Supreme Court Rules That Whistleblowers Must Report to the SEC to Benefit from Dodd-Frank Protections

Hinckley Allen Securities Alert

March 6, 2018

On February 21, 2018, the U.S. Supreme Court held, in Digital Realty Trust, Inc. v. Somers[1] (“Digital Realty”), that the anti-retaliation protections for whistleblowers under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) apply only to individuals who have reported the alleged misconduct to the Securities and Exchange Commission (“SEC” or “Commission”).

Definition of Whistleblower

Dodd-Frank defines “whistleblower” 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.”[2] In Digital Realty, Paul Somers, an employee of Digital Realty Trust, Inc., internally reported alleged securities laws violations by the company under the Sarbanes-Oxley Act of 2002, but Somers did not report the alleged violations to the Commission. According to Somers, he was promptly fired in retaliation following his internal reporting. Although Sarbanes-Oxley protects whistleblowers who report violations only internally, Somers did not assert protection under Sarbanes-Oxley. Rather, he sought anti-retaliation protection under Dodd-Frank.

Reversal of Lower Court Rulings

Section 21F of Dodd-Frank provides that an employer may not retaliate against a “whistleblower” for “providing information to the Commission. . . [or] making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 . . . and any other law, rule, or regulation subject to the jurisdiction of the Commission.”[3] Thus, the case turned on interpretation of the definition of “whistleblower” under Dodd-Frank. The rulings below, by both the Northern District of California and the U.S. Court of Appeals for the Ninth Circuit, held that the Dodd-Frank anti-retaliation statute was ambiguous, and accordingly followed guidance issued by the Commission in 2011 and 2015 regarding the definition of “whistleblower.” In the Commission’s 2011 rulemaking, it declared that the Dodd-Frank whistleblower protections extend to individuals who disclose potential securities law violations internally to employers as well as to those who report to the Commission.[4] In part relying upon the Commission’s rulemaking, the lower courts held that Dodd-Frank’s anti-retaliation provisions therefore protected Somers.

The Supreme Court unanimously reversed the decision of the Ninth Circuit, holding that the definition of “whistleblower” set forth in Dodd-Frank clearly and unequivocally includes only those individuals who report alleged securities violations to the Commission and that in order to be protected by Dodd-Frank’s anti-retaliation provisions, it is not sufficient to merely report “up the chain.”

This decision resolves a circuit court split on the issue. The Fifth Circuit held in a 2013 case that Dodd-Frank anti-retaliation protection applied only to individuals who report alleged securities violations to the Commission. In contrast, the Second Circuit (followed by the Ninth Circuit), holding that the relevant statutes were ambiguous, concluded based on Commission interpretation that the protections extend to individuals who do not report to the Commission.[5]

Possible Consequences

The Supreme Court’s decision in Digital Realty will presumably drive more employees to report violations of securities laws to the Commission rather than internally. This enables them to benefit from the greater protection afforded whistleblowers under Dodd-Frank than under Sarbanes-Oxley, including a longer statute of limitations, lesser administrative hurdles, and higher potential monetary rewards. As a result, companies might be denied the opportunity to address compliance concerns before federal regulators initiate an investigation.

For any questions, please contact the Hinckley Allen attorney with whom you regularly work, or one of our Securities attorneys. Follow Hinckley Allen on Twitter and LinkedIn for the latest news and updates.

[1] Digital Realty Trust, Inc. v. Somers, No. 16-1276, 2018 WL 987345 (Feb. 21, 2018).

[2] 15 U.S.C. § 78u-6(a)(6).

[3] 15 U.S.C. § 78u-6(h)(1)(A).

[4] 17 C.F.R. §240.21F-2 (reiterated in 2015 under 90 Fed. Reg. 47,829 (Aug.4, 2015)).

[5] See Asadi v. G.E. Energy (USA), L.L.C., 720 F. 3d 620, 630 (2013) and Berman v. NEO@OGILVY LLC, 801 F. 3d 145, 155 (2013).

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