Who’s Hearing Your Whistle? SCOTUS Resolves Circuit Split and Narrows Dodd-Frank Definition of “Whistleblower”
In February 2018, the United States Supreme Court narrowed the availability of whistleblower protections under the Dodd-Frank Act to only those employees who report potential securities violations (such as insider trading, securities or accounting fraud, and money laundering) to the Securities Exchange Commission (SEC). Under this ruling, which definitively resolved a circuit split, the Supreme Court made clear that internal reporting to upper-management alone is not protected by Dodd-Frank.
For almost two decades, Congress has endeavored to eradicate corporate fraud in United States organizations through two federal statutes, the Sarbanes-Oxley Act in 2002 and the Dodd-Frank Act in 2010, both of which provide certain protections to whistleblowers who report corporate misconduct and suffer an adverse employment action as a result of their reporting.
While the two statutes are similar, Dodd-Frank provides greater protections and more incentives than Sarbanes-Oxley for employees who report misconduct—such as double back-pay damages, a longer period of time in which to file a retaliation claim, reinstatement with the same seniority status the whistleblower would have but for the reporting, and payment of attorney’s fees. In exchange for these greater benefits, employees seeking relief under Dodd-Frank are also burdened with additional reporting responsibilities. The extent of those responsibilities was solidified by the Supreme Court last month in Digital Realty Trust, Inc. v. Somers.
Data storage and management company Digital Realty terminated Paul Somers after he informed senior management of suspected securities violations. Somers sued under Dodd-Frank’s anti-retaliation provision, seeking whistleblower protection. Digital Realty sought dismissal of the suit, citing Dodd-Frank’s definition of a whistleblower as one who reports “to the Commission” and arguing Somers’ internal reporting was insufficient. Somers relied on Dodd-Frank’s anti-retaliation provision, which prohibits an employer from discharging employees after “making disclosures that are required or protected under” Sarbanes-Oxley. Because internal reporting is protected under Sarbanes-Oxley, both the trial court and the Ninth Circuit agreed with Somers.
But the Supreme Court reversed the lower court’s decision. Justice Ginsburg, writing for the majority, explained that the statute expressly defines “whistleblower” as an employee who reports “to the Commission” and noted the statute was passed in 2008 after the financial crisis to improve accountability and transparency in the financial system and to motivate those who know of securities violations to “tell the SEC.” S. Rep. No. 111-176, pg. 38.
Under this new Supreme Court precedent, employees retaliated against for reporting corporate misconduct internally without alerting the SEC may still seek the protections of Sarbanes-Oxley, but they will not reap the additional benefits afforded by Dodd-Frank. Despite the Supreme Court’s decision in Digital Realty, employers should exercise caution in responding to all reports by whistleblowers, particularly in light of the financial incentives Dodd-Frank provides.