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From Securities Regulation Daily, March 8, 2017

Court joins 2d Cir. in extending Dodd-Frank protections to internal whistleblowers

By Anne Sherry, J.D.

The Ninth Circuit became the third circuit court of appeals to rule on whether Dodd-Frank’s whistleblower protections require reporting to the SEC. The Fifth and Second Circuits have come down on opposite sides, with the Fifth Circuit taking a strict interpretation and the Second Circuit holding that internal whistleblowers are protected from employment retaliation. The 2-1 panel decision joins the deferential Second Circuit interpretation (Somers v. Digital Realty Trust Inc., March 8, 2017, Schroeder, M.).

The Fifth Circuit was the first to rule on this issue, holding in Asadi v. G.E. Energy that the plain language of Dodd-Frank unambiguously requires SEC reporting as a prerequisite to protection from retaliation. The Second Circuit created a split by holding in Berman v. Neo@Ogilvy LLC that the statute is sufficiently ambiguous to warrant deference to the SEC’s rulemaking, which protects internal reporting.

Alleged retaliation. The plaintiff in the Ninth Circuit case was a vice president of portfolio management at Digital Realty Trust. According to his complaint, he reported to senior management actions by his supervisor that eliminated internal controls over certain corporate actions in violation of the Sarbanes-Oxley Act. He was fired shortly afterwards. Digital Realty moved to dismiss his complaint for employment retaliation for failure to report any of the alleged internal controls violations to the SEC. But the district court denied the motion, holding that Dodd-Frank is ambiguous and that the SEC’s rule was a reasonable interpretation of the statute under Chevron. The court also certified the action for interlocutory appeal to allow the Ninth Circuit to clarify the law.

Congress intended to protect internal whistleblowers. The Ninth Circuit agreed with the district court that the SEC’s rule aligned with Congress’s overall purpose to protect whistleblowers, whether they report violations internally or to the government. In doing so, the court joined others that have found an apparent incongruity in the Dodd-Frank provision: It defines "whistleblower" to mean one or more individuals reporting a securities law violation "to the Commission," but also, in subdivision (iii) of Section 21F(h)(1)(A), appears to protect disclosures that involve only internal reporting.

The appeals court observed that subdivision (iii) was added after the bill went through committee, with no legislative history to explain its purpose. The language of the subdivision, however, illuminated Congress’s intent to protect certain professionals, namely auditors and attorneys, who are required to report violations internally before they can do so externally. The fact that the statute describes whistleblowers as employees who report to the SEC did not dispose of the plaintiff’s argument because terms can operate differently in different contexts, as the Supreme Court reasoned in upholding most of the Affordable Care Act (King v. Burwell (U.S. 2015)). Reading the term "whistleblower" as narrowly as it is defined earlier in the statute would make little practical sense and undercut congressional intent.

Dissent. Citing John Carpenter’s The Thing in a single-paragraph dissent, Judge Owens sided with the Fifth Circuit. "In my view, we should quarantine King and its potentially dangerous shapeshifting nature to the specific facts of that case to avoid jurisprudential disruption on a cellular level."

The case is No. 15-17352.

Attorneys: Stephen F. Henry (Stephen F. Henry, Attorney at Law) for Paul Somers. Brian Tobin Ashe (Seyfarth Shaw LLP) for Digital Realty Trust Inc. and Ellen Jacobs.

Companies: Digital Realty Trust Inc.

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