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February 04, 2016 Top Story

Circuit Split on Dodd-Frank's Whistleblower Protections

Second Circuit breaks with Fifth Circuit and concludes reporting to SEC not necessary

Sara E. Costello

The Dodd-Frank Wall Street Reform and Consumer Protection Act protects whistleblowers even if they do not give information to the Securities Exchange Commission, concludes a federal circuit court, contradicting another circuit court. In Berman v. Neo@Ogilvy LLC, the U.S. Court of Appeals for the Second Circuit defers to the SEC’s interpretation of who qualifies for Dodd-Frank’s anti-retaliation protections. Section leaders see the potential for Supreme Court resolution of the split with the Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C.

Whistleblower Confusion under Dodd-Frank 

Dodd-Frank protects whistleblowers from retaliatory discharge. Two provisions of the statute, however, generate confusion over who qualifies for protection. Subsection 21F(a)(6) of the statute defines a “whistleblower” as an individual who provides “information relating to a violation of the securities laws to the Commission.”  Subsequently, subsection 21F(h)(1)(A)(iii) states that employers are prohibited from retaliating against whistleblowers that, among other things, make disclosures protected under the Sarbanes-Oxley Act (SOX). Thus, this portion of the statute does not expressly require reporting to the SEC.

To address potential confusion between the two subsections, the SEC issued a regulation, 17 C.F.R. 240.21F-2(b)(1), stating that whistleblowers qualify for the anti-retaliation protections without reporting to the Commission. SEC reporting is, however, necessary for whistleblowers to be eligible for a monetary award.

“The SEC has been struggling with how to strike an appropriate balance between wanting to incentivize reporting wrongdoing to the Commission and not wanting to undermine the use of companies’ internal reporting and compliance mechanisms,” notes Amelia Toy Rudolph, Atlanta, GA, cochair of the ABA Section of Litigation’s Book Subcommittee of the Professional Services Liability Litigation Committee. 17 C.F.R. 240.21F-2(b)(1) is an “example of the SEC trying to strike that balance,” she says.

Second Circuit Finds Protections Extend to Internal Reporters

While working as a finance director of a media agency, the plaintiff internally made allegations of accounting fraud. During that time, the plaintiff did not share such information with the SEC. Following his termination, the plaintiff filed suit alleging his employer violated Dodd-Frank. After the U.S. District Court for the Southern District of New York dismissed the plaintiff’s claims, he appealed to the Second Circuit.

The Second Circuit concluded that “an employee who suffers retaliation because he reports wrongdoing internally, but not to the SEC” is entitled to Dodd-Frank’s retaliation protections. In making its ruling, the Second Circuit highlighted the tension between Dodd-Frank’s limited definition of “whistleblower” and its more expansive provision prohibiting retaliation against individuals making disclosures required by SOX. As the Second Circuit points out, SOX “includes several provisions concerning the internal reporting of securities law violations or improper practices.”

The Berman court also noted the limited congressional history regarding why subsection 21F(h)(1)(A)(iii) was added to the statute, the hasty realities of the legislative reconciliation process for congressional bills, and the text’s lack of clarity. Thus, the Second Circuit concluded that it was appropriate to defer to the rule adopted by the SEC. Because 17 C.F.R. 240.21F-2(b)(1) permits non-SEC reporters to pursue Dodd-Frank remedies, the Second Circuit reversed the district court.

Circuit Split over Who is Protected from Retaliation 

In Asadi v. G.E. Energy (USA), L.L.C., the Fifth Circuit concluded that Dodd-Frank’s protections extend only to individuals who provide information to the SEC. According to the Fifth Circuit, the statute’s “plain language and structure” support this finding. The Asadi court declined to rely on legislative history to interpret the statute. Similarly, it rejected the SEC’s “expansive interpretation” of who qualified for whistleblower-protection, stating that Congress had already “addressed the precise question at issue.”

Section leaders think that the circuit split on whether Dodd-Frank protects internal reporters of security law violations may attract the U.S. Supreme Court’s attention. “The issue seems ripe for review by the Supreme Court. Not only has there been a split between two federal courts of appeals, but a number of district courts have come out on different sides of the issue,” explains Clifton L. Brinson, Raleigh, NC, cochair of the Section of Litigation’s Securities Litigation Subcommittee of the Commercial & Business Litigation Committee.

“It is an issue of public interest and the cases add a second layer of interest regarding statutory interpretation rules,” says Rudolph. In addition, “the issue relates to federal securities law, an area of particular interest for the Supreme Court in recent years,” notes Brinson.

“The Fifth Circuit correctly applies principles of statutory construction and recognizes that ‘whistleblower’ is a defined term under the statute” in Rudolph’s view. On the other hand, the Second Circuit extends the scope of whistleblower protection “beyond the statutory language and thus arguably beyond what Congress intended when it passed Dodd-Frank,” she contends.

Real World Effects

Ultimately, Berman and Asadi may not cause much confusion for businesses operating in both circuits. “It’s not as if retaliation is okay in one circuit and not another,” Rudolph points out. Even in jurisdictions where courts have adopted a more restrictive view of Dodd-Frank’s protections, “an employer may still be subject to liability under SOX” for actions taken against whistleblowers. In the end, “retaliation is still a bad idea, whether it is actionable under Dodd-Frank or not, as it can affect the integrity of an employer’s internal compliance systems.”


Sara E. Costello is an associate editor for Litigation News.

Keywords:  whistleblower, Dodd-Frank, circuit split, Second Circuit, SEC

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