Supreme Court Will Resolve Circuit Split Over the Definition of a “Whistleblower” Under the Dodd-Frank Act’s Anti-Retaliation Provision: Digital Realty Trust v. Somers
Today the Supreme Court of the United States agreed to resolve a split between the Ninth and Second Circuits on one hand, and the Fifth Circuit on the other, regarding the scope of anti-retaliation protection under the Dodd-Frank Act.
In Digital Realty Trust, Inc. v. Somers, Case No. 16-1276, the Supreme Court will determine whether, as the Ninth Circuit determined in the opinion below and the Second Circuit previously held, an individual is protected from retaliation under the Dodd-Frank Act when they make protected disclosures internally, regardless of whether he or she has also made a disclosure to the Securities and Exchange Commission (SEC). Contrary to the Ninth and Second Circuits, the Fifth Circuit previously held that in order to be a “whistleblower” under the Dodd-Frank Act, including the statute’s provision barring retaliation against “whistleblowers,” the individual must have made a protected disclosure to the SEC.
The case will largely turn on whether the SEC’s regulation interpreting the phrase “whistleblower” under the anti-retaliation provision is reasonable and entitled to deference. Consequently, Justice Gorsuch’s aversion to administrative deference may play a large role in the final determination.
The ultimate issue in Digital Realty stems from two arguably inconsistent definitions of the word “whistleblower” under the Dodd-Frank Act. Section 21F(h) of Dodd-Frank prohibits retaliation “because of any lawful act done by the whistleblower” to make a covered disclosure of information. See 15 U.S.C. 78u–6(h)(1)(A). Subsection 21F(a)(6) of the Act defines “whistleblower” to mean an individual who reports violations to the SEC and subdivision (iii) of subsection 21F(h)(1)(A), which, unlike subdivisions (i) and (ii), does not within its own terms limit its protection to those who report wrongdoing to the SEC. Subdivision (iii) expands the protections of Dodd–Frank to include the whistleblower protection provisions of Sarbanes–Oxley, which expressly protects an employee reporting violations internally. The question presented by these two provisions is whether an employee who suffers retaliation because he reports wrongdoing internally, but not to the SEC, can obtain the retaliation remedies provided by Dodd–Frank.
According to the SEC, whistleblowers who only internally disclose covered information are protected from retaliation under Dodd-Frank. In 2011, the SEC promulgated Exchange Act Rule 21F–2, 17 C.F.R. § 240.21F–2, which expressly distinguished between “whistleblower” in the context of the Act’s bounty provision, and “whistleblower” in the context of the Act’s anti-retaliation provision. Stating that the latter need only comply with the disclosure requirements of Subdivision (iii) of subsection 21F(h)(1)(A), rather than the definition of “whistleblower” under Subsection 21F(a)(6). The SEC went on to explain in another release that “the statutory anti-retaliation protections [of Dodd–Frank] apply to three different categories of whistleblowers, and the third category [described in subdivision (iii) of subsection 21F(h)(1)(A) ] includes individuals who report to persons or governmental authorities other than the Commission.” Securities Whistleblower Incentives and Protections, Release No. 34–64545, 76 Fed.Reg. 34300–01, at *34304, 2011 WL 2293084 (F.R.) (June 13, 2011) (emphasis added).
Given this internal tension between the Act’s provisions, as well as the SEC’s rules and releases, courts are split regarding whether an employee who only discloses information internally qualifies as a “whistleblower” for purposes of the Dodd-Frank Act’s anti-retaliation provision. Compare Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 146, 155 (2d Cir. 2015) (holding that reporting violations internally is sufficient to qualify an individual as a whistleblower for purposes of Dodd-Frank’s anti-retaliation provision) with Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 629 (5th Cir. 2013) (holding that only individuals who report violations to the SEC qualify as whistleblowers for purposes of Dodd-Frank’s anti-retaliation provision).
In the underlying opinion, the Ninth Circuit determined that under appropriate statutory interpretation “subdivision (iii) of section 21F should be read to provide protections to those who report internally as well as to those who report to the SEC.” Somers v. Digital Realty Trust, 850 F.3d 1045, 1050 (9th Cir. 2017). The court went on to give deference to the SEC’s regulations, stating that “[w]e also agree with the Second 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.” Id.
Given that the issues in Digital Realty turn on (a) statutory interpretation and (b) deference to administrative regulations, it is worth noting that the Court’s newest Justice, Hon. Neil Gorsuch, may play a large role in the determination of the case. As a judge on the Tenth Circuit, Justice Gorsuch argued that the Supreme Court ruling in Chevron U.S.A. v. Natural Resources Defense Council, which grants significant deference to agencies’ reasonable interpretations of statutes, “essentially inverts the conventional view of the separation of powers, under which Congress sets national policy through statutes, the courts interpret those statutes to ‘say what the law is,’ and the executive branch carries the law into execution, rather than revising it from one administration to the next according to its policy whims.” Eric Citron, The roots and limits of Gorsuch’s views on Chevron deference, SCOTUSblog (Mar. 17, 2017, 11:26 AM), http://www.scotusblog.com/2017/03/roots-limits-gorsuchs-views-chevron-deference/ (discussing Gorsuch’s opinions in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142 (10th Cir. 2016)).
The Digital Realty case will have a significant impact on whistleblowers’s rights and protections. If the Supreme Court agrees with the Fifth Circuit and restricts the Dodd-Frank Act’s anti-retaliation protections to only those individuals who disclose information to the SEC, this will severely limit the protections afforded by the Dodd-Frank Act. Realistically, whistleblowers usually report and disclose internally before or instead of reporting externally. Consequently, imposing a requirement of external disclosure to the SEC prior to receiving protection from retaliation would result in many potential whistleblowers simply allowing fraudulent and illegal conduct to continue, or rampant and unchecked retaliation against whistleblowers. Either of these situations is contrary to the purpose of the Dodd-Frank Act.
Those who are contemplating blowing-the-whistle under the Dodd-Frank Act should consult with an attorney to determine the proper course in order to receive protection from retaliation.