, it is reasonable to anticipate that whistleblowers will be more likely to go directly to the SEC. While certain internal whistleblowing is protected from retaliation under Sarbanes-Oxley, the mechanism for seeking relief from retaliation under Sarbanes-Oxley is more cumbersome (requiring exhaustion of administrative remedies before litigation can be instituted, and imposing a 180-day deadline for seeking administrative relief) than under Dodd-Frank (providing for direct access to federal courts and a six-year limitations period). This new group of whistleblowers will further increase the already robust reporting of potential wrongdoing to the SEC that yielded approximately 12 tips per calendar day for FY 2017.15

  • Cost to companies. More whistleblowing to the SEC means a greater likelihood of the SEC opening up new investigations. While not every report to the SEC warrants enforcement activity, an increase in the amount of potential wrongdoing being brought to the SEC’s attention may result in the commencement of investigations that otherwise previously would have been handled internally by a company. For those companies whose employees report investigation-worthy potential misconduct to the SEC, costs of regulatory compliance will rise significantly.

  • How will the SEC react? On February 23, 2018, just two days after the Supreme Court’s ruling, the Commission stated at its annual SEC Speaks conference that it is presently considering its options in light of the ruling. It will be worth watching to see if the SEC’s Office of the Whistleblower releases new guidance in response to this significant change to the Commission’s definition of “whistleblower.”

  • Impact on pending and threatened litigation. Persons alleging retaliation by an employer for internal reporting of potential wrongdoing under Dodd-Frank now find themselves without a remedy under that statute. Additionally, plaintiffs with currently pending Dodd-Frank retaliation claims, alleging retaliation by an employer for internal reporting of potential wrongdoing, may find themselves unable to proceed with such claims.


1 Digital Realty Trust, Inc. v. Somers, 583 U.S. __, No. 16-1276, 2018 U.S. LEXIS 1377 (Feb. 21, 2018).
2 Id. at *8.
3 15 U.S.C. § 78u-6(a)(6) (emphasis added).
4 15 U.S.C. § 78u-6(h)(1)(A). 
5 Importantly, Sarbanes-Oxley and Dodd-Frank provide different remedies for whistleblowers who have suffered retaliation.  2018 U.S. LEXIS 1377, at *1–2 (“Sarbanes-Oxley’s anti-retaliation provision contains an administrative exhaustion requirement and a 180-day administrative complaint-filing deadline . . . whereas Dodd-Frank permits a whistleblower to sue an employer directly in federal district court, with a default six-year limitation period.”).
6 17 C.F.R. § 241, Release No. 34-75592 (Aug. 4, 2015).
7 Id. (emphasis in original).
8 Id.
9 Asadi v. G.E. Energy (USA) LLC, 720 F.3d 620 (5th Cir. 2013).
10 Berman v. Neo Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).
11 Somers v. Digital Realty Trust, Inc., 850 F.3d 1045 (9th Cir. 2017).
12 Digital Realty Trust, Inc. v. Somers, Brief for the United States as Amicus Curiae Supporting Respondent, at 34.
13 2018 U.S. LEXIS 1377, at *17.
14 The Supreme Court also discussed the purpose of Dodd-Frank at length, and it concluded that the statute’s “text and purpose leave no doubt that the term ‘whistleblower’ in §78u-6(h) carries the meaning set forth in the section’s definitional provision.”  2018 U.S. LEXIS 1377, at *21.
15 Statement of Richard Best, Regional Director of the SEC’s Atlanta Office, at SEC Speaks conference on February 23, 2018.

© 2019 Vedder Price

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Junaid A. Zubairi, Vedder Price Law Firm, Government Enforcement Attorney
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Junaid A. Zubairi focuses his practice on government investigations, investment services and regulatory compliance matters.  His practice includes representing companies and individuals in SEC investigations, conducting internal investigations, counseling clients during regulatory examinations, and providing general compliance and remediation counseling.  Mr. Zubairi has extensive experience representing investment advisers, broker-dealers, corporations and officers and directors during government investigations and regulatory proceedings.

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Rachel T. Copenhaver, Vedder Price Law Firm, Litigation Attorney
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Rachel T. Copenhaver joined Vedder Price P.C. as an associate in the Commercial Litigation Practice Area.  She counsels and represents clients on a wide variety of business and commercial disputes, including contract, commercial and tort litigation.

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Ashley Huddleston, Vedder Price Law Firm, New York, Labor and Employment Litigation Attorney
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Ashley Huddleston is an Associate at Vedder Price and a member of the Labor & Employment and Litigation practice groups in the firm’s New York office.

While in law school, Ms. Huddleston served as the Executive Notes and Comments Editor of the Journal of Law and Policy and received the Scholarly Journal Writing Award for her published work. Ms. Huddleston was a member of the Appellate Division of the Moot Court Honor Society, New York City Bar Association National Moot Court Team, and was a Health Law and...

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Joshua Nichols, Vedder Price, securities attorney, department of justice legal counsel, government investigations lawyer, contract breach law
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Joshua Nichols is an Associate in Vedder Price’s Litigation practice area. He focuses extensively on defending corporations, officers and directors in government investigations. He has defended investigations by the DOJ, SEC, SIGTARP, OCC, CFTC and Illinois Securities Department, and has served as lead associate in the defense of 33 current and former bank directors and officers against FDIC investigations and claims totaling over $279 million.

Additionally, Mr. Nichols counsels and represents clients on a wide variety of business and commercial...

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