Supreme Court Narrows Dodd-Frank Definition of Whistleblower

The Supreme Court held yesterday that to sue under the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), a person must first report a violation of the securities laws to the Securities and Exchange Commission (SEC). The Court’s ruling in Digital Realty Trust, Inc. v. Somers, No. 16–1276, significantly narrows the scope of the Dodd-Frank Act’s anti-retaliation protections by excluding persons who, at the time of the alleged retaliation, had only reported internally, i.e., the majority of whistleblower reports.[1]

The 2010 Dodd-Frank Act expanded whistleblower incentives and protections created under the 2002 Sarbanes-Oxley Act. The question before the Supreme Court in Digital Realty Trust was whether a departure from the wording of Dodd-Frank—which defines a whistleblower as an employee who provides “information relating to a violation of the securities laws to the Commission” (15 U.S.C. §78u-6(a)(6))—was warranted in the case of retaliation. In a decision written by Justice Ginsberg and unanimous as to result, the Court held that the statute’s definition was clear and Dodd-Frank’s anti-retaliation protections therefore did not extend to individuals outside the statutory definition.

While Sarbanes-Oxley also provides some protections for whistleblowers who report internally, those are more limited than the protections available under Dodd-Frank. For example, Sarbanes-Oxley’s anti-retaliation provision contains an administrative exhaustion requirement and a six-month administrative complaint filing deadline,[2] while Dodd-Frank allows a whistleblower to sue an employer directly in federal district court and has a default six-year statute of limitations.[3]

In response to Somers’ retaliation suit, Digital Realty filed a motion to dismiss arguing that Somers did not qualify as a whistleblower under §78u–6(h) because he did not report any of the alleged violations to the SEC. The District Court for the Northern District of California denied the motion, according deference to the SEC’s pronouncement in Rule21F-2, which does not require disclosure to the SEC to gain Dodd-Frank whistleblower status. A divided panel of the Ninth Circuit affirmed the District Court’s decision on interlocutory appeal.[4] Though the Ninth Circuit majority acknowledged that Dodd-Frank defines a “whistleblower” as someone who provides information to the SEC, it reasoned that applying that definition to the anti-retaliation provisions would effectively result in employee protection only if reports of securities violations were made both internally and to the SEC, which they viewed as unlikely to occur.[5] Thus, it held, the statute should be read to protect employees who make such disclosures, whether or not they first report the information to the SEC.[6]

At the Supreme Court, Somers and the Solicitor General argued that Dodd-Frank’s whistleblower definition applied only to the award program and not, as the statutory text indicates, to its anti-retaliation provisions. They urged the Court to construe the term “whistleblower” in its “ordinary sense” without an SEC reporting requirement.[7] The alternative—they contended—would lead to inconsistencies, including, among other things, (i) vitiating the protections for whistleblowers who make disclosures to persons and entities other than the SEC; (ii) abandoning protections for auditors, attorneys, and other employees who are required to report information within the company before making external disclosures; and (iii) allowing the same conduct to go punished or not “based on the happenstance of a separate report” to the SEC.[8] The Court rejected all of these concerns, concluding that they do not warrant a departure from the words of the statute, which unambiguously defines “whistleblower,” precluding the SEC from more expansively interpreting that term.

Although the decision provides some certainty by resolving what had been a widening circuit split on the issue of who is covered by Dodd-Frank’s anti-retaliation protections, it also poses obvious challenges for corporate compliance programs by incentivizing whistleblowers to report to the SEC first. Companies should redouble their efforts to encourage employees to come forward internally with complaints and ensure that they have the compliance infrastructure in place to appropriately handle such complaints.

[1] According to the Solicitor General, 80% of the whistleblowers who received awards in 2016 reported internally before reporting to the Commission. See Slip Op. at 14.

[2] 18 U. S. C. §1514A(b)(1)(A), (2)(D).

[3] §78u–6(h)(1)(B)(i), (iii)(I)(aa).

[4] 850 F. 3d 1045 (2017).

[5] Id. at 1049.

[6] Id. at 1050.

[7] Slip Op. at 12.

[8] Id. at 13-16.