Take It Outside: Supreme Court Unanimously Holds That Internal Reporting Is Not Protected Under Dodd-Frank

In the Supreme Court’s first decision interpreting Dodd-Frank’s whistleblower retaliation provisions, the Court unanimously held that internal whistleblowing is not protected under Dodd-Frank.  The highly anticipated ruling resolves a circuit split between the Second and Ninth Circuits, which held that such reporting was protected, and the Fifth Circuit, which held that it was not.  The Court sided with the Fifth Circuit’s textual reading and held that no Chevron deference to the SEC’s interpretation of the statute was warranted because the statutory definition of “whistleblower” was clear.

The case, Digital Realty Trust v. Somers, involved an employee who reported his concerns about his employer’s alleged securities laws violations to senior management but not to the SEC.  He was subsequently fired and sued his former employer, arguing that his termination constituted unlawful retaliation under the Dodd-Frank Act as a result of his internal reporting.  The district court deferred to the SEC’s guidance that internal reporting was protected under Dodd-Frank, and the Ninth Circuit affirmed.  The Supreme Court disagreed, though, and adhered to what it viewed as a plain reading of the statute’s definition of “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission.”  See 15 U.S.C. § 78u-6(a)(6) (emphasis added).  Despite the policy arguments made by Somers and the Solicitor General for applying the SEC’s broader interpretation, the Court reasoned that the statute’s definition of “whistleblower” was not ambiguous in the text, so Chevron deference did not apply.  It noted that, “When a statute includes an explicit definition, we must follow that definition, even if it varies from a term’s ordinary meaning. . . . Congress placed a government-reporting requirement in § 78u-6(h) [defining ‘whistleblower’], but not elsewhere in the same statute.  Courts are not at liberty to dispense with the condition—tell the SEC—Congress imposed.”  The Court further discussed how its ruling aligned with Dodd-Frank’s “core objective” of motivating people to report securities laws violations to the SEC.  It reasoned that by “enlisting whistleblower to assist the Government [in] identify[ing] and prosecut[ing] persons who have violated securities laws, Congress undertook to improve SEC enforcement and facilitate the Commission’s recover[y] [of] money for victims of financial fraud.  To that end, § 78u-6 provides substantial monetary rewards to whistleblowers who furnish actionable information to the SEC.”

As a result of this decision, only individuals who report securities law violations to the SEC will be protected under Dodd-Frank as whistleblowers.  However, the Court did note that an individual can still be a protected whistleblower under Dodd-Frank based on internal reporting if the person has made a complaint to the SEC, even if employer is unaware of the SEC complaint.  As for internal whistleblowers who do not make reports to the SEC, the Sarbanes-Oxley Act still provides anti-retaliation protections for such whistleblowers, as long as they bring their claims to OSHA within 180 days of the alleged violations.

The Supreme Court’s Digital Realty decision is a welcome development for employers, as it will remove one retaliation cause of action from the plaintiff bar’s arsenal.  The ruling will encourage the prompt filing of whistleblower retaliation suits so that meritorious allegations will more quickly come to light, and non-meritorious allegations will be easier for companies to defend.  In addition, the removal of Dodd-Frank’s double back-pay remedy for alleged internal whistleblower violations will remove what had become a significant barrier to settlement of these types of retaliation suits.