In an important case clarifying the scope of the anti-retaliation provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the U.S. Supreme Court held on Feb. 21, 2018, that the law unambiguously requires an individual to report a securities law violation to the SEC in order to claim whistleblower protection under the provision. This means an employee who makes only an internal report may be protected by the Sarbanes-Oxley Act of 2002, but is not also protected under Dodd-Frank.
In 2010, Congress passed Dodd-Frank and established a robust whistleblower program designed to motivate employees to report securities law violations to the U.S. Securities and Exchange Commission (SEC). In addition to entitling whistleblowers to cash rewards, Dodd-Frank includes an anti-retaliation provision that prohibits employers from discriminating against or terminating employees for making such reports to the SEC.
The interplay between the definition of “whistleblower” and the identification of protected activity under Dodd-Frank has confounded the courts since shortly after Congress passed the law. A “whistleblower” is an individual who reports a securities law violation to the SEC. However, “protected activity” includes making disclosures required or protected under the Sarbanes-Oxley Act, which does not require a report to the SEC.
To harmonize these provisions, some courts concluded that including Sarbanes-Oxley-protected reports created a narrow exception to the requirement that an employee provide information to the SEC in order to claim whistleblower status under Dodd-Frank. The SEC likewise expanded the definition of “whistleblower” when it issued its final rule implementing Dodd-Frank to cover an employee who reported security violations to his or her supervisor, but not to the SEC. This definition was codified in 17 C.F.R. § 240.21F-2. In 2015, the SEC reiterated that whistleblower protection is not contingent on an employee providing information to the SEC, but even covers internal reports of wrongdoing.
In the case before the Supreme Court, Paul Somers sued his former employer, Digital Realty Trust Inc., alleging that Digital Realty fired him shortly after he reported to senior management (but not to the SEC) suspected securities law violations. Both the U.S. District Court for the Northern District of California and the U.S. Court of Appeals for the Ninth Circuit found Dodd-Frank ambiguous and deferred to the SEC’s final rule and interpretive guidance. The case presented the Supreme Court with a circuit split, in which the Ninth and Second Circuits held that employees were protected by merely reporting to their supervisor, while the Fifth Circuit held that employees must provide information to the SEC to avail themselves of the law’s protections.
The Supreme Court found no ambiguity in Dodd-Frank’s anti-retaliation provision, which protects an individual who provides “information relating to a violation of the securities laws to the Commission.” The court found that, not only does the plain language of the law require a report be made to the SEC, but also that Dodd-Frank’s “core objective” was to motivate reports to the SEC. Dodd-Frank’s purpose, the court found, was narrower than that of the Sarbanes-Oxley Act, which was designed to disturb the “corporate code of silence” that kept employees from reporting fraud “even internally.”
This case presents a welcome resolution to the circuit split over whether internal whistleblowers can maintain a Dodd-Frank anti-retaliation lawsuit against their employers. The distinction and decision are important because significant differences exist between the anti-retaliation provisions of Dodd-Frank and Sarbanes-Oxley. To seek relief under Sarbanes-Oxley, an individual must file a complaint with the Secretary of Labor within 180 days of the alleged violation. By contrast, Dodd-Frank’s whistleblower provision contains a six-year statute of limitations and no administrative exhaustion requirement. The two laws also provide for different remedies.
To read the Supreme Court’s opinion, click here.
For further information about Sarbanes-Oxley, Dodd-Frank or whistleblower protections, please contact the authors, your McGuireWoods contact or a member of McGuireWoods' labor and employment or government investigation and white collar litigation groups.