Ninth Circuit Agrees with Second Circuit That Dodd-Frank Protects Internal Whistleblowers

Practical Law Legal Update w-006-8630 (Approx. 5 pages)

Ninth Circuit Agrees with Second Circuit That Dodd-Frank Protects Internal Whistleblowers

by Practical Law Labor & Employment

Background

Somers, a Vice President at Digital Realty Trust, Inc., made several reports to the company's senior managers, alerting them to possible securities law violations. Before Somers was able to disclose his concerns to the SEC, Digital Realty terminated his employment. Somers sued Digital Realty under several laws, including Section 21F of the Securities Exchange Act of 1934 (Exchange Act), claiming that he was terminated in retaliation for the disclosures he made to the company concerning its allegedly unlawful activity. In a motion to dismiss, Digital Realty argued that Dodd-Frank did not protect Somers because he had only made internal disclosures and had not reported to the SEC.

The district court denied Digital Reality's dismissal motion, concluding that Congress's purpose was to provide protections for individuals who report violations internally and those who disclose to the government.

Outcome

The Ninth Circuit affirmed the district court's decision, in agreement with the Second Circuit and in contrast with the Fifth Circuit, finding that Dodd-Frank protects internal whistleblowers as well as those who report to the SEC.

The Ninth Circuit noted that:

The Sarbanes-Oxley Act of 2002 (SOX):
- was enacted to protect investors in public companies following the Enron scandal;
- requires internal reporting by public companies' attorneys;
- requires companies to provide systems allowing employees to anonymously report accounting or auditing concerns; and
- protects from retaliation whistleblower employees who provide information to the government or people with "supervisory authority over the employee" (18 U.S.C. § 1514A(a)).
Dodd-Frank was designed to promote US financial stability and improve financial transparency.
Dodd-Frank added Section 21F to the Exchange Act, which:
- defines a whistleblower as someone who provides "information relating to a violation of the securities laws to the [SEC]" (15 U.S.C. § 78u-6(a)(6)); and
- contains an anti-retaliation provision that protects, among others, those who make "disclosures that are required or protected under [SOX]" (15 U.S.C. § 78u-6(h)(1)(A)(iii)).
An inter-circuit split exists between the Fifth Circuit (applying Dodd-Frank's whistleblower definition strictly) and Second Circuit (interpreting the Dodd-Frank protections as extending to those who report internally or to the SEC) (see Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015); Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013)).
In 2011, the SEC issued Exchange Act Rule 21F-2a, which clarified that Dodd-Frank's anti-retaliation provision protects those who disclose alleged violations internally or to the SEC. (17 C.F.R. § 240.21F-2). The Second Circuit applied Chevron deference to the regulation.

The Ninth Circuit found that:

By incorporating SOX's disclosure protections through the Exchange Act's subdivision iii, Dodd-Frank prohibits retaliation against public company employees who report violations to a supervisor.
Since SOX and the Exchange Act require reporting to be done internally prior to externally, any failure to protect employees during that first step could result in easy retaliation by employers before employees have the opportunity to reach the second step of SEC reporting (Berman, 801 F.3d at 151).
Although Dodd-Frank's definitions section defines whistleblowers as employees who report to the SEC, the term can still be used elsewhere in the statute in a different context without it being read through that narrow definition (King v. Burwell, 135 S. Ct. 2480, 2489, 2493 (2015)).
The Second Circuit was correct to conclude that incorporating Section 21E's narrow whistleblower definition into its anti-retaliation provision would make the anti-retaliation provision nearly pointless, because it:
- would only protect individuals who take the unlikely path of reporting alleged violations to both internal authorities and the SEC, and who have their employment terminated based on the internal report; and
- would not protect the individuals from potential retaliation occurring immediately after an employee's internal report.
(Berman, 801 F.3d at 151-53.)
Despite the Fifth Circuit's conclusion that SOX's enforcement scheme would be superfluous if Dodd-Frank and SOX protected the same conduct (Asadi, 720 F.3d at 628-30), the two laws actually offer different processes, and SOX may be more appealing to whistleblowers for the following reasons:
- SOX allows matters to be adjudicated administratively through the DOL, which is more affordable than filing a federal lawsuit through Dodd-Frank; and
- Employees suffering substantial emotional injury rather than financial harm might prefer SOX's remedial scheme which allows for special damages, instead of Dodd-Frank's potential award of double back pay.

Practical Implications

In Somers, the Ninth Circuit followed the Second Circuit in holding that Dodd-Frank's anti-retaliation protections extend not only to individuals who raise unlawful activity with the SEC, but also to those whistleblowers who report issues to internal company authorities. Employers within the Second and Ninth Circuits must be aware that they are not permitted to punish or terminate the employment of anyone who raises an internal complaint about how the company is conducting business. When encountering such a complaint, employers must respond with heightened care. Although a circuit split still exists over alternate interpretations of Dodd-Frank's anti-retaliation coverage, the Ninth Circuit's decision to join the Second Circuit reflects a growing trend granting whistleblower protection to employees as soon as they report internally their concerns about allegedly unlawful activity.

Ninth Circuit Agrees with Second Circuit That Dodd-Frank Protects Internal Whistleblowers | Practical Law