Last week the US Supreme Court issued its decision in Digital Realty Trust v. Somers (Somers). It was a closely watched case in the compliance community as the Court had the opportunity to directly decide the question of who is a whistleblower under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). In a unanimous 9-0 decision, the Court made clear that only a person who reports actions to the Securities and Exchange Commission (SEC) will benefit from the anti-retaliation and discrimination protections afforded under Dodd-Frank. Over the next couple of blog posts, I will review the Court’s decision and then consider the impact of the Court’s decision on a variety of actors; including the SEC itself, Chief Compliance Officers (CCOs) and compliance practitioners, compliance programs and corporate America.

Justice Ginsburg delivered the opinion for the Court. Most interestingly, there was a Concurrence by Justice Sotomayor, joined by Justice Breyer and a separate Opinion of Justice Thomas, joined by Justices Alito and Gorsuch, concurring in part and concurring in the judgment. These concurrences dealt with a side issue of whether Congressional Reports should be considered in statutory construction and had no bearing on the decision in chief.

The case involved Paul Somers, who was a Vice President (VP) at Digital Realty Trust, Inc. (DLR). He alleged he was dismissed after reporting suspected security law violations to senior management of the company for which he was terminated. Somers brought suit in federal district court for wrongful termination and retaliation barred by Dodd-Frank. DLR sought dismissal, alleging Somers was not a ‘whistleblower’ as defined by Dodd-Frank as he had not reported the allegations to the SEC. They were unsuccessful at the district court and on interlocutory appeal at the 9th Circuit Court of Appeals. DLR appealed to the US Supreme Court. There have been two other courts of appeal to address this issue. In Assad, the 5th Circuit Court of Appeals held that only a whistleblower who reports the SEC could claim Dodd-Frank protections. The 2nd Circuit, in Berman came to the same conclusion as the 9th Circuit, holding that a person who reported internally or to the SEC would receive Dodd-Frank anti-retaliation protect.

The Supreme Court began its analysis by stating ““When a statute includes an explicit definition, we must follow that definition,” even if it varies from a term’s ordinary meaning. This principle resolves the question before us. Our charge in this review proceeding is to determine the meaning of “whistleblower”, in Dodd-Frank’s anti-retaliation provision.” This is the who question and the Court noted, “The definition section of the statute supplies an unequivocal answer: A “whistleblower” is “any individual who provides . . . information relating to a violation of the securities laws to the Commission.” [all citations omitted herein]

From there the Court discussed what a whistleblower received. The first thing is the incentives available to whistleblowers and it is the well-known bounty of between 10%-30% of “monetary sanctions collected in an enforcement action.” Second is the protections available to the whistleblower. Here the Court laid out the anti-retaliation protections available to whistleblowers under Dodd-Frank, “first “in providing information to the SEC; second, “in initiating, testifying in, or assisting in any investigation or . . . action of the Commission based upon” information provided to the SEC; and  third, “in making disclosures that are required or protected under” either Sarbanes-Oxley (SOX), the Securities Exchange Act of 1934, or “any other law, rule, or regulation subject to the jurisdiction of the Commission”. The incentive is a powerful tool for the SEC to attract whistleblowers and the protections are powerful tools for individuals to have in place to prevent retaliation and discrimination. There is a 6-year statute of limitations on whistleblower retaliation claims under Dodd-Frank.

The Court also detailed the differences in whistleblower provisions between Dodd-Frank and SOX. Under SOX, an “employee qualifies for protection when he or she provides information or assistance either to a federal regulatory or law enforcement agency, Congress, or any “person with supervisory authority over the employee.” However, a discriminated-against or retaliated-against employee must seek redress by filing a complaint with 180 days with the Secretary of Labor. If the Secretary of Labor does not respond, the whistleblower can file suit in federal court and obtain the remedies of “reinstatement, back-pay with interest, and any “special damages sustained as a result of the discrimination,” among such damages, litigation costs.”

The SEC had argued that the definition of whistleblower had two components. The first was the whistleblower eligible for the bounty award, as someone who had provided the SEC with information relating to a possible Federal securities violation. Nevertheless, for whistleblower protection, the SEC had said that if you provided information to the Commission or information as laid out in SOX (an employee’s supervisor); anti-retaliation protection was available. This was the final rule promulgated by the SEC and which DLR argued against. The Supreme Court agreed with DLR, declined to follow the SEC promulgated rule and dismissed Somers claim.

The Supreme Court rejected three basic SEC arguments (made by the Solicitor General). First the definition eventually decided by the Supreme Court would “gut much of the protection afforded by the third clause” which “prohibits retaliation against a “whistleblower for making disclosures to various persons and entities, including but not limited to the SEC, to the extent those disclosures are “required or protected under” various laws other than Dodd-Frank.” The Supreme Court recognized its ruling would shield “fewer individuals from retaliation than the alternative”.

Second was the government’s concern that the Court’s definition “would jettison protection for auditors, attorneys, and other employees subject to internal-reporting requirements; SOX, “for example, requires auditors and attorneys to report certain information within the company before making disclosures externally” thereby making these professionals “vulnerable to discharge for complying with their internal reporting obligations.” Here the Court re-emphasized that the Dodd-Frank whistleblower provision is designed to “encourage SEC disclosures” which apparently did not include protections for those classes of professionals.

The final government argument was almost existential that Dodd-Frank did not contain “any requirement of a temporal or topical connection between the violation reported to the Commission and the internal disclosure for which the employee suffers retaliation.” This led the government to posit that “an employee who was fired for reporting accounting fraud to his supervisor in 2017 would have a cause of action under [§78u–6(h)] if he had reported an insider-trading violation by his previous employer to the Commission in 2012.” The Supreme Court dismissed this argument with a backhanded “it veers far from the case before us.”

Tomorrow I will discuss what the effect of this decision might be going forward.


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© Thomas R. Fox, 2018