A recent decision from the 9th Circuit has served to widen the circuit split over whether Dodd-Frank’s anti-retaliation protections should protect internal whistleblowers. In early March, a split 9th Circuit panel found in favor of extending Dodd-Frank’s anti-retaliation protections to whistleblowers that chose not to report suspected securities laws violations to the SEC, but rather reported internally to their employers. While the 9th Circuit was busy extending protections for internal whistleblowers, the United States Supreme Court declined to review a case out of the 6th Circuit, which was previously dismissed on the grounds that Dodd-Frank’s whistleblower protections applied only to those who report to the SEC directly. The 6th Circuit’s decision sidestepped the Dodd-Frank issue, so it was not at issue on certiorari. However, in light of the 9th Circuit’s decision, it appears the Supreme Court’s may be asked to resolve the circuit split at some point.
Confusion Created by the Dodd-Frank Act
The center of controversy as it relates to protections for internal whistleblowers is Section 922 of the Dodd-Frank Act, which offers protection to those whistleblowers that make reports internally to their employers but not the SEC itself. However, 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.” To make things even more confusing, Section 21F(h)(1)(A)(iii) prohibits retaliation against “whistleblowers” who make disclosures that are required or protected under the Sarbanes-Oxley Act, the Securities Exchange Act and “any other law, rule or regulation subject to the jurisdiction of the [SEC],” which, under certain circumstances, would include only internal reports. Given the confusing and somewhat contradictory language in the Dodd-Frank Act itself, the SEC has promulgated its own rules in an attempt to clarify its position regarding protections for internal whistleblowers. The confusion has also produced a circuit split among the various federal courts of appeals around the country.
SEC Continually Takes Position That Internal Whistleblowers are Protected
In light of the confusion surrounding the purported protections for internal whistleblowers under the Dodd-Frank Act, the SEC has acted to solidify its position on the issue. The SEC has used its rule-making authority, as well as filing a number of amicus briefs around the country since the inception of the Act, which make clear that the SEC believes that internal whistleblowing is essential to stopping violations of the country’s securities laws. To that end, in May 2011, the SEC issued regulations that provided protections for whistleblowers under Dodd-Frank, even if those reports were made to the whistleblower’s employer and not the SEC. As part of its regulations, the SEC adopted two separate definitions of the word “whistleblower.” The first definition applies to whistleblower awards and confidentiality provisions, while the other definition applies for purposes of Dodd-Frank’s anti-retaliation protections.
In August 2015, the SEC issued an “interpretative rule,” which reaffirmed the SEC’s view that whistleblowers who had not reported suspected violations to the SEC were protected from retaliation by their employer. As noted above, the SEC has also been heavily involved in litigation of the internal whistleblower protection issue as it has played out in courts across the country. The SEC’s amicus briefs filed in those cases have consistently taken the position that “individuals who report to persons or governmental authorities other than the Commission,” including employees who make “the disclosures that are required or protected under the Sarbanes-Oxley Act” or other securities laws.
Furthermore, in October 2016, Jane Norberg, chief of the SEC’s Office of the Whistleblower, reiterated the SEC’s position that it is “committed to protecting whistleblowers from retaliation and will continue to file briefs as appropriate in support of whistleblower protection.” Also in 2016, the SEC initiated its own litigation to enforce whistleblower protection, bringing its first stand-alone enforcement action against a company for unlawful retaliation without an underlying securities violation, as well as enforcement actions based solely on restrictive language contained in companies’ standard separation agreements, and not relating to the underlying allegations reported by a whistleblower.
Circuit Split Develops Over Whether Internal Whistleblowers are Protected
While the SEC has made it no secret what its position is on the issue, the various Circuit Courts of Appeals around the country have come to varying conclusions whether Dodd-Frank protects internal whistleblowers, creating a circuit split. In Asadi v. G.E. Energy LLC, the 5th Circuit, as the first court to consider the issue, held that whistleblowers who did not report to the SEC had no claim for retaliation against their employers under Dodd-Frank. In so holding, the 5th Circuit looked to the definition of “whistleblower” under the statute, which sets forth that a whistleblower is a person that reports information to the SEC. The 5th Circuit explained that the definition of “whistleblower” must be applied consistently throughout the statute, thereby requiring whistleblowers to report to the SEC in order to become eligible for anti-retaliation protection. The 5th Circuit found that the relevant statutory provisions were not inconsistent when applied to an employee who complained to both the SEC and his or her employer, as such employee would qualify as a “whistleblower” under the statutory definition and therefore would be entitled to protection from retaliation. The 5th Circuit pointed out that if a whistleblower qualified for retaliation protection under Dodd-Frank based on the individual’s qualification as a whistleblower under Sarbanes-Oxley, such a result would effectively moot Sarbanes-Oxley’s distinct protections.
2nd Circuit Finds Act Protects Internal Whistleblowers
In Berman v. Neo@Ogilvy LLC, the 2nd Circuit disagreed with the 5th Circuit’s analysis in Asadi, find that whistleblowers that report suspected violations to their employers, and not the SEC, are entitled to protection. The court found that the Dodd-Frank Act’s definition of whistleblower was inconsistent with the Act’s anti-retaliation provisions. As a result, the 2nd Circuit applied Chevron deference to the SEC’s own regulations interpreting the Act. The 2nd Circuit noted that the Dodd-Frank anti-retaliation provisions would be narrowed to the point of absurdity if SEC reporting were a requirement for protection. For example, under the 5th Circuit’s interpretation of the issue, the only protected individuals would be those who reported possible securities violations both internally and to the SEC and were then fired solely on the basis of the internal report. Despite the circuit split caused by the Second Circuit’s opinion, the defendants in Berman did not seek Supreme Court review of the decision.
9th Circuit Agrees With 2nd Circuit
Most recently, the 9th Circuit took its turn at interpreting whether Dodd-Frank offers protection for internal whistleblowers. There, in Somers v. Digital Realty Trust Inc., the 9th Circuit affirmed the lower district court’s ruling that a former employee was entitled to sue his former employer over his termination after he reported suspected securities law violations to his employer but not to the SEC. According to a split 9th Circuit panel, Dodd-Frank “unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally.” The court further reasoned that requiring a whistleblower to have reported to the SEC in order to benefit from Dodd-Frank’s anti-retaliation provisions would unjustly limit the intended protections for whistleblowers and would “make little practical sense.”
The majority also expressed concern that requiring whistleblowers to provide information to the SEC before they could be protected against retaliation may provide an incentive for companies to immediately terminate complaining employees in the hopes that they have not yet shared their concerns with the agency, thereby avoiding a potential retaliation claim. The 9th Circuit’s opinion recognized that since certain of Sarbanes-Oxley’s provisions require internal reporting before external reporting for certain individuals, failing to protect internal reporters “would result in early retaliation before the information could reach the regulators.” Additionally, the 9th Circuit expressly agreed with the 2nd Circuit’s reasoning in Berman, including that the SEC’s regulations are entitled to Chevron deference and that the SEC’s position “correctly reflects congressional intent to provide protection for those who make internal disclosures as well as to those who make disclosures to the SEC.”
Dissent Sides With 5th Circuit
The dissenting judge, much like the 5th Circuit stated in Asadi, set forth that the Act’s definition of whistleblower should be applied consistently throughout the statute. The dissent further had trouble with the majority’s reliance on the U.S. Supreme Court’s 2015 decision in King v. Burwell, which held that a defined statutory term could be interpreted differently depending on the context of different statutory sections.
U.S. Supreme Court May Yet Get Chance to Weigh in On Circuit Split
The circuit split created by the decisions out of the 2nd, 5th, and now 9th Circuit, appeared poised to be addressed by the U.S. Supreme Court as it related to a case out of the 6th Circuit. However, as noted above, the Supreme Court declined to hear the case, which saw the 6th Circuit sidestep the whistleblower protection issue entirely. Even still, there is yet another case in the 3rd Circuit where the internal whistleblower issue is front and center. As a result, the Supreme Court may yet get its chance to weigh in on whether Dodd-Frank protects only those whistleblowers who report to the SEC, or whether, like the SEC has maintained, the Act protects internal whistleblowers just the same.
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