In a unanimous decision issued on February 21, 2108, the United States Supreme Court held that employees seeking to sue under the whistleblower anti-retaliation protection of the Dodd-Frank Act, must report alleged misconduct to the U.S. Securities and Exchange Commission ("SEC"), whether or not they also report internally within the company. Digital Realty Trust, Inc. v. Somers, Case No. 15-1276. For a history of the proceedings, please see our previous posts, which are available here and here. The Court’s decision resolved a split among the Circuits in holding that an individual who has not reported a violation of the securities laws to the SEC is not a "whistleblower" within the meaning of the anti-retaliation provisions of the Act, and therefore is not entitled to the protection of those provisions. In so holding, the Court overruled the decision of the Ninth Circuit.
The facts of the case are fairly straightforward. An employee reported a suspected securities violation internally, but did not report the violation to the SEC. Shortly thereafter, the company terminated the employee. The employee filed suit seeking protection under the anti-retaliation provisions of the Dodd-Frank Act. The Supreme Court analyzed the Act’s statutory language, which defines "whistleblower" as a person who provides "information relating to a violation of the securities laws to the Commission." 15 U.S.C. §78u-6(a)(6). Noting that Dodd-Frank was established to motivate people who know of securities law violations to tell the SEC, the Court concluded that the Act's "whistleblower" protections do not extend to an individual who had not reported a securities law violation to the SEC.
There are several practical implications of the Supreme Court’s ruling for our clients. On the one hand, the holding creates an additional hurdle for employees. By requiring reporting to the SEC before an employee may file a wrongful termination action and seek the anti-retaliation protections of the Act, some would-be whistleblowers may find (like Somers) that the failure to do so will deprive them of a cause of action under the Act. On the other hand, it seems likely that employees (guided by the plaintiff's bar) will quickly learn from Somers' lesson and will be motivated by a renewed incentive to share their tips with the SEC more promptly. Naturally, this will require employers to respond to the SEC (and the employee) with less time for internal investigation than an earlier internal report might have allowed. And, given the success of the SEC's whistleblower program to date, companies should anticipate that Digital Realty could well increase the number of tips to the SEC from whistleblowers both in the United States and abroad. While it may be impossible to entirely avoid that result, companies can mitigate their risks, as always, by nurturing a culture of compliance, and by having in place sufficiently robust compliance programs and "hotlines" for receiving, managing, and investigating tips and complaints.
To read more on this ruling, click here.