chevron-down Created with Sketch Beta.
February 25, 2016

Circuit Split over Whistleblower Protections

Important questions about Dodd-Frank and the SEC's reach

Matthew P. Allen

Congress passed the “securities whistleblower incentives and protection” section of the Dodd-Frank Act (section 21F or the Dodd-Frank anti-retaliation provision) to protect “whistleblowers,” which it defines as those who report violations of the securities laws to the Securities and Exchange Commission (SEC). Section 21F also prohibits retaliation against whistleblowers in certain circumstances. The SEC has issued a rule under which an employee who complains of a securities law violation but does not report it to the SEC may still benefit from section 21F’s protections for “whistleblowers.” The Fifth Circuit has rejected the SEC rule and limited section 21F’s anti-retaliation protections to “whistleblowers” as defined in section 21F—those who report securities law violations to the SEC. In late 2015, the Second Circuit adopted the SEC rule and permitted an employee who did not report a securities law violation to the SEC to nonetheless take advantage of the generous anti-retaliation remedies under Dodd-Frank’s whistleblower provisions.

This circuit split raises important questions about the scope of Dodd-Frank’s whistleblower protections and the reach of the SEC and the courts in interpreting or expanding those protections.

The Fifth Circuit’s Rejection of the SEC Rule
In Asadi v. GE Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), the Fifth Circuit held that an employee must report potential securities law violations to the SEC, not just to his or her employer, in order to have standing to bring a lawsuit under the Dodd-Frank anti-retaliation provision. In so ruling, the court invalidated an SEC administrative definition of “whistleblower” that impermissibly broadened the definition by Congress to include employees who do not report securities law violations to the SEC.

Asadi was employed by GE Energy and was sent to Amman, Jordan, to serve as the Iraq country executive. Asadi informed his supervisor about concerns raised by an Iraqi official that the company was potentially violating the Foreign Corrupt Practices Act (FCPA). Asadi did not report this tip to the SEC. Asadi was terminated one year later and sued his employer under the Dodd-Frank anti-retaliation provision, arguing he was fired because he reported his concerns about the FCPA. In section 78u-6(a) of the Dodd-Frank anti-retaliation provision, Congress defines “whistleblower” as someone who “provides . . . information relating to a violation of the securities laws to the Commission.” 15 U.S.C. 78u-6(a)(6) (emphasis added). However, the anti-retaliation provision, section 78u-6(h), contains a subsection—78u-6(h)(1)(A)(iii)—that prohibits retaliation against an employee making disclosures required by the Sarbanes-Oxley Act, which does not require disclosure of information to the SEC. Asadi argued that persons who fall within this subsection are protected even if they do not fall within the section 78u-6(a) definition of “whistleblower,” which requires reporting to the SEC as part of the definition. Asadi said that the conflict between 78u-6(a) and 78u-6(h) created an ambiguity that should be cured in his favor. The court cited several U.S. district court opinions that accepted Asadi’s analysis and permitted retaliation claims by employees who did not report alleged securities violations to the SEC. See Asadi, 720 F.3d at 625 n.6.

The Fifth Circuit in Asadi found that there was no conflict between or ambiguity in the two provisions. To the court, section 78u-6(a) unambiguously defines “whistleblower” as an individual who provides “information relating to a securities law violation to the SEC.” Id. at 625. Section 78u-6(h)(1)(A) represents protected activity in a whistleblower retaliation claim, but it does “not define which individuals qualify as whistleblowers.” Id. Indeed, the anti-retaliation section 78u-6(h) unambiguously provides protection to “whistleblowers,” a term that is unambiguously defined in section 78u-6(a) as those who report securities law violations to the SEC. Congress did not provide anti-retaliation protection to any “employee” or “individual”; it provided protection to a “whistleblower,” previously defined as someone who reports violations to the SEC. See id. at 626. Merely because someone may engage in protected activity under section 78u-6(h)(1)(A)(iii) and not qualify as a “whistleblower” “does not render [section] 78u-6(h)(1)(A)(iii) conflicting or superfluous.” Id.

The court provided an example of an employee who reports a securities law violation to the company’s chief executive officer (CEO) and the SEC, and is fired by the CEO when the CEO was not aware the employee also reported to the SEC. Because the employee was not fired for reporting a violation to the SEC, the employee could not pursue a retaliation claim under section 78u-6(h)(1)(A)(i) or (ii). But the disclosure to the CEO is protected under the Sarbanes-Oxley Act, under section 78u-6(h)(1)(A)(iii). And because the employee also reported the violation to the SEC, he qualifies as a whistleblower under section 78u-6(a) and is eligible for the more generous remedies and limitations period provided in the the Dodd-Frank anti-retaliation provision as compared with the Sarbanes-Oxley whistleblower provisions. Id. at 627–28 & n.11, 629. Asadi’s interpretation of section 78u-6(h)(1)(A)(iii) would render the whistleblower provisions of the Sarbanes-Oxley Act moot because both could be used without reporting violations to the SEC. See id. at 628.

The court rejected Asadi’s reliance on Rule 21F-2(b)(1), 27 C.F.R. § 240.21F-2(b)(1), in which the SEC redefined “whistleblower” to include individuals who engage in protected activity under section 78u-6(h) but do not report the securities law violation to the SEC. Because the court found Congress’s definition of “whistleblower” in section 78u-6(a) unambiguous, the court rejected “the SEC’s expansive interpretation of the term ‘whistleblower’ [in Rule 21-F(b)(1)] for purposes of the whistleblower protection provision” under the Chevron doctrine. In Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the Supreme Court found that an administrative agency like the SEC must give effect to the unambiguous intent of Congress and not make rules that contradict that intent. See Asadi, 720 F.3d at 629–30 (citing Chevron, 467 U.S. at 842–44 (finding that an administrative agency like the SEC must give effect to the unambiguous intent of Congress and not make rules that contradict that intent)). See also Rachel Louise Ensign, “The Whistleblower Debate: Companies Say Protections Apply Only When Tipsters Raise Concerns with the SEC,” Wall St. J., Aug. 12, 2013, at B4.

U.S. district courts in other circuits have declined to follow Asadi, deferring to the SEC’s broadened definition of “whistleblower” in Rule 21-F(b)(1). The Second Circuit reached the same result but did so in part relying on a recent Supreme Court decision interpreting the Affordable Care Act and rejecting an implementing Internal Revenue Service (IRS) rule. The Second Circuit ruling creates a circuit split in interpreting the Dodd-Frank anti-retaliation provision and how far courts will go in imposing their intent on what Congress “really meant” based on the courts’ opinion about the quality of the legislation and the legislative process.

The Second Circuit’s Application of Chevron Deference to the SEC Rule
In Berman v NEO@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015), the Second Circuit ruled, contrary to the Fifth Circuit, that an employee was eligible to pursue Dodd-Frank anti-retaliation remedies after reporting alleged securities fraud to his employer but not the SEC. The Berman court declined to apply section 21F(a)(6)’s definition of “whistleblower” to the anti-retaliation provision in section 21F(h)(1)(A)(iii), thereby finding an ambiguity in section 21F, which it cured by Chevron deference to SEC Rule 21F-2(b)(ii). While acknowledging that such definitional subsections of statutes are usually taken literally and “usually applied to all subdivisions literally covered by that definition,” the Second Circuit has “also recognized that ‘mechanical use of a statutory definition” is not always warranted.” Id. at 154. The Berman court declined to apply the whistleblower definition to the anti-retaliation subsection of section 21F because, in the court’s view, subsection (iii) of the anti-relation provision was added at “the last minute,” and in the court’s view, the drafters of section 21F would never have intended to limit subsection (iii)’s remedies with its own definition of “whistleblower”:

Ultimately, we think it doubtful that the conferees who accepted the last minute insertion of subdivision (iii) would have expected it to have the extremely limited scope it would have if it were restricted by the Commission reporting requirement in the “whistleblower” definition in subsection 21F(a)(6).

Id. at 155.

The court found that the limited anti-retaliation protection afforded in subsection (iii), if it was saddled with the definition of “whistleblower” in subsection (a)(6), rendered section 21F “as a whole sufficiently ambiguous to oblige us to give Chevron deference” to SEC Rule 21F, which does not require SEC reporting in order to qualify for Dodd-Frank’s more generous anti-retaliation remedies. The court found that the SEC rule was a “reasonable interpretation of the agency charged with administering the statute.” Id.

The court also relied on an SEC release issued after oral argument in Berman,but before the opinion was issued, in which the SEC “clarified” its position in oral argument that protection as a whistleblower under section 21F “is determined solely by the terms of Exchange Act Rule 21F-2(b)(1).” Id. at 148 n.1 (quoting SEC Release No. 34-75592, Interpretation of the SEC’s Whistleblower Rules under Section 21F of the Securities Exchange Act of 1934 (Aug. 4, 2015)).

The court found license to ignore the definition of whistleblower in one part of a statute in interpreting another part of the statute from the Supreme Court’s decision in King v. Burwell, 135 S. Ct. 2480 (June 25, 2015). In King, the Court saved the Affordable Care Act by interpreting the statutory phrase “established by the state” to mean “established by the state or the Federal Government.” The Court found that interpreting the phrase as drafted by Congress would have denied tax credits to individuals in states using a health insurance exchange established by the federal government. The Court’s opinion was that following the words Congress wrote would deny states with federal exchanges two of the three major reforms of the Affordable Care Act, which would send those states’ individual insurance markets into a “death spiral.” Id. at 2493. The Court inferred that Congress would never intend an interpretation of the Affordable Care Act that would “destroy” health insurance markets and therefore interposed its own interpretation, which it felt was “a fair reading of legislation” because it was the Court’s “fair understanding of the legislative plan.” Id. at 2496.

Like the Berman court, the Court in King seemingly ignored the plain wording of the statute by impugning the legislative process, which in the Court’s opinion did “not reflect the type of care and deliberation that one might expect of such significant legislation.” Id. at 2492. The Court also declined to extend Chevron deference to the IRS rule interpreting the relevant provision of the Affordable Care Act, opining that Congress would not have delegated a decision of such “deep ‘economic and political significance’ that is central” to the act’s statutory scheme to an agency that “has no expertise in crafting health insurance policy of this sort.” Id. at 2489. The Court’s view was clear: “This is not a case for the IRS.” Id.

Unlike the King Court, however, the Second Circuit in Berman found that the SEC was “clearly the agency to resolve the ambiguity” in the Dodd-Frank Act, and so the Second Circuit deferred “to the reasonable interpretative rule adopted by the appropriate agency.” Berman, 801 F.3d at 155.

Questions Raised by the Circuit Split
During the past seven years, there has been a proliferation of significant legislation, including attempts to revamp health insurance and securities and financial markets and institutions. Administrative agencies charged with implementing these large pieces of legislation have significant rulemaking agendas. As illustrated by Dodd-Frank’s whistleblower provision, there is sometimes a fine line between statutory interpretation and rewriting legislation under the guise of ambiguity. As an academic exercise, this may prove interesting. As a matter of commerce, this creates uncertainty.

This uncertainty raises seminal questions for our federal courts and their proper role in our tripartite system:

• Should they simply enforce the laws of Congress as written, regardless of how complicated or poorly written, even if doing so “destroys” the statute or the program it was meant to implement?

• Is it better to allow a poorly written or conceived statute or statutory scheme to die and allow Congress to try again if it can, or should courts be in the business of amending bad (or badly written) law by opining on the quality of the legislative process and, if the court finds it wanting, provide its own “fair reading of legislation” after its own “fair understanding of the legislative plan,” whatever that is, as the Supreme Court attempted in King?

• Is it the court’s place to judge “the quality of the care and deliberation that went into this or any law”? Id. at 2506 (Scalia, J., dissenting).

• Isn’t a law “enacted by voice vote with no deliberation whatever” as fully binding on us “as one enacted after years of study, months of committee hearings, and weeks of debate”? Id.

• Isn’t it up to Congress, and not the courts, to “design its laws with care,” and up to the people “to hold them to account if they fail to carry out that responsibility”? Id.

• Should courts defer to agency interpretations of their own rules, even when those interpretations are issued after oral argument but before the court issues its opinion, as the Second Circuit in Berman did with the SEC’s self-serving rule interpretation?

Whatever the answers to these questions, the one overriding principle attendant to the success of our system of government is that only Congress can make law. Administrative agencies can implement the laws of Congress and courts can say what they are, but neither can supplant the role of an elected Congress to make law. It appears that the Supreme Court’s decision in King has created a slippery slope, which courts like the Second Circuit in Berman may use to slide statutory provisions into what they view as the “fair legislative plan.” This is a dangerous and uncertain slope.

Keywords: litigation, securities, whistleblower, anti-retaliation, section 21F, Chevron deference