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Dodd-Frank Protects Whistleblowers Filing Internal Complaints: Second Circuit
Practical Law Legal Update 7-618-7045 (Approx. 7 pages)
Dodd-Frank Protects Whistleblowers Filing Internal Complaints: Second Circuit
by Practical Law Labor & Employment
| Published on 15 Sep 2015 • USA (National/Federal) |
In Berman v. Neo@Ogilvy LLC, the US Court of Appeals for the Second Circuit held that the Dodd-Frank Act protects a whistleblower who internally reports securities violations without reporting them directly to the Securities and Exchange Commission (SEC). The court resuscitated a dismissed Dodd-Frank retaliation claim brought by a terminated finance director who reported perceived accounting fraud internally but did not report the allegedly wrongful conduct to the SEC.
On September 10, 2015, in Berman v. Neo@Ogilvy LLC, the US Court of Appeals for the Second Circuit held in a 2-1 decision that the Dodd-Frank Act protects a whistleblower who internally reports violations of the securities laws without reporting the violations directly to the SEC. The court identified tension between Dodd-Frank's definition of whistleblower and a subdivision of Dodd-Frank's anti-retaliation provision that did not expressly reference SEC involvement. According to the court, this tension created sufficient ambiguity to warrant Chevron deference to an SEC rule conferring Dodd-Frank protection on a whistleblower who reports violations internally without reporting to the SEC. As a result, the court resuscitated the plaintiff's dismissed Dodd-Frank retaliation claim, based on perceived accounting fraud that was reported internally but not to the SEC. (No. 14-4626, (2d Cir. Sept. 10, 2015).)
Background
Dodd-Frank's passage in 2010 added Section 21F (captioned "Securities Whistleblower Incentives and Protection") to the Exchange Act (15 U.S.C. § 78u-6).
Subsection 21F(a)(6) of Dodd-Frank defines whistleblower as an individual who provides information about securities laws violations to the SEC (15 U.S.C. § 78u-6(a)(6)).
Subsection 21F(h)(1)(A) of Dodd-Frank's anti-retaliation provision prohibits employers from discharging, demoting, suspending, threatening, harassing, intimidating or discriminating against a whistleblower for any lawful actions taken by the whistleblower to:
- Provide information to the SEC under Dodd-Frank.
- Take part in any SEC investigation or judicial or administrative action based on information provided to the SEC.
- Make disclosures required or protected under the Sarbanes-Oxley Act (SOX), the Exchange Act, and any other law, rule or regulation subject to the SEC's jurisdiction. This portion of subsection 21F(h)(1)(A) is known as subdivision (iii).
In 2011, the SEC promulgated a rule to implement Section 21F that:
- Tried to reconcile the arguable tension between:
- Dodd-Frank's definition of whistleblower as those who report violations to the SEC; and
- subdivision (iii), which does not limit protection only to those who report violations to the SEC.
- Defined "whistleblower" as a person who provides information to the SEC, echoing Dodd-Frank's statutory definition.
- Included a subsection cross-referencing subdivision (iii) to SOX's internal reporting provisions.
- Included an accompanying statement that the third category of whistleblowers described in subdivision (iii) includes whistleblowers who report violations to people and entities other than the SEC.
In January 2014, Daniel Berman, the former finance director for Neo@Ogilvy (Neo), sued Neo under Dodd-Frank's whistleblower protection provisions alleging that Neo terminated him in April 2013 in retaliation for identifying accounting fraud within Neo and reporting the violations internally.
The district court dismissed Berman's Dodd-Frank claims, finding that:
- The definition of whistleblower in Dodd-Frank subsection 21F(a)(6) together with subdivision (iii) provided whistleblower protection only to individuals who reported violations to the SEC.
- Berman did not provide information to the SEC until October 2013, six months after his termination from Neo, and therefore was not a protected whistleblower under Dodd-Frank.
For more information on the district court's decision, see Legal Update, Dodd-Frank Provides No Retaliation Protection to Employees Who Do Not Report Violations to SEC: SDNY.
Berman appealed to the Second Circuit.
Outcome
The Second Circuit reversed the district court's dismissal of Berman's Dodd-Frank claims and remanded, holding that:
- Dodd-Frank protects whistleblowers who internally report violations of the securities laws without reporting the violations directly to the SEC.
- The tension between Dodd-Frank's whistleblower definition and the subdivision in Dodd-Frank's retaliation prohibition provision is significant enough to warrant Chevron deference to the SEC's rule interpretation that whistleblowers entitled to Dodd-Frank protection include those who do not report violations to the SEC.
The Second Circuit noted that:
- Its decision in this case creates a split with the Court of Appeals for the Fifth Circuit. The Fifth Circuit and several US district courts held that all employees seeking Dodd-Frank remedies for whistleblower retaliation were required to notify the SEC. The Fifth Circuit's decision was based strongly on the possibility that an employee can complain simultaneously to an employer and the SEC (Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620, 627-28 (5th Cir. 2013).)
- Far more district courts held that the whistleblower definition and subdivision (iii) were ambiguous enough to warrant deference to the SEC's rule.
- The legislative history on subdivision (iii) is not helpful in gleaning Congress's intent because subdivision (iii) was not in either the original House or Senate versions of the Dodd-Frank bill but was added in conference without explanation or comment.
- The SEC, Berman and Neo all argue that different readings of the statute would render at least certain Dodd-Frank language superfluous, but those arguments are not persuasive because the messiness of the legislative process explains why subdivision (iii) and the whistleblower definition do not "fit together neatly."
The Second Circuit found that:
- The possibility relied on by the Fifth Circuit in Asadi that employees can simultaneously report violations both to their employer and to the SEC overlooks the likelihood that few whistleblowers will actually do that because reporting to a government agency carries a far higher risk of retaliation than merely reporting violations internally.
- Holding that subdivision (iii) requires an employee seeking whistleblower protection to report violations to the SEC would leave certain types of employees with almost no Dodd-Frank protection (and leave the subdivision itself with very little scope) because SOX, cross-referenced in subdivision (iii), prohibits certain types of whistleblowers from reporting violations to the SEC until after they have reported violations to their employer.
- The SEC was clearly the appropriate agency to resolve the ambiguity left by the two Dodd-Frank provisions.
Judge Jacobs dissented, noting that:
- The majority and the SEC are effectively altering Dodd-Frank by removing the words "to the Commission" from its whistleblower definition.
- Dodd-Frank's whistleblower definition unambiguously requires that a whistleblower report violations to the SEC.
- The Fifth Circuit's reading of the two provisions in Asadi is more sensible and the majority in this case does not dispute that, instead deferring to the SEC's rule.
- The majority relies on the unsupported provision that if a plain reading of a statutory provision would give the provision a limited effect, then the statutory provision is ambiguous. Many federal law provisions have a limited effect but are not ambiguous.
Practical Implications
The Second Circuit's decision in Berman deferring to the SEC rule and holding that whistleblowers need not report violations to the SEC to be protected under Dodd-Frank creates a split with the Fifth Circuit, which did not defer to the SEC rule and held that SEC reports are required for Dodd-Frank protection. It is likely that this issue will ultimately be resolved by the US Supreme Court.