Supreme Court Action and Whistleblower Protections
Concerning Whistleblower Protections – 0n February 21, 2018, the Supreme Court held in Digital Realty Trust, Inc. v. Somers that to sue under the anti-retaliation provisions of the Dodd-Frank Act, a person must first report a violation of the securities laws to the Securities and Exchange Commission (SEC). In reversing a prior Ninth Circuit decision, the Supreme Court ruled that employees who report alleged violations only internally are not protected whistleblowers under Dodd-Frank but are protected only if they have reported to the SEC.
The Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) strengthened SEC enforcement by providing monetary awards and anti-retaliation protections to “whistleblowers” who report on securities law violations. The statute unambiguously provides monetary awards to people who report to the SEC. However, the issue in Digital Realty was the extent of anti-retaliation protections that restrict employers from firing, demoting, harassing or otherwise discriminating against a “whistleblower.”
The Dodd-Frank Act defines a “whistleblower” as someone who provides “information relating to a violation of the securities laws to the Commission.” While that definition seemingly only protects those who report to the SEC, the Dodd-Frank Act separately provides protection for whistleblowers who make disclosures consistent with other federal laws that do not require disclosure to the SEC, including the Sarbanes-Oxley Act.
Digital Realty Trust, Inc. v. Somers
Paul Somers worked as a vice president for Digital Realty from 2010 until he was terminated in April 2014. While employed with Digital Realty, Somers claims to have reported possible securities law violations to senior management, and alleges he was fired shortly after making these internal reports. In November 2014, Somers filed suit against his Digital Realty, claiming that his former employer retaliated against him in violation of the Dodd-Frank Act by firing him for making an internal report protected by the Sarbanes-Oxley Act.
Digital Realty immediately asked the court to dismiss the case, arguing that Somers was not entitled to whistleblower protection because he did not meet the statutory definition under the Dodd-Frank Act. By his own account, Somers admitted that he did not make any reports to the SEC.
Lower Court Decisions
A California federal court and the 9th Circuit Court of Appeals both refused to dismiss the Somers’ case. The lower courts could not find a clear way to reconcile the Act’s narrow definition of whistleblower with the broad protections of its anti-retaliation provision. Therefore, the lower courts deferred to the SEC’s interpretation of the Act which extends protection to individuals who make internal reports. Recognizing that certain provisions of the Sarbanes-Oxley Act require internal reporting, the 9th Circuit reasoned that a strict application of the Dodd-Frank Act’s whistleblower definition would narrow the anti-retaliation provisions of the Act “to the point of absurdity,” leaving entire categories of employees, such as in-house counsel and auditors, with little protection under the Act.
In short, the 9th Circuit elevated Congressional intent and regulatory interpretation over the plain language of the Act. This created a split in the circuits, as the 5th Circuit Court of Appeals had strictly applied the Act’s definition of whistleblower in an earlier case. The Supreme Court accepted the case to resolve the dispute and determine who Congress intended to protect when it defined “whistleblower” in the Dodd-Frank Act.
The Supreme Court ruled 9-0 in favor of Digital Realty. In the majority opinion authored by Justice Ginsburg, the Supreme Court held that an individual must report securities law violations to the SEC to be protected as a whistleblower under the Dodd-Frank Act. The Court found that the Dodd-Frank Act unambiguously defines a “whistleblower” as someone who provides information regarding securities law violations to the SEC. Because the statute’s definition limits those who are entitled to protection to those who report to the SEC, a person who reports only internally is not protected as a whistleblower regardless of the conduct they engage in, such as reporting misconduct.
The Court found that, by enacting the whistleblower provisions of Dodd-Frank, “Congress undertook to improve SEC enforcement and facilitate the Commission’s ‘recovery of money for victims of financial fraud.’” The Court held that by requiring the provision of information to the SEC, the narrower whistleblower definition serves the goal of assisting SEC enforcement.
The Supreme Court’s decision in Digital Realty Trust, Inc. v. Somers should remind all employers to evaluate anti-retaliation policies and to take all employee reports seriously. While a zero-tolerance policy is the most effective practice, employers should ensure all employees, supervisors and managers are aware of such policies. If you feel you have been a victim of retaliation, or have questions about any of California’s employment related laws, feel free to contact leading California employment lawyers at Kingsley & Kingsley. Call toll-free at (888) 500-8469 or contact us via email.
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