February 23, 2018

Dodd-Frank Protects Only Employees Who Blow Whistle to the SEC

Holland & Knight Regulatory Litigation Blog
Steven D. Gordon | Timothy Taylor

To whom must an employee report suspected misconduct to qualify as a “whistleblower” under the Dodd-Frank Act? According to the Supreme Court in Digital Realty Trust, Inc. v. Somers, he must report his concerns to the SEC and not simply to a supervisor. We previewed the case in a webinar, and now the decision has arrived.

An employee who reports potential securities-law violations to a supervisor qualifies as a whistleblower under the Sarbanes-Oxley Act (SOX) and can sue his employer under SOX if he suffers retaliation for reporting his concerns.  But, under SOX, the employee must bring suit within 180 days and he can only recover his lost pay and any additional relief necessary to make him whole.  Dodd-Frank’s whistleblower protection is much more generous: the employee can bring suit up to six years after the retaliation occurred and he can recover double the amount of any lost pay.  Thus, employees have clear incentives to sue under Dodd-Frank, rather than SOX, if they can do so.   

There is arguably an inconsistency in the language of the Dodd-Frank Act about who qualifies as a whistleblower. Section 21F of the Act defines a “whistleblower” as someone who reports to the SEC. Yet that same provision prohibits retaliation against a “whistleblower” for making disclosures under SOX—but SOX also protects those who report to a supervisor. So what happens when somebody seeks protection under Dodd-Frank’s § 21F for reporting to a supervisor? Are they a protected “whistleblower” as defined in the statute or not? The SEC, in a 2011 regulation interpreting § 21F, said they are. The Supreme Court’s decision overrules the SEC and says they are not.

The decision has critical implications for any business obligated to follow SOX and Dodd-Frank. Only time will tell how exactly this will affect corporate compliance programs and the behavior of employees.

The Case: Digital Realty Trust, Inc. v. Somers

Until now, the federal courts were divided about how § 21F should be interpreted. The initial circuit court to review it, the Fifth, held (as the Supreme Court eventually did) that the language was plain: a Dodd-Frank “whistleblower” is someone who reports to the SEC, period. No reporting, no Dodd-Frank protections. But  the Second and Ninth Circuits ruled that the language was ambiguous—applying the “report to the SEC” requirement too strictly would undermine intended employee protections in their view—so they deferred to the SEC’s more generous interpretation that a person need not report to the SEC.

The Supreme Court’s decision restores order to the universe. The Court explained that the anti-retaliation provisions of SOX and Dodd-Frank are very different. SOX’s provision was intended to break the “corporate code of silence” purportedly prevalent in the days of Enron; it protects employees who disclose potential securities-law violations to the proper authorities or to a supervisor. Dodd-Frank’s provision, which was enacted later, was meant to encourage reporting to the SEC by providing more robust anti-retaliation protections (a longer statute of limitations, double back-pay, immediate access to courts)  and a generous bounty on any government recovery.

In light of these differences, the Supreme Court reasoned, there was nothing odd about requiring employees to report to the SEC to qualify for Dodd-Frank’s more generous protections. Which is exactly what the statute says. And because the statute is clear—a “whistleblower” is “any individual who provides … information … to the SEC”—the SEC’s contrary regulation is a nullity.

The Court also addressed several counterarguments raised by the plaintiff and its supporting amicus, the United States. The counterarguments, generally speaking, raised several scenarios where employees who report internally will not qualify for Dodd-Frank’s anti-retaliation protections. The court dismissed some as unlikely and all as insufficient to overcome the text and purpose of the statute, which is to encourage reporting to the SEC itself.

Implications for Business

The Supreme Court’s decision will, at least in the short run, lessen the exposure of employers to retaliation claims. SOX’s statute of limitations for retaliation is short—just 180 days. If employees miss that window and have not reported their concerns to the SEC, then they will have no luck prevailing under Dodd-Frank’s anti-retaliation protections.

But over the long run, the consequences are less clear. One amicus argued that the business community strongly favored the SEC’s rule granting Dodd-Frank protection to internal as well as external whistleblowers. The rationale was that businesses prefer to have their employees report misconduct internally—enabling them to address it—rather than going directly to the government. Yet the Supreme Court’s new decision tells employees that they might lose out if they don’t report to the SEC.

While the Supreme Court’s decision is a welcome development for the business community, the best safeguard against retaliation claims is a culture of compliance with clear reporting procedures and resilient anti-retaliation policies. And most importantly,  businesses must take complaints seriously. Failure to do so is the strongest predictor of whether a complainant will go outside the company. Holland & Knight has extensive experience both in preventing SOX, Dodd-Frank, and other securities problems before they start, and assisting companies after an allegation has been made, whether internally or before regulators, in litigation, or on appeal.

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