On February 22, the U.S. Supreme Court, in a unanimous decision, narrowed the class of individuals who qualify as whistleblowers under the Dodd-Frank Act, holding that Dodd-Frank’s anti-retaliation protections shield only those who report violations directly to the U.S. Securities and Exchange Commission. While the decision may seem like a win for American employers, it may be, in actuality, a loss for corporate America. The Supreme Court’s decision restricts the rights of whistleblowers but, ultimately, creates uncertainty for employers as they may be excluded from initial reports of suspected violations and deprived of the opportunity to address the issue prior to the SEC’s involvement.
Anti-retaliation protections for whistleblowers
To combat corporate misconduct and garner confidence in the financial markets, Congress respectively passed the Sarbanes–Oxley Act of 2002, 116 Stat. 745 and the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, 124 Stat. 1376. While both Acts provide protections for whistleblowers from retaliation by their employer, they differ in material ways. Perhaps the biggest difference is how each Act delineates who is eligible for protection.
Sarbanes-Oxley applies to all employees who report misconduct to the Securities and Exchange Commission, any other federal agency, Congress, or an internal supervisor. Dodd-Frank is more limited. It defines “whistleblower” to include a person who provides information relating to a violation of the securities laws to the Commission. As compared to Sarbanes-Oxley, Dodd-Frank provides additional incentives for whistleblowers. Most notable is that a whistleblower may be eligible to receive an award for providing original information to the SEC that leads to a successful enforcement action, and to receive double back pay with interest if subjected to retaliation.
Pursuant to Dodd-Frank, the SEC adopted regulations interpreting the anti-retaliation protections for whistleblowers. Under Rule 21F-2, whistleblowers can gain anti-retaliation protection without providing information to the SEC, so long as they provide information in any other protected manner, such as a report to a company supervisor.
The Supreme Court’s decision in Digital Realty
In Digital Realty Trust, Inc. v. Somers, the plaintiff, Paul Somers, alleged that the defendant, his previous employer, terminated him in retaliation for reporting to senior management suspected securities law violations committed by the company. However, although nothing prevented Somers from alerting the SEC of the suspected violations, he never contacted the SEC prior to his termination. After his termination, Somers filed a suit in federal court against the company alleging that the company unlawfully terminated him in violation of Dodd-Frank’s anti-retaliation provision, which protects whistleblowers from such conduct.
The company moved to dismiss Somers’s lawsuit on the ground that he did not qualify as a whistleblower under Dodd-Frank because he did not alert the SEC prior to his termination. Relying on Rule 21F-2, the trial court denied the company’s motion on grounds that the SEC regulation extends the Dodd-Frank anti-retaliation protection to any employee who reports suspected violations internally. The Ninth Circuit Court of Appeals affirmed the trial court’s decision, concluding that Dodd-Frank’s definition of a whistleblower should be read to include those employees who report suspected violations internally, notwithstanding whether those employees also provided information to the SEC.
The Supreme Court reversed the Ninth Circuit and rejected the broad interpretation of a “whistleblower” under Dodd-Frank’s anti-retaliation provision. Specifically, the Court held that Dodd-Frank’s definition of “whistleblower” unambiguously and unequivocally limits its anti-retaliation protections to those individuals who provide information to the SEC. The Court concluded that because Somers did not provide information to the SEC before his termination, he did not qualify as a “whistleblower” at the time of his termination and, therefore, was ineligible to seek relief under Dodd-Frank’s anti-retaliation provision. In doing so, the Court disregarded the SEC’s interpretation of Dodd-Frank, which the Court found inconsistent with the plain wording of the statute.
Implications for employers
The incentives for future whistleblowers are clear – report suspected violations directly to the SEC. Whistleblowers may still choose to also report suspected violations to their employers, but whether employees will do so is uncertain. As a result, companies may be deprived of an opportunity to investigate and resolve suspected violations internally prior to SEC involvement, or to assess whether to take advantage of the benefits from self-reporting a violation to the SEC. Put simply, a company may be notified for the first time of a potential securities law violation when it hears from the SEC.
Accordingly, the one certainty for companies subject to Dodd-Frank and Sarbanes-Oxley is that establishing and maintaining compliance programs that encourage whistleblowers to report their complaints internally is vital. Companies’ compliance programs should inform employees and make them feel comfortable with the internal reporting process. To be effective, companies should establish policies and procedures that help ensure employees are confident that they will not be retaliated against for coming forward with suspected violations. In light of the Digital Realty decision, policies and procedures that fail to assure employees that their complaints will be addressed appropriately now run the heightened risk of removing a company from the reporting process and keeping it in the dark until the SEC comes calling.
Should you need assistance regarding claims involving whistleblower issues, please contact Gunster’s labor and employment law practice group. Should you need assistance regarding an existing compliance program or in establishing a compliance program, please contact Gunster’s securities and corporate governance practice group.
This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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