Is an Internal Whistleblower a “Whistleblower” Entitled to Anti-Retaliation Protection Under the Dodd-Frank Act?
A Preview of Digital Realty Trust, Inc., v. Somers in Anticipation of the Supreme Court Oral Argument
Who is a “whistleblower” entitled to protection under the anti-retaliation provisions of the Dodd-Frank Act (the “Act”)? In Digital Realty Trust, Inc. v. Somers, the United States Supreme Court will answer that question by deciding whether an internal whistleblower (i.e., one who reports internally in a company but not to the U.S. Securities and Exchange Commission (“SEC”)) is entitled to the same anti-retaliation protection as an external whistleblower (i.e., one who reports directly to the SEC, with or without internal reporting).
The Act plainly defines a “whistleblower,” in relevant part, as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. § 78u-6(a)(6). Thus, the Petitioner, Digital Realty Trust (“DRT”) (the former employer of the Respondent whistleblower) emphasizes the clause requiring reporting “to the Commission.” But the last clause – “in a manner established, by rule or regulation, by the Commission” – seems to favor the terminated whistleblower, given the SEC’s adoption of a rule construing the statute to protect internal whistleblowers. And yet, whether the Court will accord this interpretation so-called “Chevron deference,” particularly given Justice Gorsuch’s well known criticism of that doctrine, is an open question. Oral argument will take place on November 28, 2017. We offer our thoughts in anticipation of the argument, below.
Somers comes to the Court on appeal from the Ninth Circuit, which held, in a divided opinion, that internal whistleblowers are entitled to protection from retaliation under the Act. In so holding, the Ninth Circuit joined the Second Circuit and broke from the Fifth. The Fifth Circuit had held, in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013), that a “whistleblower” entitled to the Act’s anti-relation protections is one who reports to the SEC. On the other hand – in a decision decided during the pendency of Somers’ appeal – a divided Second Circuit held, in Berman v. Neo @Ogilvy LLC, 801 F.3d 145 (2015), that the anti-retaliation provisions do protect internal whistleblowers, as interpreted by the SEC’s rule.
Somers sued his former employer, DRT, a publicly traded real estate investment trust, claiming that DRT terminated him in retaliation for Somers’ internal report to senior management about alleged violations of the Sarbanes-Oxley Act (“SOX”) that Somers believed his supervisor had committed. Somers alleged the concealment of seven million dollars in cost overruns on one project. All agree that he did not report to the SEC or to any other government agency.
In arguing that his termination violated the Act, Somers concedes that the definition of “whistleblower” in § 78u-6(a)(6) plainly requires external reporting to the SEC, but maintains that this definition is ill-suited to the anti-retaliation provisions. Specifically, Somers points to a clause (“Clause (iii)”) that protects a whistleblower from retaliation because of the whistleblower’s lawful conduct “in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter . . . [the federal criminal witness tampering statute (18 U.S.C. § 1513(e)], and any other law, rule, or regulation subject to the jurisdiction of the [SEC].” 15 U.S.C. § 78u-6(h)(1)(A)(iii).
And, since SOX does protect internal whistleblowers, as all parties agree, Somers maintains that Clause (iii) must be interpreted consistently with SOX in order to protect internal whistleblowers from anti-retaliation. The Solicitor General, weighing in on Somers’ behalf, further notes that Dodd-Frank was intended to strengthen the protections of SOX, and argues that Somers’ interpretation of Clause (iii) is consistent with this goal.
Somers’ argument is helped by the fact that the Act granted the SEC “the authority to issue such rules and regulations as may be necessary or appropriate to implement the provisions of this section consistent with the purposes of this section.” 15 U.S.C. § 78u-6(j). Under that authority, the SEC promulgated a final rule in 2011 providing that individuals can bring causes of action under the Act as either internal or external whistleblowers. See 17 C.F.R. § 240.21F-2.
DRT, on the other hand, maintains that the plain language of the “whistleblower” definition in § 78u-6(a)(6) controls and applies to all other portions of the Act. With respect to Clause (iii), DRT argues that Somers’ interpretation would eviscerate limitations on internal reporters that SOX created – e.g., a requirement to exhaust administrative remedies through the U.S. Department of Labor, the existence of a brief 6-month statute of limitations period, and limited financial recovery potential – by providing such whistleblowers with a federal cause of action without the need for administrative review, a 6-year statute of limitations period, and the possibility of recovering double backpay.
Some Key Issues for Oral Argument
1. Does the clarity of the “whistleblower” definition create ambiguity when read together with the anti-retaliation provision, and if so, should the Court defer to the SEC’s interpretation under Chevron?
DRT argues that “[t]his case turns on a principle of statutory interpretation so self-evident that it hardly needs stating: where a statute includes an express definition of a term, courts and agencies may not invent a different definition.” DRT Br. at 12. While acknowledging the clarity of the definition, however, Somers argues that this is one of the “unusual situations” in which the statutory definition should not apply. He notes that certain statutes listed in Clause (iii) require internal reporting prior to a report to the government. He therefore argues that “[i]t makes a mockery of the overall regulatory scheme to suggest that internal reporting is required but will not be protected – even though internal reporting is required in the broadest swath of cases before any information can be disclosed to the SEC.” Somers Br. at 35. Somers also leans heavily on the application of Chevron deference to what he views as statutory ambiguity: “This is a Chevron case,” his brief boldly states. Id. at 17.
Thus, the Court will need to first determine whether the clarity of the definition of “whistleblower” is the beginning and end of the issue, or whether when applied to the anti-retaliation provision it creates ambiguity. If it does, this will open the door to consideration of the SEC’s interpretation under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., which is regularly cited for the proposition that “considerable weight should be accorded to an executive department’s construction of a statutory scheme it is entrusted to administer,” and “deference [accorded] to [an agency’s] administrative interpretations.” Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 844 (1984).
DRT, for its part, argues that Chevron deference is misplaced here because there is no ambiguity to begin with and, even if there was, the SEC’s adoption of the rule did not follow proper procedures, including by not allowing for sufficient public comment on the version of the rule the SEC ultimately adopted. Somers counters that this is a new argument that DRT did not preserve below.
Justice Gorsuch’s view of Chevron deference in this context (assuming he finds ambiguity) will be particularly interesting, given the skepticism he expressed for the “behemoth” that Chevron deference has become in an opinion while he was on the U.S. Court of Appeals for the Tenth Circuit. See Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1149, 1152 (10th Cir. 2016) (Gorsuch, J., concurring) (describing Chevron as “a judge-made doctrine for the abdication of the judicial duty”).
2. If the “whistleblower” definition is interpreted to protect internal reporters, would this render superfluous the SOX protections afforded internal reporters?
Another key issue will be whether Clause (iii) – if interpreted to afford anti-retaliation protections to internal reporters – supplements the SOX whistleblowing framework or supplants the SOX whistleblowing framework.
DRT argues that if the Clause (iii) protections are extended to internal reporters, this effectively allows such reporters to make an end-run around the limitations that SOX procedural requirements impose. Indeed, DRT notes that Somers himself is the paradigmatic example: his claim, which is premised upon alleged SOX violations, would have been foreclosed as time barred had he proceeded under SOX. In DRT’s view, the absence of the SOX limitations in the Act is a meaningful distinction suggesting that the internal reporting encouraged in SOX is not similarly permitted under the Act (without combined external reporting to the SEC). But the argument that the Act seeks to fill gaps that SOX left, and therefore, by inference, extends the protections of SOX to internal reporters even further, is also compelling.
Implications for the Business Community
Somers will ultimately either affirm the Ninth Circuit’s view that internal reporters are protected under the anti-retaliation provisions, or conclude that the failure to report externally to the SEC deprives them of such protection. Legal arguments aside, what are the implications of these potential outcomes for the business community?
There is some irony – to which Somers and the Solicitor General allude – that several representatives of the business community apparently argued in favor of a mechanism for internal reporting during the rule-making process. And of course, the reasons to encourage such reporting, from the perspective of businesses, are not hard to imagine. An internal report gives in-house counsel the opportunity to carefully consider and investigate the report. A bona fide report can then be promptly addressed through internal remedial actions but may or may not warrant disclosure to government authorities. If disclosure is warranted, the company will be in a better position to present its findings to government authorities if it has had sufficient time to investigate the report. Moreover, this is likely to preserve scarce governmental resources by avoiding the disclosure of frivolous claims, and in the case of meritorious ones, affording businesses time to adequately investigate and share well prepared findings with authorities.
Encouraging internal reporting also comports with both the U.S. Department of Justice’s and the SEC’s approach to giving companies cooperation credit. Under the so-called “Yates Memorandum,” cooperation credit is afforded when companies fully disclose all relevant facts known to them, which is a goal more attainable after a thorough internal investigation reveals those facts. Similarly, in a speech in May 2015, then Director of the SEC’s Division of Enforcement, Andrew Ceresny, pointed out that “immense benefits . . . can accrue” to companies that provide the SEC “with all relevant facts” by “sharing the results of [their] internal investigations with the government.”
To be sure, broadening the scope of anti-retaliation protection carries with it some additional litigation risk for companies, but it is worth pondering the degree to which such risk is offset or mitigated by the potential for more timely and thorough internal investigations when whistleblowers have added incentives to report internally (including the knowledge that by reporting internally they will be protected from adverse action).
Check back for our post-oral argument analysis, where we will seek to read the tea leaves from the Justices’ questions for counsel.