Dodd-Frank Whistleblowing: Anticipating the Aftermath of Digital Realty Trust, Inc. v. Somers

Brook Mullins, KLJ Staff Editor[1]

Who are the whistleblowers protected from retaliation under Dodd-Frank?[2] A resolution to the circuit split that has existed since 2015 is on the horizon.[3] Oral arguments for Digital Realty Trust, Inc. v. Somers were heard by the Supreme Court Tuesday, November 28.[4] Coming from the Ninth Circuit, the case centers around two provisions of the statute that arguably produce “tension.”[5] Though we cannot know how the Court will come out, we can try to anticipate how this case could impact employment and labor law.

Under the Act’s definition provision, 15 U.S.C. § 78u–6(a)(6), “whistleblower” is defined as “any individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”[6] Meanwhile, the Act’s prohibition against retaliation, § 78u­–6(h)(1)(A)(iii), provides that “[n]o employer may discharge . . . a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower in making disclosures that are required or protected under the Sarbanes-Oxley Act.”[7] Dodd-Frank remedies may only be available to external whistleblowers, whereas Sarbanes-Oxley is a separate statutory scheme that protects internal whistleblowers.[8] The case ultimately falls into Chevron territory due to a rule promulgated by the SEC, however.[9]

17 C.F.R. § 240.21F–2(b)(1) effectively rejects § 78u–6(a)(6) to accept a broad view of § 78u­–6(h)(1)(A)(iii) that extends Dodd-Frank’s retaliation protection to internal whistleblowers.[10] Thus, Digital Realty’s principal argument is that § 78u–6(a)(6) is clear: Somers cannot be a whistleblower for purposes of the anti-retaliation provision because he failed to notify the SEC about potential securities law violations.[11] This argument is consistent with the Fifth Circuit’s view that a plain language reading of the statute satisfies the first prong of Chevron, so no deference is afforded to the Commission’s interpretation.[12] Conversely, Somers argues that as a whole, the two statutory provisions and the regulation create enough ambiguity to warrant Chevron deference.[13] Leaning on the Second Circuit’s decision,[14] Somers contends that the SEC’s interpretation is reasonable because it “encourages internal reporting” and ‘“enhances’ the statute’s deterrent effects.”[15] Chevron’s second prong is satisfied under this line of reasoning, making Somers’ internal report sufficient to proceed with a private cause of action under Dodd-Frank.[16]

If Justice Gorsuch can persuade his colleagues that the words “to the Commission”[17] are indeed “an important little phrase,”[18] employers might experience a decline in the number of internal reports made by potential whistleblowers about possible violations of securities laws.[19] Given that most employers prefer to deal with allegations in-house, this may mean that companies will change their compliance systems to strengthen incentives for internal reporting.[20] After all, Dodd-Frank already encourages whistleblowers to make an internal report before going to the SEC, offering higher award amounts to those who do so.[21] At the very least, plaintiff’s lawyers may be more apt to advise their clients to report concerns to higher-ups and the SEC simultaneously when possible.[22] Accordingly, potential whistleblowers will need to obtain knowledge on the front end or seek legal advice soon after the alleged retaliation to safeguard all possible forms of relief available. To be sure, Somers only seeks to qualify as a Dodd-Frank whistleblower because he relinquished any remedy under Sarbanes-Oxley when he allowed its shorter statute of limitations to lapse.[23]

Perhaps this is why Justice Breyer is “a little bit more willing to go with the not clear language” theory.[24] If the Court finds an ambiguity, those who are unaware of Sarbanes-Oxley’s procedural requirements will be protected from retaliation, as will whistleblowers who report internally out of loyalty.[25] The same would be true for some employees, like auditors and attorneys, who are required to report misconduct to their employer before they are even allowed to go the SEC, as well as those who only make internal reports because they associate notifying a government agency about potential misconduct with an increased risk of retaliation.[26] This could cause problems for employers, however, who sometimes rely on the distinctions between Dodd-Frank whistleblowers and Sarbanes-Oxley whistleblowers to assess risks of liability.[27] Therefore, it follows that allowing internal reporters to pursue Dodd-Frank remedies might make Sarbanes-Oxley superfluous.[28] It could be true that certain whistleblowers who seek special damages or perceive the protection as more cost-efficient may prefer Sarbanes-Oxley, but special damages can be hard to calculate.[29] Besides, Dodd-Frank allows employees to bypass administrative exhaustion requirements.[30] The distinction between the two becomes even more critical given that Dodd-Frank allows whistleblowers to recover double the back pay available under Sarbanes-Oxley; it is obvious which scheme employees will pursue if given a choice.[31] With this in mind, there could be broader implications for the Chevron doctrine. Litigants, for example, may try to manufacture ambiguities in all sorts of other statutory schemes.[32]

Still, it is important to remember that Chevron is not the only possible analysis. Below, the Ninth Circuit bought Somers’ argument that the SEC’s definition should stand because it most “accurately reflects congressional intent.”[33] This rationale is consistent with the government’s view.[34] Further, in the alternative, a “constructive conveyance argument” is offered in an amicus brief by the National Whistleblower Center.[35] This argument is probably a long shot, but it is impossible to know how the Supreme Court will decide.[36] Labor and employment lawyers should be on the lookout in the meantime.

[1] J. D. expected May 2019.
[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
[3] Theresa Gabaldon, Argument preview: Plain talk about Dodd-Frank whistleblowing, SCOTUSblog (Nov. 21, 2017, 2:23 PM), http://www.scotusblog.com/2017/11/argument-preview-plain-talk-dodd-frank-whistleblowing/.
[4] Transcript of Oral Argument, Dig. Realty Tr., Inc. v. Somers (No. 16-1276), https://www.supremecourt.gov/oral_arguments/argument_transcripts/2017/16-1276_i426.pdf.
[5] Somers v. Dig. Realty Tr., Inc., 850 F.3d 1045 (9th Cir. 2017).
[6] 15 U.S.C. § 78u­–6(a)(6) (2012).
[7] 15 U.S.C. § 78u­–6(h)(1)(A)(iii) (2012).
[8] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.
[9] Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984); Theresa Gabaldon, Argument analysis: Don’t just whistle while you work – Dodd-Frank whistleblowers may need to pucker up for the SECSCOTUSblog (Nov. 29, 2017, 11:42 AM), http://www.scotusblog.com/2017/11/argument-analysis-dont-just-whistle-work-dodd-frank-whistleblowers-may-need-pucker-sec/.
[10] 17 C.F.R. § 240.21F–2(b)(1) (2011).
[11] See generally Brief for Petitioner, Dig. Realty Tr., Inc. v. Somers (No. 16-1276), http://www.scotusblog.com/wp-content/uploads/2017/08/16-1276-ts.pdf.
[12] Asadi v. G.E. Energy United States, L.L.C., 720 F.3d 620 (5th Cir. 2013).
[13] Brief for Respondent at 26, Dig. Realty Tr., Inc. v. Somers (No. 16-1276), http://www.scotusblog.com/wp-content/uploads/2017/10/16-1276-bs.pdf.
[14] Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).
[15] Brief for Respondent, supra note 13, at 16.
[16] Berman, 801 F.3d at 155.
[17] § 78u­–6(a)(6).
[18] Transcript of Oral Argument, supra note 4 at 56.
[19] Daniel Gilpin, Hiding Behind the Veil of Ambiguity: Why Courts Should Apply the Plain Meaning of the Dodd-Frank Whistle Blower Provisions, 90 St. John’s L. Rev. 851, 878 (2016).
[20] Id. at 879.
[21] Id.
[22] Id. at 879.
[23] Transcript of Oral Argument, supra note 4 at 30.
[24] Id. at 33.
[25] Samantha Osborne, Dodd-Frank Whistleblower Provision: Determining Who Qualifies as a Whistleblower, 41 Del.
J. Corp. L. 903, 925 (2017).
[26] Brent T. Murphy, A Textual Analysis of Whistleblower Protections under the Dodd-Frank Act, 92 Notre Dame L. Rev. 2259, 2265–66 (2017).
[27] See Asadi, 720 F.3d at 625–30.
[28] Berman, 801 F.3d at 155. But see Asadi, 720 F.3d at 630.
[29] Osborne, supra note 26, at 908.
[30] Id.
[31] Id.
[32] Murphy, supra note 27, at 227.
[33] Somers, 850 F.3d at 1051.
[34] Transcript of Oral Argument, supra note 4 at 58.
[35] Gabaldon, supra note 3.
[36] Id.

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