Whistle-Blowers Must Report to SEC for Dodd-Frank Retaliation Protection

The high court reached a unanimous decision settling a conflict among lower courts

Lisa Nagele-Piazza, J.D., SHRM-SCP By Lisa Nagele-Piazza, J.D., SHRM-SCP February 22, 2018
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The U.S. Supreme Court ruled on Feb. 21 that whistle-blower protections under the Dodd-Frank Act do not cover a fired employee who reported alleged securities law violations to his employer but not to the Securities and Exchange Commission (SEC).

The justices held that the anti-retaliation provisions only cover individuals who report matters to the SEC.

"All of the justices agreed that the statute's 'whistle-blower' definition is clear and that ends the case," said Bryan House, an attorney with Foley & Lardner in Washington, D.C.

"This is an important decision because it defines once and for all the parameters of the statute," said Meg Campbell, an attorney with Ogletree Deakins in Atlanta. "But it doesn't change the obligation of employers to maintain a culture of compliance—particularly with respect to their securities obligations."

Clear Language

The Dodd-Frank Act was signed into law in 2010, following the 2008 financial crisis, and was intended to encourage whistle-blowers to report securities violations. Campbell noted that the relevant parts of the act to this case focus heavily on helping the SEC obtain the information it needs to protect the investing public.

The act defines a whistle-blower as "any individual who provides … information relating to a violation of the securities laws to the [SEC]." A whistle-blower is then eligible for an award—if he or she provides new information to the SEC that leads to an enforcement action—and is also protected from employment retaliation in certain situations.

The act first defines who is a protected whistle-blower and then describes what conduct is protected from retaliation. "An individual who meets both measures may invoke Dodd-Frank's protections," Justice Ruth Bader Ginsburg wrote for the court. "But an individual who falls outside the protected category of 'whistleblowers' is ineligible to seek redress under the statute, regardless of the conduct in which that individual engages."

Since the employee in this case only reported the alleged securities law violations to his employer before he was fired—not to the SEC—he was not eligible for the act's whistle-blower protections.

Before this decision, there was a division among federal appellate courts about whether an employee had to go to the SEC or could just report matters internally to be able to sue for retaliation under Dodd-Frank.

The 5th U.S. Circuit Court of Appeals had ruled that violations must be reported to the SEC. Thereafter, the SEC said that the act's protections also applied to individuals who only reported violations internally, and the 2nd and 9th Circuits followed the SEC's interpretation. But the high court's ruling reversed the 9th Circuit's opinion.

"There has never been any real question about the literal reading of the 'whistle-blower' definition in the statute, but lower courts have struggled with 'tension' between different parts of the statute," House said.

Focus on Compliance

"Although the opinion means a narrower scope of protections under Dodd-Frank's anti-retaliation provision, this seems an ambiguous 'victory' for companies," said Brian Hoffman, an attorney with Holland & Hart in Denver and Washington, D.C.

Whistle-blowers may still claim retaliation under the broader Sarbanes-Oxley Act (SOX), which covers whistle-blowers who report alleged violations internally, he explained. "Plus, this ruling may spur more individuals to also report directly to the SEC in the first instance, perhaps even bypassing internal corporate avenues—so as to bolster a claim that Dodd-Frank applies."

Employees and employers who fall within the coverage of either SOX or Dodd-Frank still have rights and responsibilities under those statutes—the Supreme Court's ruling doesn't change that, Campbell said. It just changes what remedies might be available to a litigant.

"Every employer should have a robust culture of compliance," she said. Companies should have written policies and procedures, an updated code of conduct or business ethics, and multiple avenues for employees to report concerns and identify the people who can receive those complaints and concerns, she noted, adding that employers should conduct prompt and thorough investigations and make clear to everyone that retaliation isn't permitted.

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"The tone at the top matters significantly," Campbell said. "Top management must show vocal support for a culture of compliance."

HR should make sure people are aware of the policies and reporting channels. Employees need to feel comfortable speaking up and expressing concerns, she added.

"Companies should consider being proactive in this area, often in consultation with outside counsel, to appropriately investigate and remediate potential concerns," Hoffman said. "Indeed, when a report arrives it may be safest to assume, now more than ever, that the SEC already has the same report as well."

The case is Digital Realty Trust, Inc. v. Somers, U.S., No. 16–1276 (Feb. 21, 2018).

 

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