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SCOTUS Limits Protections for Whistleblowers

February 22, 2018

The U.S. Supreme Court has spoken: Dodd-Frank protection extends only to individuals who report violations of securities laws directly to the Securities and Exchange Commission (“SEC”). In a decision that will have a lasting impact on whistleblower litigation, Digital Realty Trust, Inc. v. Somers, 583 U.S. _____ (2018), holds that internal whistleblowers are precluded from bringing suit against employers under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).

On Wednesday, February 21, 2018, the Supreme Court resolved a circuit split by unanimously ruling that individuals must report alleged corporate wrongdoing to the SEC to qualify for whistleblower protections under Dodd-Frank. Under Digital Realty, it is no longer sufficient for a Dodd-Frank plaintiff to allege potential securities law violations internally within a company.

The Supreme Court’s decision is based on a plain-text reading of Dodd-Frank’s “whistleblower” definition, which is limited to those who provide “information relating to a violation of the securities law to the commission.” 15 U.S.C. §78u-6(a)(6). This is in contrast to the 2002 Sarbanes-Oxley Act (“Sarbanes-Oxley”), which applies to all “employees” who report misconduct to the SEC, any other federal agency, or their internal supervisors. The Digital Realty opinion, authored by Justice Ruth Bader Ginsburg, acknowledges that the Court’s reading “undoubtedly shields fewer individuals from retaliation than the alternative.” However, such a construction is consistent with Dodd-Frank’s core objective of “motivat[ing] people who know of securities law violations to tell the SEC.”

Digital Realty overturns the Ninth Circuit’s decision that former executive Paul Somers was entitled to Dodd-Frank protection after he complained to upper management (not the SEC) that his supervisor’s elimination of certain internal corporate controls violated securities laws. In the lower court, Digital Realty argued the case should be dismissed, given Somers’ failure to report any alleged violations to the SEC. After the district court denied Digital Realty’s motion to dismiss and the Ninth Circuit affirmed, Digital Realty appealed to the Supreme Court.

Before the Supreme Court was a circuit split—the Fifth Circuit held that employees must provide information to the SEC in order to avail themselves of Dodd-Frank’s anti-retaliation safeguards, while the Second and Ninth Circuits reasoned that in-house reporting was sufficient under Dodd-Frank. See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013); Berman v. NEO@OGILVY LLC, 801 F.3d 145 (2d Cir. 2015).

The Supreme Court unanimously determined that the principles of statutory construction resulted in an “unequivocal answer” to the question before it: Dodd-Frank’s anti-retaliation provisions do not apply to an individual if he or she has not reported a violation of securities laws directly “to the commission.” Thus, because Somers only reported information internally and did not provide any information to the SEC before his termination, he did not qualify as a “whistleblower” under Dodd-Frank and was ineligible to seek relief under its anti-retaliation provisions.

Moving forward, employees will not be able to invoke whistleblower protections under Dodd-Frank unless they report wrongdoing directly to the SEC. If an employee simply reports wrongdoing internally, he or she will be barred from bringing a Dodd-Frank suit by Digital Realty. Without providing information to the SEC, internal whistleblowers will be denied the benefits of Dodd-Frank, including the ability to bring suit directly in federal district court within a six-year limitations period and the recovery of double back pay with interest, if successful.

Note that internal whistleblowers will still be able to bring Sarbanes-Oxley suits—assuming they have complied with the 180-day administrative complaint filing deadline and have exhausted all administrative remedies.

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