March 11, 2018 Practice Points

U.S. Supreme Court: Reporting to the SEC Is a Prerequisite for Dodd-Frank’s “Whistleblower” Anti-Retaliation Protection

The case is Digital Realty Trust, Inc. v. Somers.

Jeffrey B. Greenspan

The United States Supreme Court recently held that the anti-retaliation provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) does not extend to an individual who has not reported a violation of the securities laws to the Securities and Exchange Commission (SEC or the Commission).

In Digital Realty Trust, Inc. v. Somers, Case No. 16-1276, 2018 WL 987345 (S. Ct. Feb. 21, 2018), Paul Somers alleged that Digital Realty Trust, Inc. terminated him as a vice president shortly after he reported to senior management suspected violations of securities law by the company. However, Somers did not alert the SEC of his suspicions prior to his termination. He also failed to file an administrative complaint within 180 days of his termination, making him ineligible for relief under the Sarbanes-Oxley Act of 2002. Instead, he filed suit in the United States District Court for the Northern District of California, asserting a claim of whistleblower retaliation under Dodd-Frank.

Digital Realty moved to dismiss the claim, contending that Somers did not qualify as a “whistleblower” under Section 78u-6(h) of the act because he did not report any violations to the SEC. Section 78u-6(a)(6) defines a “whistleblower” as “any individual who provides…information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” The statute directs that definition to be applied throughout Section 78-u-6. Dodd-Frank gives “whistleblowers” incentives and protections to provide the SEC with information by allowing them to collect a cash award based on the monetary sanctions collected in any enforcement action, and prohibiting an employer from retaliating against them for reporting information to the SEC.

Despite the clear language in Section 78u-6, the district court denied Digital Realty’s motion. The district court relied on SEC Rule 21F-2. Rule 21F-2 contains two definitions for a “whistleblower.” For purposes of awarding damages, the rule states that an individual is a whistleblower if he provides the SEC with information relating to a possible violation of the federal securities laws. However, an individual may gain anti-retaliation protection as a whistleblower under Rule 21F-2 without providing information to the SEC, as long as he or she provides information in accordance with Section 78u-6(h)(1)(A)(i) through (iii). The district court found the statutory scheme to be ambiguous and deferred to SEC Rule 21F-2. The Ninth Circuit affirmed. While it acknowledged that the Dodd-Frank defines a whistleblower as an individual who provides information to the SEC itself, the Ninth Circuit concluded that applying that definition to the anti-retaliation provision would narrow Section 78u-6(h)(1)(A) “to the point of absurdity;" protecting employees only if they reported possible securities violations both internally and to the SEC.

The Supreme Court reversed the Ninth Circuit’s decision, finding that Dodd-Frank’s definition of a whistleblower was “clear and conclusive.” Citing to its decision in Burgess v. United States, 553 U.S. 124, 130 (2008), the court stated that “the statute’s unambiguous whistleblower definition, in short, precludes the Commission from more expansively interpreting that term.” It disagreed with Somers [and the Solicitor General’s] contention that Dodd-Frank’s whistleblower definition only applied to the statute’s award program and not its anti-retaliation provision; finding that “‘when a statute includes an explicit definition, [the Court] must follow that definition,’ even if it varies from the term’s ordinary meaning.” The court further noted that Dodd-Frank’s purpose and design corroborated its understanding of Section 78u-6(h)’s reporting requirement, as the “core objective” of Dodd-Frank’s whistleblower program is to motivate people who know of securities law violations to tell the SEC.

The Court found that given the facts, the case’s disposition was “evident.” It held that because Somers did not provide information to the Commission before his termination, he did not qualify as a “whistleblower” at the time of the alleged retaliation, and was therefore ineligible to seek relief under Dodd-Frank.

Jeffrey B. Greenspan is a member of Cozen O’Connor in Chicago, Illinois.