Supreme Court Gives Clarity as to Who is a Whistleblower Under The Anti-Retaliation Provision of the Dodd-Frank Act

In Digital Realty Trust, Inc. v. Somers , 138 S. Ct. 767 (2018), the United States Supreme Court was asked to decide whether the anti-retaliation provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or “Dodd-Frank Act”) extends to an individual who has not reported a violation of the securities laws to the Securities and Exchange Commission (“SEC” or “Commission”). The Supreme Court held Dodd-Frank does not protect such a person; to be protected a person must “provid[e] . . . information relating to a violation of the securities laws to the Commission.”

In the wake of the financial crisis of 2008, Congress enacted the Dodd-Frank Act, in part to assist the SEC “in identifying securities law violations.” To assist with this process, the Dodd-Frank Act included a whistleblower protection provision. The statute 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.” (emphasis added by the Court). The statute also created an award program for “whistleblowers who voluntarily provid[e] original information to the Commission that le[ads] to the successful enforcement of [a] covered judicial or administrative action.” The award ranges from 10% to 30% of the monetary sanctions the SEC collects in the enforcement action. The statute further provides that an employer may not take adverse employment action against a “whistleblower” “because of any lawful act done by the whistleblower” (1) “in providing information to the Commission in accordance with [15 U.S.C. § 78u-6];” (2) “in initiating, testifying in, or assisting in any investigation or . . . action of the Commission based upon” information provided to the SEC in accordance with § 78u-6; or (3) “in making disclosures that are required or protected under” either the Sarbanes-Oxley Act (“SOX”), the Securities Exchange Act of 1934, the criminal anti-retaliation provision of 18 U.S.C. § 1513(e), or “any other law, rule, or regulation subject to the jurisdiction of the Commission.”

When implementing the Dodd-Frank Act, the SEC promulgated certain regulations. Rule 21F-2 included two discrete definitions of a “whistleblower.” To obtain the monetary award available under the statute, a “whistleblower” is a person who must “ provide the Commission with information . . . relat[ing] to a possible violation of the Federal securities laws.” (emphasis added by the Court). For purposes of the anti-retaliation provision, however, the SEC defined a “whistleblower” as a person who “possess[es] a reasonable belief that the information you are providing relates to a possible securities law violation” and who “provide[s] that information in a manner described in” clauses (i) through (iii) of § 78u-6(h)(1)(A). The SEC’s regulations further provide that the “anti-retaliation protections apply whether or not you [the whistleblower] satisfy the requirements, procedures and conditions to qualify for an award.” In other words, under Rule 21F-2, an individual may obtain “whistleblower” protection without providing information to the SEC, provided that “he or she provides information in a manner shielded by one of the anti-retaliation provision’s three clauses.”

Paul Somers was a Vice President of Digital Realty Trust, Inc., from 2010 to 2014. He alleged that the company terminated his employment shortly after he reported to senior management what he believed were securities laws violations by the company. He did not report his concerns to the SEC, however, and he did not file an administrative complaint for protection under the Sarbanes-Oxley Act (“SOX”). The federal district court denied Digital Realty’s motion to dismiss and, on interlocutory appeal, the United States Court of Appeals for the Ninth Circuit affirmed. The Supreme Court, however, reversed those decisions.

The Supreme Court started its analysis by explaining that the definition of “whistleblower” operates in conjunction with the three clauses of § 78u-6(h)(1)(A) to establish the scope of protection afforded to a “whistleblower.” To this end, the Court explained that the definition of “whistleblower” describes who is eligible for protection – a person who provides pertinent information “to the Commission.” The Court then explained that the three clauses of § 78u-6(h)(1)(A) describe what conduct is protected from retaliation. The Court concluded that only an individual who satisfies both requirements may seek protection under Dodd-Frank’s anti-retaliation provision.

To further support this conclusion, the Court noted that another whistleblower provision of the Dodd-Frank Act (that concerning the Consumer Financial Protection Bureau) did not impose any requirement that information must be conveyed to a government agency. By noting this provision, the Supreme Court relied on the rule of statutory construction that provides “[w]hen Congress includes particular language in one section of a statute but omits it in another[,] . . . th[e] Court presumes that Congress intended a difference in meaning.” By placing the government reporting requirement in § 78u-6(h), but not elsewhere in the statute, the Court determined it was “not at liberty to dispense with the condition – tell the SEC – Congress imposed.” By holding that the Dodd-Frank whistleblower protections require reporting information to the SEC, the Court determined that Somers necessarily failed to state a claim.

The Supreme Court’s decision in Digital Realty is significant because it narrows the scope of who is a “whistleblower” under the Dodd-Frank Act. While this narrower definition creates a more limited universe of potential whistleblowers, the Court determined that this narrower definition is consistent with the statute’s text and purpose. With that said, part of the Court’s analysis (not included in this post) included a comparison to the whistleblower protection provisions of SOX, which the Court noted are broader. Thus, whistleblowers of potential securities violations are not without protections, including under the Dodd-Frank Act.

If you have any questions regarding this post, please contact Stephen B. Stern at sstern@hwlaw.com or (410) 260-6585 or Amitis Darabnia at adarabnia@hwlaw.com or (410) 260-6592.

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