The Supreme Court and the Scope of Whistleblowing Anti-retaliation Protections

Yesterday [February 21, 2018], SCOTUS handed down its decision in Digital Realty v. Somers, a case addressing the split in the circuits regarding the application of the Dodd-Frank whistleblower anti-retaliation protections: do the protections apply regardless of whether the whistleblower blows the whistle all the way to the SEC or just reports internally to the company? You might recall that during the oral argument, the Justices seemed to signal that the plain language of the statute was clear and controlling, thus suggesting that they were likely to decide for Digital, interpreting the definition of “whistleblower” in the Dodd-Frank anti-retaliation provision narrowly to require SEC reporting as a predicate. There were no surprises. As Justice Gorsuch remarked during oral argument, the Justices were largely “stuck on the plain language.” The result may have an ironic impact: while the win by Digital will limit the liability of companies under Dodd-Frank for retaliation against whistleblowers who do not report to the SEC, the holding that whistleblowers are not protected unless they report to the SEC may well drive all securities-law whistleblowers to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor.

Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 added Section 21F to the Exchange Act, establishing new incentives and protections for whistleblowers, including monetary awards for reporting information, confidentiality provisions and employment retaliation protections. The statute defines a “whistleblower” as a person who reports potential violations of the securities laws to the SEC. Under the anti-retaliation provisions, an employer is prohibited from discharg­ing, harassing or otherwise discriminating against a “whistleblower” because of the whistleblower’s having made protected disclosures in any of three situations: (i) providing information to the SEC, (ii) testifying or assisting in the SEC’s investigation and (iii) “making disclosures that are required or protected under” SOX, the Exchange Act, specified criminal anti-retaliation prohibitions or “any other law, rule, or regulation subject to the jurisdiction of the Commission.” In its rulemaking under the statute, the SEC employed the definition of “whistleblower” in the statute in connection with the incentive award provisions, but, with regard to the anti-retaliation protections, adopted a broader definition covering all three clauses above, thereby allowing the protections to apply to internal company reporting even if the individual did not report to the SEC.

Somers, formerly a vice-president of the company, was terminated by the company and claimed that his termination was a result of his reports to senior management regarding possible securities law violations. However, he did not make any disclosure of the alleged misconduct to the SEC. Somers sued, claiming that Digital had retaliated against him as a whistleblower in violation of the whistleblower protections of Dodd-Frank. Digital argued that, because he did not report to the SEC, Somers was not a “whistleblower” as defined in Dodd-Frank, which, Digital contended, expressly applies only to “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” As a result, Digital maintained, Somers was not entitled to the protection of the Dodd-Frank anti-retaliation provisions.

The 9^th Circuit refused to dismiss Somers’ whistleblower claim, even though he had failed to report the violation to the SEC. After analyzing the statute, the 9^th Circuit panel concluded that the definition of “whistleblower” as an employee who reports to the SEC “should not be dispositive of the scope of [Dodd-Frank’s] later anti-retaliation provision”; the term “whistleblower,” the panel held, did not limit protections to persons who alerted the SEC regarding alleged unlawful activity, but also protected persons who were terminated after making internal disclosures. The panel reasoned that applying the narrow definition to the entirety of the anti-retaliation provision would narrow clause (iii) (quoted above) “to the point of absurdity” because it would require the employee to report both internally and to the SEC.

In addition, the 9th Circuit panel noted that Rule 21F-2, adopted by the SEC, expressly supported that interpretation. (That rule provides that “[t]he anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.”) The 9^th Circuit panel agreed with the 2^d Circuit that,

“even if the use of the word ‘whistleblower’ in the anti-retaliation provision creates uncertainty because of the earlier narrow definition of the term, the agency responsible for enforcing the securities laws has resolved any ambiguity and its regulation is entitled to deference.”

(See this PubCo post for a discussion of the 2^nd Circuit case.) In contrast, the 5^th Circuit has interpreted the statute to protect only those who report to the SEC.

Question presented

The question presented for review was “[w]hether the anti-retaliation provision for ‘whistleblowers’ in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 extends to individuals who have not reported alleged misconduct to the Securities and Exchange Commission and thus fall outside the Act’s definition of a ‘whistleblower.’” (For a discussion of the Court’s oral argument in this case, see this PubCo post.)

Held

Dodd-Frank’s anti-retaliation provision does not extend to an individual, like Somers, who has not reported a violation of the secu­rities laws to the SEC.

Opinion

The Court reversed the decision of the 9^th Circuit. In her opinion, Justice Ginsburg focused on interpreting the precise language of the Dodd-Frank provision, comparing it to the broader scope of the whistleblower protection provisions in SOX, which do extend to internal reporting. In contrast to SOX, she wrote, Dodd-Frank was adopted in part to help the SEC identify securities law violations. Accordingly, Dodd-Frank addressed this goal by adding a new whistleblower provision to the Exchange Act that defines “whistleblower” as an individual who provides in­formation regarding a securities law violation to the SEC. The statute establishes an incentive program for reporting to the SEC as well as anti-retaliation provisions, and, she observed, directs that the definition be applied throughout the statute’s whistleblower provisions (§78u–6). Justice Ginsburg also noted the differences in the procedures and available recovery under the two statutes.

Quoting from Burgess v. United States, 553 U. S. 124, 130 (2008), Justice Ginsburg maintained that the question before the Court was resolved by applying the principle that, “‘[w]hen a statute includes an explicit definition, we must follow that definition,’ even if it varies from a term’s ordinary meaning”:

“Our charge in this review proceeding is to determine the meaning of ‘whistleblower’ in §78u–6(h), Dodd-Frank’s anti-retaliation provision. The definition section of the statute supplies an unequivocal answer: A ‘whistleblower’ is ‘any individual who provides … information relating to a violation of the securities laws to the Commission.’… (emphasis added). Leaving no doubt as to the definition’s reach, the statute instructs that the ‘defi­nitio[n] shall apply’ ‘[i]n this section,’ that is, throughout §78u–6.”

That definition, she concluded, describes who is eligible for anti-retaliation protection if the individual engages in any of the protected conduct enumerated in the three clauses. An individual not within that definition is not entitled to protection. Moreover, she observed, this interpretation is consistent with “the ‘core objective’ of Dodd-Frank’s robust whistleblower program, as Somers acknowledges, [which] is ‘to motivate people who know of securities law violations to tell the SEC.’” That’s why, for example, the program provides for substantial monetary rewards for SEC reporting. By comparison, SOX had a broader mission: to “disturb the ‘corporate code of silence’ that ‘discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally.’”

Somers had argued that the narrow whistleblower definition applied only to the Dodd-Frank award program, not to its anti-retaliation provisions, and urged the Court to give the term its ordinary meaning in the anti-retaliation context. To do otherwise, he argued, would produce anomalous results and “gut” the protections for the other types of conduct, particularly the conduct encompassed by the third clause above. Even employees providing testimony to the SEC (under the second clause) could potentially be in jeopardy if providing testimony were not viewed as “reporting to the SEC.” In addition, the Solicitor General contended that, because there was no required “temporal or topical connection” between the violation that was reported to the SEC and internal disclosure that triggered the retaliation, it would possible, under Digital’s reading, for an employee fired for reporting accounting fraud internally in 2017 to have protection because the employee had reported an insider-trading violation to the SEC years ago.

The Court disagreed:

“With the statutory definition incorporated, clause (iii) protects a whistleblower who reports misconduct both to the SEC and to another entity, but suffers retaliation because of the latter, non-SEC, disclosure. That would be so, for example, where the retaliating employer is unaware that the employee has alerted the SEC. In such a case, without clause (iii), retaliation for internal reporting would not be reached by Dodd-Frank, for clause (i) applies only where the employer retaliates against the employee ‘because of’” the SEC reporting…. Moreover, even where the employer knows of the SEC reporting, the third clause may operate to dispel a proof problem: The employee can recover under the statute without hav­ing to demonstrate whether the retaliation was motivated by the internal report (thus yielding protection under clause (iii)) or by the SEC disclosure (thus gaining protec­tion under clause (i)).”

Moreover, dual reporting was hardly anomalous: the Solicitor General, she observed, reported that about 80% of award recipients in 2016 had initially reported internally. Justice Ginsburg also gave short shrift to the hypothetical raised by the Solicitor General, contending that “it veers far from the case before us.” In addition, auditors, attor­neys and other employees who are subject to internal-reporting requirements should not have additional concerns as they would be protected under the provision as soon as they also reported to the SEC. And with regard to the application of the protections to employee testimony, because “the statute expressly delegates authority to the SEC to establish the ‘manner’ in which information may be provided to the Commission by a whistleblower,” the SEC could easily determine that giving testimony was a means of SEC reporting.

Consequently, because the statute was clear, the Court did “not accord defer­ence to the contrary view advanced by the SEC” in its rulemaking: the “statute’s unambiguous whistleblower definition, in short, precludes the Commission from more expansively inter­preting that term.”

Concurring Opinions

Justice Thomas, with Justices Alito and Gorsuch joining, concurred in the judgment, but “only to the extent it relies on the text of [Dodd-Frank,]” objecting to the opinion’s discussion of “the supposed ‘purpose’ of the statute, which it primarily derives from a single Senate Report.” Even assuming that a majority of Senators had read the report, they doubted that it was a “‘particularly reliable source’ for discerning ‘Congress’ intended mean­ing.’”

Justice Sotomayor (with Justice Breyer joining) joined the Court’s opinion in full, but wrote a concurring opinion in support of the use of legislative history in statutory interpretation; she wrote “only to note my disagreement with the suggestion in my col­league’s concurrence that a Senate Report is not an appro­priate source for this Court to consider when interpreting a statute.”