Vedder Thinking | Articles The Bumpy Road To Protection For Internal Whistleblowers
March 27, 2017
As published on March 27, 2017 in Law360.
Two recent court decisions are just the latest developments in the bumpy road to protection for internal corporate whistleblowers, a prominent issue that has sparked outspoken advocacy from the U.S. Securities and Exchange Commission, and may be increasingly likely to draw the U.S. Supreme Court’s attention. On March 8, 2017, a split Ninth Circuit panel ruled in favor of extending Dodd-Frank’s anti-retaliation protections to whistleblowers who choose to report suspected securities law violations internally to their employers, but who do not report directly to the SEC. On March 20, 2017, the Supreme Court declined to review a case out of the Sixth Circuit in which the district court had dismissed the case and ruled that Dodd-Frank’s whistleblower protections applied only to those who report to the SEC. In that case, the Sixth Circuit had affirmed on other grounds, so the Dodd-Frank issue was not squarely in play on certiorari. But, in light of the widening circuit split on the issue, it seems likely that the Supreme Court’s recent denial of certiorari will not be its final say on the topic.
The crux of the legal debate centers on whether the whistleblower protection provision in Section 922 of Dodd-Frank protects whistleblower reports that are made internally within a company but not to the SEC. Section 21F(a)(6) of Dodd-Frank defines a “whistleblower” as “any individual who provides ... information relating to a violation of the securities laws to the Commission.” However, Dodd-Frank’s anti-retaliation provisions, specifically Section 21F(h)(1)(A)(iii), prohibit retaliation against “whistleblowers” who make disclosures that are required or protected under the Sarbanes-Oxley Act, the Securities Exchange Act and “any other law, rule or regulation subject to the jurisdiction of the [SEC],” which, under certain circumstances, would include only internal reports. It is no surprise that the arguably confusing statutory provisions have caused the SEC to adopt rules clarifying its position and have resulted in opposing judicial opinions in multiple circuit courts.
The SEC’s Strong Record in Favor of Broad Whistleblower Protection
The SEC’s position on the issue has been well-documented through agency rule-making, as well as in numerous amicus briefs filed in federal cases across the country since the implementation of Dodd-Frank. From a policy perspective, the SEC believes that internal company reporting by employees is essential in order to deter, detect and halt unlawful conduct that may harm investors. To that end, the SEC views the Dodd-Frank anti-retaliation provisions as a welcome supplement to the existing securities-law enforcement regime because the provisions encourage robust compliance programs and internal investigations of whistleblower reports.
Thus, the SEC has supported broad whistleblower protection in the face of legal challenges and has taken all steps available to encourage reporting and prohibit retaliation.1 In May 2011, the SEC issued regulations providing that internal whistleblowers are protected from retaliation under Dodd-Frank, even if they report only to their employers and not to the SEC.2 The SEC accomplished this by promulgating two separate definitions of the word “whistleblower” — one that applies to whistleblower awards and confidentiality provisions and one that applies for purposes of Dodd-Frank’s anti-retaliation protections. Just over four years later, in August 2015, the SEC issued an “interpretive rule” reaffirming its view that individuals who have not reported to the SEC are protected from retaliation by an employer.3
The SEC has been very active in litigation pertaining to this issue in federal district and appellate courts across the country.4 The SEC’s amicus briefs filed in these cases have asked courts to rely on the agency’s adopted regulations prohibiting employers from retaliating against “individuals who report to persons or governmental authorities other than the Commission,” including employees who make “the disclosures that are required or protected under the Sarbanes-Oxley Act” or other securities laws.5 In October 2016, Jane Norberg, chief of the SEC’s Office of the Whistleblower, reiterated the SEC’s position that it is “committed to protecting whistleblowers from retaliation and will continue to file briefs as appropriate in support of whistleblower protection.” Moreover, in 2016 the SEC initiated its own litigation to enforce whistleblower protection, bringing its first stand-alone enforcement action against a company for unlawful retaliation without an underlying securities violation,6 as well as enforcement actions based solely on restrictive language contained in companies’ standard separation agreements, and not relating to the underlying allegations reported by a whistleblower.7
Under the SEC’s formal whistleblower program, created as part of Dodd-Frank, an individual who provides the SEC with original information leading to an enforcement action that results in over $1 million in monetary sanctions is eligible to receive an award of 10 percent to 30 percent of the amount collected. The whistleblower program encourages internal reporting of possible violations by offering additional economic incentives to do so in the first instance.8 Based on the success of the whistleblower program, the SEC has a vested interest in expanding protections for those individuals who choose to report possible misconduct, whether they choose to do so internally or directly to the SEC.9
On the other hand, many companies facing legal action for alleged retaliation have vehemently opposed the SEC’s position and argued against extending whistleblower protections to non-SEC reports, hoping to eliminate a potential cause of action that could be asserted by terminated employees. In response to the SEC’s concerns, companies have argued that Congress has taken clear and effective action to address potential abuse of whistleblowers through the plain language of Dodd-Frank and Sarbanes-Oxley. Thus, companies insist that whistleblower qualification under Dodd-Frank requires more than merely performing existing job duties, which for many employees includes assessing compliance with the law and reporting issues internally. Companies may also have a valid interest in protecting their right to make reasonable employment decisions based on false reports made in bad faith, or for legitimate alternative business reasons, without fear of a retaliation lawsuit.
Federal Circuit Split — Conflicting Interpretations of Whistleblower Protection
The recent Ninth Circuit ruling (discussed above and below) followed two prominent conflicting decisions in other federal circuit courts. In Asadi v. G.E. Energy (USA) LLC, the Fifth Circuit was the first to consider the issue and held that whistleblowers who did not report to the SEC had no claim for retaliation against their employers under Dodd-Frank.10 The court chose to “start and end [its] analysis with the text of the relevant statute,” holding that the definition of “whistleblower” must be applied consistently throughout the statute, thereby requiring whistleblowers to report to the SEC in order to become eligible for anti-retaliation protection.11 The Fifth Circuit found that the relevant statutory provisions were not inconsistent when applied to an employee who complained to both the SEC and his or her employer, as such employee would qualify as a “whistleblower” under the statutory definition and therefore would be entitled to protection from retaliation. The Fifth Circuit pointed out that if a whistleblower qualified for retaliation protection under Dodd-Frank based on the individual’s qualification as a whistleblower under Sarbanes-Oxley, such a result would effectively moot Sarbanes-Oxley’s distinct protections.12
The Second Circuit rejected this analysis in Berman v. Neo@Ogilvy LLC and found that non-SEC reporting whistleblowers are entitled to protection from employer retaliation.13 The court found Dodd-Frank’s definition of whistleblower inconsistent with its anti-retaliation provisions, and it therefore applied Chevron deference to the SEC’s regulations interpreting the statute.14 The Second Circuit noted that the Dodd-Frank anti-retaliation provisions would be narrowed to the point of absurdity if SEC reporting were a requirement for protection. In such a scenario, the only protected individuals would be those who reported possible securities violations both internally and to the SEC and were then fired solely on the basis of the internal report.15 Despite the circuit split caused by the Second Circuit’s opinion, the defendants in Berman did not seek Supreme Court review of the decision.
Ninth Circuit’s Recent Ruling Widens the Circuit Split
More recently, in Somers v. Digital Realty Trust Inc., the Ninth Circuit affirmed a district court ruling that a former employee was entitled to sue his former employer over his termination after he reported suspected securities law violations to his employer but not to the SEC.16 The Ninth Circuit panel majority found that Dodd-Frank “unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally,” and it reasoned that requiring a whistleblower to have reported to the SEC in order to benefit from Dodd-Frank’s anti-retaliation provisions would unjustly limit the intended protections for whistleblowers and would “make little practical sense.”17 The court expressed concern that such a requirement may provide an incentive for companies to immediately terminate complaining employees in the hopes that they have not yet shared their concerns with the agency, thereby avoiding a potential retaliation claim. The court recognized that since certain of Sarbanes-Oxley’s provisions require internal reporting before external reporting for certain individuals, failing to protect internal reporters “would result in early retaliation before the information could reach the regulators.”18 The court expressly agreed with the Second Circuit’s reasoning in Berman, including that the SEC’s regulations are entitled to deference and that the SEC’s position “correctly reflects congressional intent to provide protection for those who make internal disclosures as well as to those who make disclosures to the SEC.”19
The dissent simply stated that the statute’s definition of whistleblower should be applied consistently throughout the statute, in accordance with the Fifth Circuit’s opinion in Asadi. The dissent also took issue with the majority’s reliance on a 2015 Supreme Court decision in King v. Burwell,20 which found that a defined statutory term could be interpreted differently depending on the context of different statutory sections.
The scope of Dodd-Frank whistleblower protection has been presented in at least two other courts of appeals. As discussed above, the Supreme Court recently declined to review the Verble case out of the Sixth Circuit, which had sidestepped the issue by finding that a potential whistleblower’s claims were too vague.21 The issue is also presented for decision in a case currently pending in the Third Circuit.22
Expanded Whistleblower Protection — Ripe for Repeal or Reversal?
Given the present uncertainty in the law, it is not readily apparent how the change in administration may affect the SEC’s well-defined position on whistleblower protection, if at all. The SEC may prefer the status quo, since encouraging and protecting internal reporters from retaliation may allow companies to investigate issues internally and potentially minimize SEC inquiries resulting from whistleblower reports. On the other hand, the anti-retaliation provisions may be subject to scrutiny given that President Donald J. Trump and congressional Republicans have pledged to roll back many Dodd-Frank regulations, although President Trump’s nominee for SEC chair, Walter “Jay” Clayton, revealed at his confirmation hearing that he would have no immediate plans to broadly attack Dodd-Frank’s mandates if he is confirmed. In addition, the new administration may prefer that anti-retaliation provisions not be extended to employees who do not report to the SEC if that is viewed as imposing a greater burden on employers.
On the enforcement front, many commentators have noted that SEC chair nominee Clayton, a partner at a New York law firm who has not held any government position, may not be as aggressive as recent former federal prosecutors who served as chair, which could result in fewer enforcement actions to protect whistleblowers. Others have been outspoken in their criticism of the SEC’s current stance — and of Dodd-Frank itself — including Paul Atkins, a former SEC commissioner and adviser to President Trump, who has argued in favor of requiring whistleblowers to report internally before going to the SEC. Exactly how the new administration and SEC leadership will view Dodd-Frank’s whistleblower protections and the SEC’s well-documented position on the issue remains to be seen.
Irrespective of the possible legislative and executive developments, it is likely that anti-retaliation provisions will continue to face significant scrutiny in the courts. If the issue is squarely presented and the Supreme Court weighs in on the circuit split, President Trump’s selected Supreme Court nominee, Judge Neil Gorsuch, could take part in deciding the issue if he is confirmed. Given his well-documented history as an originalist and textualist, and as a skeptic of deference to agencies, Judge Gorsuch, if confirmed, may be inclined to follow the Fifth Circuit’s approach in Asadi, strictly applying Dodd-Frank’s whistleblower definition rather than looking to the SEC’s interpretation of the provisions and its asserted entitlement to deference to its own rule-making. Thus, should the SEC choose to maintain the status quo on the regulatory front, the Supreme Court’s resolution of the circuit split may result in a rollback of protections for non-SEC reporting whistleblowers nonetheless.
Even if the Supreme Court chooses to limit Dodd-Frank’s anti-retaliation provisions to SEC reports, it is unclear how much employers stand to gain. If an employee is required to report to the SEC prior to termination in order to later bring a retaliation claim against an employer, companies may face increased regulatory scrutiny as a result. Additional SEC investigations of whistleblower reports may occur before companies are able to fully investigate the reported misconduct themselves. Moreover, even if the whistleblowers do not report to the SEC, employees who report internally could continue to seek recourse from retaliation under Sarbanes-Oxley. Employers will continue to be obligated to investigate whistleblower allegations and to provide an independent basis for terminating any whistleblowers, lest it appear to regulators that steps were taken to conceal misconduct. Under the circumstances, a potential lawsuit by a former employee may not be the most distressing of the risks facing companies that receive a whistleblower complaint.
No matter what happens, whistleblower protection is not an issue employers can afford to take lightly. Companies should not discount the importance of effective whistleblower reporting infrastructure and anti-retaliation training. This is particularly important in the Second Circuit and Ninth Circuit, where employers are more likely to be sued by terminated employees who report internally without going to the SEC. Companies should continue to retain experienced outside counsel to investigate whistleblower claims as soon as a report is received. Companies contemplating the termination of an employee who may be considered a whistleblower should involve outside counsel in that process and should work to ensure that any termination is well-documented. If a company discovers that a whistleblower claim has merit, it should consult with outside counsel regarding how best to remediate the misconduct and to consider whether a self-report to the SEC is warranted. In any event, however a whistleblower chooses to report potential misconduct, a company’s response may be subject to scrutiny by the government or the courts.
1 The SEC has repeatedly touted its “consistent” view that the anti-retaliation protections “apply not just to individuals who report to the SEC but also to individuals when they, among other things, report potential securities law violations internally at public companies.” See U.S. Sec. Exch. Comm’n, 2014 ANNUAL REPORT TO CONGRESS ON THE DODD-FRANK WHISTLEBLOWER PROGRAM, at 19, available at http://www.sec.gov/about/offices/owb/annual-report-2014.pdf.
2 Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34300, 34323 (June 13, 2011).
3 17 C.F.R. pt. 241.
4 See, e.g., Brief of the Securities and Exchange Commission as Amicus Curiae in Support of the Appellant, Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015); Brief of the Securities and Exchange Commission as Amicus Curiae in Support of the Appellee, Somers v. Digital Realty Tr. Inc., No. 15-17352 (9th Cir. 2017); Brief of the Securities and Exchange Commission as Amicus Curiae in Support of the Appellant, David Danon v. The Vanguard Grp. Inc., No. 16-2881 (3d Cir. 2016).
5 Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34300, 34323 (June 13, 2011); Brief of the Securities and Exchange Commission as Amicus Curiae in Support of the Appellee, Somers v. Digital Realty Tr. Inc., No. 15-17352, at 15–16 (9th Cir. 2017).
6 In the Matter of Int’l Game Tech., No. 3-17596 (Sept. 29, 2016).
7 See In the Matter of BlueLinx Holdings Inc., No. 3-17371 (Aug. 10, 2016); see also In the Matter of Health Net Inc., No. 3-17396 (Aug. 16, 2016).
8 For example, the rules provide for payment of whistleblower awards in instances in which an individual’s internal report results in a successful SEC action resulting in monetary sanctions exceeding $1 million. Also, when an individual first reports internally and then reports to the SEC within 120 days, the internal report date will be treated as the SEC report date for purposes of a whistleblower award. In addition, when determining the amount of a whistleblower award, the SEC will consider as a plus factor the whistleblower’s participation in a company’s internal compliance procedures.
9 At the Practising Law Institute’s "The SEC Speaks in 2017" conference in February, the agency touted the program’s success, noting that the SEC has received over 4,200 tips from all 50 states and 103 countries. As of February 2017, the SEC has awarded over $150 million in awards paid out since the program’s inception approximately five years ago. See Highlights from SEC Speaks 2017: Litigation and Enforcement Trends, Feb. 28, 2017, Vedder Price, http://www.vedderprice.com/vedder-thinking/publications/2017/02/highlights-from-sec-speaks-2017.
10 Asadi v. G.E. Energy (USA) LLC, 720 F.3d 620 (5th Cir. 2013).
11 Id. at 623.
12 Id. at 628–29. The Fifth Circuit noted that Dodd-Frank’s whistleblower protection provisions allow for greater monetary damages, a speedier route to filing a district court proceeding and a longer statute of limitations than Sarbanes-Oxley’s anti-retaliation provisions, thereby practically eliminating the need for Sarbanes-Oxley’s protections.
13 Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).
14 Id. The court looked to the SEC as “clearly the agency to resolve the ambiguity we face.” See also Chevron USA Inc. v. Nat. Res. Def. Council Inc., 467 U.S. 837 (1984), holding that federal agencies are entitled to deference by the courts when considering an agency’s reasonable interpretation of a statute it administers, so long as the statute is silent or ambiguous on the matter at issue.
15 Berman, 801 F.3d at 152; Somers v. Digital Realty Tr. Inc., No. 15-17352, at 10 (9th Cir. Mar. 8, 2017).
16 Somers, No. 15-17352 (9th Cir. Mar. 8, 2017).
17 Id. at 9–10.
18 Id. at 9.
19 Id. at 4–5, 12.
20 King v. Burwell, 135 S. Ct. 2480 (2015).
21 Verble v. Morgan Stanley Smith Barney LLC,No. 15-6397 (6th Cir. 2017).
22 David Danon v. The Vanguard Grp Inc., No. 16-2881 (3d Cir.).