On February 21, 2018, the United States Supreme Court unanimously held that the anti-retaliation provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") only protect individuals who report violations of the securities laws to the SEC.
Writing for the Court in Digital Realty Trust, Inc. v. Somers, Supreme Court Justice Ruth Bader Ginsburg explained that the Dodd-Frank Act explicitly defined the term "whistle-blower" to include only individuals who report to the SEC and that, when a statute explicitly defines a term, courts must follow that definition. Therefore, she concluded, Paul Somers, who had reported only within his company, was ineligible for the whistle-blower protections under the Dodd-Frank Act.
Somers was employed by Digital Realty Trust for four years before he was fired in 2014, allegedly in retaliation for reporting to senior management that his supervisor had eliminated internal controls in violation of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). Somers did not report those violations to the SEC, and he did not rely upon the Sarbanes-Oxley Act's own remedial scheme for retaliation against whistle- blowers. Instead, Somers sued Digital Realty Trust in federal court in California under the Dodd-Frank Act whistle-blower anti-retaliation provisions.
That court denied Digital Realty Trust's motion to dismiss, in reliance on an SEC rule, promulgated under the Dodd-Frank Act, that defined the term whistle-blower, for purposes of the Dodd-Frank Act's anti-retaliation protections, to include individuals who reported only internally. The Ninth Circuit Court of Appeals (which hears appeals from Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington and the territories of Guam and the Northern Mariana Islands) affirmed. It reasoned that applying the more limited statutory definition would narrow the protection "to the point of absurdity," and therefore that the Dodd-Frank Act's anti-retaliation provisions must include individuals who report only internally, without reporting to the SEC. Previously, the Fifth Circuit Court of Appeals (which hears appeals from Louisiana, Mississippi and Texas), when faced with this question, held that "employees must provide information to the SEC to avail themselves of Dodd Frank's anti-retaliation safeguard," but the Second Circuit reached the same conclusion as the Ninth Circuit.
In resolving the circuit split, the Supreme Court reversed the Ninth Circuit and concluded that the SEC's rule interpreting the term "whistle-blower" did not merit deference in light of the plain language of the Dodd-Frank Act. The Court found no ambiguity in the statutory definition of "whistle-blower," which expressly included only individuals who reported to the SEC. This interpretation, the Court reasoned, was supported by the underlying purpose of the Dodd-Frank Act: "to motivate people who know of securities law violations to tell the SEC."
The Court disagreed with the Ninth Circuit that applying the narrow definition would reduce protection "to the point of absurdity," on the grounds that the Dodd-Frank Act still "protects a whistle-blower who reports misconduct both to the SEC and to another entity, but suffers retaliation because of the latter, non-SEC, disclosure." The Dodd-Frank Act thus protects whistle-blowers if they disclose alleged violations to the SEC, even if a contemporaneous disclosure to a company itself is the true cause of any retaliation.
The decision could have negative consequences for corporations covered by the whistle-blower rules. If their employees, with the benefit of counsel, conclude that they have greater protection against retaliation if they report misconduct to the SEC, the ruling could end up discouraging internal reporting and encouraging whistle-blowers to circumvent any internal hotlines that the company has established.
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