August 30, 2017 Articles

The Scope of Dodd-Frank’s Whistleblower Protections Is Hotly Disputed

Pending Supreme Court review, a Ninth Circuit ruling further complicates the terrain

by Rafael E. Rosario Jr.

Section 21F of the Dodd-Frank Act (DFA) directs the Securities and Exchange Commission (SEC) to pay monetary awards to whistleblowers who provide "original information" leading to enforcement actions that result in sanctions exceeding $1 million. Thus far, the SEC's whistleblower program has been successful; indeed, as of 2016, the SEC's Office of the Whistleblower has issued more than $111 million in awards to 34 individuals. See SEC, 2016 Annual Report to Congress on the Dodd-Frank Whistleblower Program [hereinafter SEC Annual Report], at 10 (Nov. 15, 2016). The SEC received over 4,000 whistleblower tips in 2016 alone. See id. at 23. A circuit split among the Second, Fifth, and Ninth Circuits, however, threatens the whistleblower program's ongoing success and provides mixed signals to the financial institutions covered by the DFA.

The dispute concerns whether Congress intended that section 21F protect whistleblowers against unlawful retaliation only if the whistleblower reports alleged securities violations to the SEC. That narrow reading was first adopted by the Fifth Circuit in Asadi v. G.E. Energy (USA), 720 F.3d 320 (5th Cir. 2013). A Sixth Circuit district court largely agreed with that same reasoning in Verble v. Morgan Stanley Smith Barney, LLC, 148 F. Supp. 3d 644, 656 (E.D. Tenn. 2015).

By contrast, the Ninth Circuit, in Somers v. Digital Realty Trust Inc., 850 F.3d 1045 (9th Cir. 2017), recently endorsed a broader interpretation of the law, which holds that the DFA prohibits employers from firing whistleblowers who report alleged securities violations either to the SEC or within their respective companies. In so doing, the Somers court followed the Second Circuit's decision in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015). Resolution of the circuit split is particularly important because, of the whistleblowers who were "current or former employees of the entity, approximately 80 percent raised their concerns internally to their supervisors or compliance personnel. . . ." See SEC Annual Report, at 18 (emphasis added).

To resolve this conflict, both Berman and Somers defer to the SEC's interpretation of the DFA in SEC Rule 21F-2(b). In adopting the rule, the SEC stated its view that that under the DFA, whistleblowers are "individuals who report to persons or governmental authorities other than the Commission." Securities Whistleblower Incentives and Protections, 76 Fed Reg. 34, 300, 34,304 (June 13, 2011) (emphasis in original). Notably, to resolve the pending conflict, the court in Somers deferred to SEC Rule 21F-2(b) and thereby protected individuals who may report alleged securities violations only to corporate managers or supervisors. See Somers, 850 F.3d at 1050–51.

The Supreme Court recently decided that the existing circuit split is ripe for review. As the Court considers the split, recently appointed Justice Neil M. Gorsuch may cast the deciding vote. Justice Gorsuch's previous criticisms of the improper judicial deference commonly afforded to administrative agencies such as the SEC suggests that the Court could eventually narrow the DFA's whistleblower protections and overturn the Somers decision.

How the Circuit Split Developed: Asadi Announces a Narrow View
The circuit split concerns whether courts conclude that the DFA's definition of a "whistleblower" conflicts with the law's antiretaliation provisions in such a way that can be resolved only by SEC Rule 21F-2(b). In other words, the issue facing courts is whether a strict reading of the act permits the termination of corporate whistleblowers who do not report possible securities violations to the SEC, opting instead to disclose the alleged violations only within their respective companies.

Despite that possible outcome, in Asadi, the Fifth Circuit upheld the dismissal of a DFA whistleblower complaint filed by Khaled Asadi, who claimed he was fired for reporting violations of the Foreign Corrupt Practices Act to his supervisor. See 720 F.3d at 621. The court noted that the DFA defines a whistleblower as "any individual who provides . . . information relating to a violation of the securities laws to the Commission. . . ." 15 U.S.C. § 78u-6(a)(6) (emphasis added). In its whistleblower provision, the act further bans employers from retaliating against "whistleblowers" who (i) provide information "to the Commission," (ii) initiate or assist in any "investigation or judicial or administrative action," or (iii) make disclosures required "under the Sarbanes-Oxley Act of 2002 . . . and any other law, rule, or regulation subject to the jurisdiction of the Commission." 15 U.S.C. § 78u-6(h)(1)(A).

Subsection (iii) of the whistleblower provision therefore creates the apparent conflict facing courts nationwide. That subsection seemingly prevents employers from retaliating against whistleblowers who report possible securities violations pursuant to the Sarbanes-Oxley Act (SOX). The issue here is that, unlike subsections (i) and (ii) of the whistleblower provision, SOX expressly protects whistleblowers who report alleged securities violations to corporate supervisors or managers.

The court in Asadi examined the text of the statute and nonetheless concluded that it was clear: The DFA protects only "whistleblowers" from unlawful retaliation, and the act defines "whistleblowers" as individuals providing "information relating to a securities violation to the SEC." Asadi, 720 F.3d at 626 (emphasis added). Unlike SOX, the DFA therefore does not expand protections to employees who only internally report possible securities violations.

Somers Favors Broader Whistleblower Protections
In Somers, the Ninth Circuit approved a more expansive interpretation of the DFA's whistleblower provision. In that case, the court sided with plaintiff, who alleged that his employer violated the DFA by firing him after he reported alleged securities violations only to senior management. See Somers, 850 F.3d at 1047.

The dispute again turned on subsection (iii) of the whistleblower provision, which prohibits retaliation against whistleblowers making disclosures under SOX. Crucially, SOX requires certain employees to internally report alleged securities violations. For instance, before disclosing anything to the SEC, auditors must "as soon as practicable, inform the appropriate level of management" about any illegal acts. 15 U.S.C. § 78j-1(b). SOX also mandates that attorneys report alleged securities violations "up the ladder" to the company's chief legal officer. See 15 U.S.C. § 7245. In the court's view, following the Asadi decision would endorse an illogical reading of the DFA because Congress could not have intended the law to leave both auditors and attorneys without any protections. See Somers, 850 F.3d at 1049–50.

The court concluded by noting that SEC Rule 21F-2(b) resolved any ambiguity relating to the whistleblower provision. See Somers, 850 F.3d at 1050–51; see also Berman, 801 F.3d at 155. Thus, pursuant to Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), the court deferred to SEC Rule 21F-2(b), which it considered a reasonable interpretation of the act because it was more likely that Congress intended the DFA to protect "employees whether they blow the whistle internally, as in many instances, or they report directly to the SEC." Somers, 850 F.3d at 1051.

Justice Gorsuch May Eventually Resolve the Circuit Split
On March 20, 2017, just two weeks after Somers, the Supreme Court declined to resolve the pending circuit split by rejecting the certiorari petition filed by plaintiff in the Verble case. The denial of certiorari notably occurred before the confirmation of Justice Gorsuch. However, at the end of the 2017 term, on June 26, 2017, the Supreme Court granted the petition for certiorari in Somers. With the Court's current composition, it appears that Justice Gorsuch may cast a crucial and even deciding vote concerning the DFA's whistleblower program. More to the point, Justice Gorsuch's previous strong criticism of Chevron indicates that he would likely reject the deference afforded to SEC Rule 21F-2(b) in both Berman and Somers.

While still a member of the Tenth Circuit, then Judge Gorsuch wrote the opinion in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016), an immigration case in which the court declined to extend Chevron deference to a rule enacted by the Board of Immigration Appeals. In his concurrence, Judge Gorsuch reasoned that, because of Chevron deference, courts are simply endorsing an administrative agency's interpretation of a disputed statute, which violates the constitution's separation of powers. See Gutierrez-Brizuela, 834 F.3d at 1152–54. In his view, Chevron requires that courts decide whether an administrative agency's statutory interpretation is "reasonable," instead of allowing judges to "interpret the law and say what it is." Id. at 1152 (emphasis in original). Because of the central role Chevron played in both Berman and Somers, Justice Gorsuch's lengthy critique suggests that he would side with the Court's current conservative majority as the Court considers Somers in the fall 2017 term.After all, an originalist ideology grounded the narrow interpretation favored by the Fifth Circuit in Asadi, which, it is important to note, did not decide the pending issue by deferring to SEC Rule 21F-2(b). See Asadi, 720 F.3d at 620–25.

Key Takeaways
Supreme Court guidance concerning the scope of the DFA's whistleblower protections is necessary, given that, as previously noted, most whistleblowers thus far have reported potential securities violations internally. One crucial result of both Somers and Berman isthat these decisions allow whistleblowers to file claims several years after the alleged retaliatory action occurred. As an example, the statute of limitations for the DFA is between 6 and 10 years. See 15 U.S.C. § 78u-6(h)(1)(B)(iii). SOX, on the other hand, provides only a 180-day statute of limitations and requires that whistleblowers exhaust administrative remedies before filing in federal court. See 18 U.S.C. § 1514A(b)(1)–(2).

The continued uncertainty surrounding the actual scope of the DFA's whistleblower protections thus requires that corporate compliance programs maintain robust policies and procedures concerning the investigating and reporting of whistleblower complaints both internally and to the SEC. Comprehensive training programs concerning the rights of whistleblowers under state and federal law are another vital step. Finally, to prevent claims in the first place, supervisors and managers should seek advice from experienced outside counsel when considering any action involving a corporate whistleblower.


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