Dodd-Frank Provides No Retaliation Protection to Employees Who Do Not Report Violations to SEC: E.D. Wisconsin | Practical Law

Dodd-Frank Provides No Retaliation Protection to Employees Who Do Not Report Violations to SEC: E.D. Wisconsin | Practical Law

In Verfuerth v. Orion Energy Systems Inc., the US District Court for the Eastern District of Wisconsin (Eastern District) granted an employer's motion to dismiss a former CEO's whistleblower claim that he was protected by the retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) when he complained internally but not to the US Securities and Exchange Commission (SEC). Following the Fifth Circuit's decision in Asadi v. G.E. Energy (USA) L.L.C. (Asadi), the Eastern District held that the statute requires an employee to report an alleged violation to the SEC to be covered by the Dodd-Frank Act's whistleblower protection provision. This decision is significant in that it bucks a recent trend of courts that have decided not to follow Asadi.

Dodd-Frank Provides No Retaliation Protection to Employees Who Do Not Report Violations to SEC: E.D. Wisconsin

by Practical Law Labor & Employment
Published on 17 Nov 2014 • USA (National/Federal)
In Verfuerth v. Orion Energy Systems Inc., the US District Court for the Eastern District of Wisconsin (Eastern District) granted an employer's motion to dismiss a former CEO's whistleblower claim that he was protected by the retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) when he complained internally but not to the US Securities and Exchange Commission (SEC). Following the Fifth Circuit's decision in Asadi v. G.E. Energy (USA) L.L.C. (Asadi), the Eastern District held that the statute requires an employee to report an alleged violation to the SEC to be covered by the Dodd-Frank Act's whistleblower protection provision. This decision is significant in that it bucks a recent trend of courts that have decided not to follow Asadi.
On November 4, 2014, the US District Court for the Eastern District of Wisconsin (Eastern District) in Verfuerth v. Orion Energy Systems, Inc. granted an employer's motion to dismiss a former CEO's whistleblower claim that he was protected by the retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) when he complained internally but not to the US Securities and Exchange Commission (SEC). Following the Fifth Circuit's decision in Asadi v. G.E. Energy (USA) L.L.C., the Eastern District held that the statute requires an employee to report an alleged violation to the SEC to be covered by the Dodd-Frank Act's whistleblower protection provision. This decision is significant in that it bucks a recent trend of courts that have decided not to followAsadi. (No. 14-C-352, (E.D. Wis. Nov. 4, 2014).)

Background

Neal Verfuerth started Orion Energy (the company) in 1996 and became the company's CEO in 2005. At one point, Verfuerth was reimbursed $90,000 by the company for the cost of his divorce attorney. On September 27, 2012, the board of directors (the board) removed Verfuerth as the company's CEO and placed him in an advisory role. Verfuerth was also offered the option to resign and he did in October 2012.
On November 8, 2012, Verfuerth sent an e-mail to several board members, titled "Whistleblower Filing," describing his complaint as pursuant to the company's whistleblower policy and the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act). The same day, the board terminated Verfuerth's employment, for cause, because:
  • Verfuerth did not use the $90,000 to pay his attorney's fees and failed to account for the funds.
  • Violated the terms and conditions of the board's September 27, 2012 letter regarding his demotion.
After being terminated, Verfuerth forwarded a copy of his whistleblower e-mail to an SEC attorney investigating the company for matters unrelated to Verfuerth's e-mail.
In March 2014, Verfuerth filed a lawsuit with 14 causes of action, including a Dodd-Frank whistleblower retaliation claim against the company.
The company filed a motion to dismiss all of Verfuerth's claims, arguing Verfuerth was not a whistleblower under the Dodd-Frank Act, and therefore was not entitled to its protection.
In response, Verfuerth argued that he was covered by the Dodd-Frank Act's anti-retaliation provisions because:
  • The conflict between the Act's definition of whistleblower and the kinds of activity the statute protects renders the statute ambiguous.
  • The SEC has taken a position that individuals who report security violations to people other than the government are protected under the Act's anti-retaliation provision.

Outcome

The Eastern District granted the company's motion to dismiss Verfuerth's claims.
Following the Fifth Circuit's decision in Asadi, the Eastern District held that:
  • There is "no ambiguity in the statute at all" because the definition of a whistleblower is clearly defined in the statute.
  • Verfuerth does not qualify as a whistleblower under the Dodd-Frank Act and is not protected from retaliation by the company because:
    • he did not report alleged violations directly to the SEC; and
    • he conceded he does not qualify as a whistleblower as defined in the Act.
The Dodd-Frank Act defines a whistleblower as someone who provides information regarding securities law violations to the commission (15 U.S.C. § 78u-6(a)(6)). However, it provides whistleblower protection for three types of behavior:
  • Providing information to the SEC in accordance with the Dodd-Frank Act.
  • Initiating, testifying in or assisting in any investigation or judicial or administrative action of the SEC based on or related to such information.
  • Making disclosures that are required or protected under the Sarbanes-Oxley Act, the Dodd-Frank Act and any other law, rule, or regulation subject to the jurisdiction of the SEC.
(15 U.S.C. § 78u-6(h)(1)(A).)
In reaching its conclusion, the district court noted that:
  • Some courts have agreed that the statute's anti-retaliation provision is ambiguous and accepted the SEC's view that an individual is entitled to whistleblower protection even if the person does not complain to the SEC.
  • No court finding "ambiguity" has yet identified a clause or phrase devoid of interpretation.
  • The statute is clear: reporting to the SEC triggers the statute's three anti-retaliation provisions.
  • The SEC's interpretation makes an entire section of the statute redundant, especially the definition of "whistleblower" itself.
  • In Asadi, the Fifth Circuit correctly rejected the argument that the statute was ambiguous (720 F.3d 620 (5th Cir. 2013)).
Additionally, the district court dismissed Verfuerth's defamation, intellectual property and economic duress claims, declined to find a cause of action based on Verfuerth's claim of being barred from shareholders' meetings and denied Verfuerth's motion seeking leave to file a supplemental response. However, the court granted the defendant's motion to strike immaterial portions of Verfuerth's complaint.

Practical Implications

Employers should continue to monitor this split of authority regarding the reach of the Dodd-Frank Act's whistleblower protections. Only one circuit court (the Fifth Circuit) has decided this issue in favor of the employer, holding that an employee must report to the SEC to gain whistleblower protection. Most district courts have accepted the SEC's interpretation of the Act, extending protection to those who only complain internally about securities violations. Until this split is resolved in the courts or clarified by legislation, employers must avoid engaging in adverse actions against employees who complain of securities violations internally or to the SEC.