Are corporate whistleblowers protected under federal law?

Are corporate whistleblowers protected under federal law?
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In the case of Digital Realty Trust v. Somers, the Supreme Court held that the anti-retaliation provision of the Dodd-Frank Act of 2010 does not extend to an individual who has failed to report the suspected securities law violations to the Securities and Exchange Commission (SEC).

Divided panels of the U.S. Court of Appeals for the Ninth and Second Circuits had previously ruled that employees who made certain disclosures, such as those required under the Sarbanes-Oxley Act of 2002, either internally to their employers or to the SEC, should be eligible for protection from retaliation by their employers under Dodd-Frank.

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In contrast, the U.S. Court of Appeals for the Fifth Circuit had applied what it considered to be the plain language of the statute and held that employees must provide information to the SEC if they are to avail themselves of the anti-retaliation safeguard under Dodd-Frank. The Supreme Court resolved this judiciary split by unanimously reversing the judgment of the Ninth Circuit.

The background of the case was the firing of an employee, Paul Somers, by Digital Realty Trust after he had reported to management allegations that his supervisor had breached internal controls in violation of Sarbanes-Oxley. The ex-employee brought suit in the U.S. District Court for the Northern District of California claiming protection under Dodd-Frank, which protects employees against retaliation for reporting Sarbanes-Oxley violations.

Critical differences in timing and recovery procedures between Sarbanes-Oxley and Dodd-Frank likely guided Somers in the pursuit of his claim under the latter. Dodd-Frank permits a whistleblower to sue a current or former employer directly in federal district court for up to six years after the date of the alleged violation, whereas Sarbanes-Oxley procedures contain an administrative exhaustion requirement and a 180-day administrative complaint filing deadline, which had already expired.

Here, Somers filed suit seven months after he was fired. Additionally, while both Sarbanes-Oxley and Dodd-Frank authorize reinstatement and reasonable attorney fees, and Sarbanes-Oxley allows for the award of actual back pay with interest, the more liberal Dodd-Frank instructs a court to award a prevailing plaintiff double back pay plus interest. If original information provided by a whistleblower to the SEC leads to a successful enforcement action, that whistleblower is eligible for a monetary award.

While the plain text of Dodd-Frank 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 SEC’s regulations implementing the Dodd-Frank provision contain two discrete whistleblower definitions. Importantly, in the context of awards to whistleblowers, the SEC has a rule requiring whistleblowers to “provide the commission with information” relating to potential securities-laws violations. By contrast, for the purpose of anti-retaliation protection, the SEC rule does not require reporting to the commission.

Digital Realty Trust moved to dismiss the lawsuit, asserting that under the plain language of Dodd-Frank, the Somers could not technically be a whistleblower because he never reported the securities laws violations to the SEC. Although this position was rejected by the U.S District Court for the Northern District of California and the U.S Court of Appeals for the Ninth Circuit, the Supreme Court has now accepted the rationale of the Fifth Circuit, holding that Dodd-Frank does not allow an individual who has not reported suspected securities law violations to the SEC to claim anti-retaliation protection as a whistleblower.

Supreme Court Justice Ruth Bader Ginsburg wrote that because the statute explicitly defines whistleblowers as those who provide pertinent information “to the commission,” an individual who has not met the SEC reporting requirement is not a whistleblower under Dodd-Frank, and is, therefore, ineligible to receive the statute’s protection against retaliation. Ginsburg’s majority opinion also gave weight to the statute’s legislative history by considering a Senate report supporting the conclusion that the core objective of the Dodd-Frank whistleblower program is to aid SEC enforcement efforts by motivating people who know of securities law violations to tell the commission.

The opinion has significant consequences for employees, including auditors, attorneys and other professionals who are required to report misconduct inside companies before making external disclosures. Given the high court ruling, such professionals will now remain ineligible for protection against retaliation under Dodd-Frank until they inform the SEC of the potential securities law violations. If retaliated against before they are able to inform the SEC, such professionals may now have to rely on the anti-retaliation protections in Sarbanes-Oxley and must be mindful of the 180-day deadline for filing their administrative complaint as a necessary step prior to bringing a lawsuit.

Leonard K. Samuels is a partner on the dispute resolution team at Berger Singerman. David A. Archer, an associate on the team, contributed.