Supreme Court Will Decide if Dodd-Frank Protects Internal Whistle-Blowers

HR departments should be vigilant about protecting whistle-blowers from retaliation

Allen Smith, J.D. By Allen Smith, J.D. July 5, 2017
Supreme Court Will Decide if Dodd-Frank Protects Internal Whistle-Blowers

​Human resource professionals are often the first people that internal whistle-blowers turn to when reporting misconduct at an organization. It's for that reason that they should take note of an upcoming U.S. Supreme Court case that will resolve whether such whistle-blowers are protected from retaliation for reporting securities violations. 

The Supreme Court announced June 26 that it will review the case of Paul Somers, a vice president at San Francisco-based Digital Realty Trust who was fired after telling senior management that his supervisor, a senior vice president, allegedly eliminated internal controls in violation of securities laws. Somers sued, claiming he had been retaliated against in violation of the Dodd-Frank Act, a financial reform law that encourages people to report securities violations by offering financial rewards. Somers' employer claimed he wasn't eligible for protection because he only reported internally and not to the Securities and Exchange Commission (SEC).

If the court rules, as the 5th U.S. Circuit Court of Appeals has, that the law covers only whistle-blowers who report to the SEC, individuals will be more likely to bypass internal compliance mechanisms, said Claire Sylvia, an attorney with Phillips & Cohen LLP in San Francisco.

But if it sides with the 2nd and 9th circuits and rules that internal whistle-blowers are protected by the law, "it will expose employers to a much wider array of potential claims, as internal complaints occur daily across the country while by contrast it is rare for an individual to first go to the SEC," said Greg Keating, an attorney with Choate in Boston.

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'Poorly Drafted' Law's Interaction with SOX

The Dodd-Frank Act "is poorly drafted," according to Keating.

He noted that the definition of "whistle-blower" under Dodd-Frank is someone who has gone to the SEC—language that the 5th Circuit relied on in holding that only those who go to the SEC are protected from retaliation.

However, subsequent language in Dodd-Frank gives examples of actionable retaliation and includes actions prohibited by the Sarbanes-Oxley Act (SOX), which forbids retaliation against those who report fraudulent behavior at publicly traded companies. "SOX clearly prohibits retaliation for internal complaints," he said.

"Even if the Supreme Court holds that Dodd-Frank only protects external whistle-blowing, the whistle-blower protection provisions in Sarbanes-Oxley will still protect internal whistle-blowing," said Debra Katz, an attorney with Katz, Marshall & Banks in Washington, D.C. "HR professionals, therefore, will still need to be vigilant about ensuring that internal whistle-blowers are protected from retaliation."

But Keating noted that Dodd-Frank has a stiffer penalty—double back pay—and a much longer statute of limitations than SOX—six years as opposed to 180 days.

Potential Exposure

"The net of potential exposure will be substantially greater should the Supreme Court adopt the 9th Circuit holding," Keating said.

"Practically, employers should recognize that the net of liability and attendant damages for whistle-blower retaliation has expanded exponentially in recent years," he added. "All employers should consider a more-focused commitment to compliance, which would include at a minimum stepped-up training of management and periodic review of internal complaint procedures and investigation protocols."

The Supreme Court's next term starts in October.

This case is Digital Realty Trust Inc. v. Somers, No. 16-1276.


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