Why it matters
Broadening a circuit split, the U.S. Court of Appeals for the Ninth Circuit determined that a whistleblower was entitled to the protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act despite failing to report his concerns about corporate actions to the Securities and Exchange Commission (SEC). A vice president of portfolio management at Digital Realty Trust, Paul Somers shared with senior management his concern about actions by a supervisor that he said violated the Sarbanes-Oxley Act. When he was fired not long after, he sued. Digital Realty moved to dismiss, arguing that Somers was not entitled to protection from alleged retaliation because he did not report his concerns to the SEC. A district court denied the motion and the Ninth Circuit affirmed, joining the Second Circuit to hold that Dodd-Frank’s whistleblower protections do not require reporting to the SEC and that Congress intended to protect internal whistleblowers. The decision stands in opposition to Fifth Circuit precedent and increases the likelihood the issue will end up before the U.S. Supreme Court.
Paul Somers began working as a Vice President at Digital Realty Trust in 2010. He claimed that over the four years he worked for the company he made several reports to senior management regarding possible securities law violations by the company, soon after which he was fired.
Somers then sued Digital Realty, alleging violations of various state and federal laws, including Section 21F of the Securities Exchange Act, seeking the protections afforded to whistleblowers under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Digital Realty moved to dismiss this claim, arguing that Somers only reported the alleged violation internally and not to the SEC, meaning he was not a “whistleblower” under Dodd-Frank’s definition.
The district court denied the motion and the U.S. Court of Appeals for the Ninth Circuit affirmed. The federal appellate panel documented the existing circuit split on the question, with the Fifth Circuit strictly applying Dodd-Frank’s definition of “whistleblower” so as to require dismissal of the plaintiff’s action because he did not make his disclosures to the SEC. The Second Circuit has taken the opposite position, viewing the statute itself as ambiguous and deferring to the SEC’s regulation, which interprets the provision to extend protections to all those who make disclosures of suspected violations—whether internally or to the SEC.
“We agree with the district court that the regulation is consistent with Congress’s overall purpose to protect those who report violations internally as well as those who report to the government,” the Ninth Circuit wrote. “This intent is reflected in the language of the specific statutory subdivision in question, which explicitly references internal reporting provisions of Sarbanes-Oxley and the Securities Exchange Act. In view of that language, and the overall operation of the statute, we conclude that the SEC regulation correctly reflects congressional intent to provide protection for those who make internal disclosures as well as to those who make disclosures to the SEC.”
The case must be seen against “the background of twenty-first century statutes to curb securities abuses,” the court explained. Dodd-Frank established legal protections for employees who blow the whistle on a company’s illegal activities, but the statute wasn’t entirely clear. Section 78u-6(a)(6) defines a 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.”
Separately, Section 78u-6(h)(1)(A) provides whistleblowers with a private right of action against employers who take retaliatory actions against a whistleblower for taking certain protected actions, delineated in three subsections. Two subsections specifically reference working with the SEC, while the third provides protections more generally “in making disclosures that are required or protected” under the Sarbanes-Oxley Act, the Exchange Act “and any other law, rule, or regulation subject to the jurisdiction of the Commission.”
There is no legislative history explaining the purpose of the third subsection, “but its language illuminates congressional intent,” the court said. “By broadly incorporating, through subdivision (iii), Sarbanes-Oxley’s disclosure requirements and protections, [the Dodd-Frank Act] necessarily bars retaliation against an employee of a public company who reports violations to the boss, i.e., one who provide[s] information regarding a securities law violation to ‘a person with supervisory authority over the employee.'”
Some provisions of Sarbanes-Oxley and the Exchange Act mandate internal reporting before external reporting for certain types of employees, such as auditors, the panel added. “Leaving employees without protection for that required preliminary step would result in early retaliation before that information could reach the regulators,” the court said.
The panel rejected the employer’s argument that Dodd-Frank’s definitional provision on “whistleblowers” should be dispositive. “Terms can have different operative consequences in different contexts,” the court wrote. Dodd-Frank’s “anti-retaliation provision unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally. Its terms should be enforced.”
Even if the court were to find the statutory language ambiguous, “the agency responsible for enforcing the securities laws has resolved any ambiguity and its regulation is entitled to deference,” the panel said. Pursuant to its rule-making authority, the SEC issued Exchange Act Rule 21F-2 in 2011, stating that anyone who does any of the things described in subdivisions (i), (ii), and (iii) of the anti-retaliation provision is entitled to protection, including those who make internal disclosures under Sarbanes-Oxley.
One member of the panel filed a dissenting opinion, agreeing with the Fifth Circuit’s line of reasoning.