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From Securities Regulation Daily, October 19, 2017

SEC asks SCOTUS to protect internal whistleblowers

By Anne Sherry, J.D.

The SEC is urging the Supreme Court to hold that internal whistleblowers, not just those who report misconduct to the SEC, are protected against retaliation under Dodd-Frank. The Court will hear arguments next month in the appeal by Digital Realty Trust, which submits that the Ninth Circuit’s decision in favor of its former employee upsets the balance between the retaliation protections offered by Sarbanes-Oxley and Dodd-Frank. In its amicus brief, the SEC argues that the statutory text, structure, and background argue for interpreting "whistleblower" in its ordinary sense and that its rulemaking to that effect warrants judicial deference (Digital Realty Trust, Inc. v. Somers, October 17, 2017).

Statutory definition. Exchange Act Section 21F, added by Dodd-Frank, bars employers from discriminating against "a whistleblower" for providing information to the SEC; being involved in an investigation or action based on the information; or (in the controversial subsection (iii)) making disclosures required or protected under the securities laws. That third category of protected disclosures includes certain categories of internal reporting and other reports that are not necessarily made to the SEC. But "whistleblower" is defined elsewhere in Section 21F 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." In light of this apparent tension, many employees argue that the statute is ambiguous, warranting Chevron deference to the SEC’s rule, which does not require reporting to the agency.

Circuit split. The Court granted certiorari to review the Ninth Circuit holding that internal whistleblowers are protected from employment 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.

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. The language of subsection (iii) illuminates 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 employee’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)). One judge on the panel dissented on the grounds that this case should be "quarantined" to its specific facts.

The Ninth Circuit holding deepened a circuit split by joining the Second Circuit in favor of protecting internal whistleblowers, while the Fifth Circuit—the first to rule on this question—read the plain language of the statute to require SEC reporting.

SEC’s plain-text argument. In its amicus brief, the SEC submits to the Court that the Ninth Circuit was correct to apply the statutory definition of "whistleblower" only to the award portion of the statute and use the word’s ordinary meaning when interpreting the anti-retaliation half. "This Court has often confirmed that a statutorily defined term may retain its ordinary meaning where necessary to give effect to the language and objective of a statute," the agency wrote. "The court of appeals applied that sensible approach, preserving the specialized meaning of ‘whistleblower’ in the award provisions, while applying its ordinary meaning to facilitate the effective implementation of the anti-retaliation provisions."

Legislative history. The brief also notes, as the Ninth Circuit opinion did, that the definition of "whistleblower" first appeared in the bill at a stage of the drafting process when only the award provisions used that term. Subsection (iii) of the anti-retaliation provision was adopted at the final stage of the legislative process, after both the House and Senate had passed the bill. There is no indication that the conferees who accepted this last-minute insertion intended it to be interpreted so narrowly as to require SEC reporting.

Looking toward the legislative history also reconciles the petitioner’s claim that protecting internal whistleblowers would render Sarbanes-Oxley "effectively obsolete," the agency argues. The legislative history shows that Congress viewed SOX as inadequate and wanted to strengthen its protections, as reflected by the fact that subsection (iii) cross-references the entirety of the older statute. Although Dodd-Frank provides a longer statute of limitations, greater potential back pay, and no administrative-exhaustion requirement, SOX’s remedial scheme also offers different advantages. The Department of Labor administers initial review and investigates claims, which can be "less costly and stressful" than litigating in federal court, especially for pro se whistleblowers. SOX also authorizes courts to award compensation for special damages such as emotional injuries and expressly prohibits pre-dispute arbitration agreements, unlike Dodd-Frank.

Rule warrants deference. "At a minimum," the SEC concludes, the tension between these provisions creates an ambiguity, which the SEC reasonably resolved pursuant to its rulemaking authority, and which is entitled to deference.

The case is No. 16-1276.

Attorneys: Kannon K. Shanmugam (Williams & Connolly LLP) for Digital Realty Trust, Inc. Daniel L. Geyser (Stris & Maher LLP) for Paul Somers.

Companies: Digital Realty Trust, Inc.

MainStory: TopStory DoddFrankAct SarbanesOxleyAct WhistleblowerNews SupremeCtNews

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