Supreme Court Tightens Whistleblower Protections

But Will it Change Anything?

The Supreme Court recently narrowed the Dodd-Frank whistleblower definition and excluded from protection employees who do not take their complaints to the SEC.  It is impossible to know at this point what effect the case will have on the number of whistleblower actions, both because the decision is new and because there are numerous other whistleblower protections in place.  In the aftermath of the decision, employers should continue to foster a culture that promotes compliance.

Up until last month, geography determined if an employee who reported a suspected SEC violation to her employer, but not to the SEC, qualified for anti-retaliation protection under Dodd-Frank. That is no longer true after the Supreme Court resolved a circuit split on who is entitled to whistleblower protections.

In Digital Realty Trust, Inc. v. Somers, the Supreme Court ruled 9-0 in favor of limiting the Dodd-Frank Act’s definition of whistleblower to those who report their allegations to the SEC, and excluded from whistleblower protection individuals who report their complaints internally.[1] The issue before the Court was interpreting the language of Dodd-Frank, which defines “whistleblower” as “any individual who provides … information relating to a violation of the securities laws to the Commission, in a manner established … by the Commission.”[2]

Paul Somers, a former vice president of Digital Realty Trust, Inc., was terminated after he reported suspected securities law violations to the senior management of the company. Somers did not alert the SEC to his suspicions. The district court and the Ninth Circuit Court of Appeals held that Somers was entitled to protection from retaliation under Dodd-Frank despite not going to the SEC with his concerns.

The Supreme Court’s decision reversed the Ninth Circuit and resolved a circuit split. The Fifth Circuit[3] had previously held that employees are required to provide information to the SEC to take advantage of Dodd-Frank’s anti-retaliation safeguard, while the Second[4] and Ninth[5] Circuits extended Dodd-Frank remedies to employees who reported alleged wrongdoing only to their employers.

The refrain of the case is that a would-be whistleblower must “tell the SEC” in order to benefit from Dodd-Frank’s anti-retaliation provision. It’s always notable when all nine justices agree, and here the Court relied on the unambiguous, clear and conclusive language of the statute to hold that anti-retaliation protection does not apply unless and until the SEC is notified of alleged securities law violations.

What Hasn’t Changed

The Digital Realty decision and the changes that could flow from it have generated a lot of discussion and analysis. It is important to note that the opinion applies only to complaints of securities violations covered by the Dodd-Frank Act. Whistleblower protection detailed under numerous state and federal statutes remains unchanged.

For example, the Court made the limited application of the opinion clear by contrasting complaints under the purview of the Consumer Financial Protection Bureau (CFPB) with the provision at issue in Digital Realty.  Unlike the statutory section Somers proceeded under, the CFPB whistleblower-protection statute permits a covered employee to provide information to an employer, the CFPB or a local, state or federal government agency. Had Somers’ situation fallen under CFPB’s umbrella, the fact that he raised allegations only with his employer would not have impeded his retaliation claim from moving forward.

Similarly, employees who go the route of filing only an internal complaint continue to be protected under Sarbanes-Oxley and can recover:

• lost wages,
• reinstatement and
• special damages.

The availability of Sarbanes-Oxley remedies is perhaps little comfort to potential whistleblowers. As compared to the provision of Dodd-Frank at issue in Digital Realty, the requirements of Sarbanes-Oxley are more onerous and offer successful whistleblowers less reward.

Of course, there are numerous other specific whistleblower protection laws at both the federal and state levels.  A 2013 survey lists 40 discrete federal whistleblower and anti-retaliation laws.[6]  In addition, nearly all 50 states have some type of whistleblower law that prohibits retaliation.

Will the Number of Whistleblower Cases Change?

With so many other whistleblower protections in place, what affect Digital Realty Trust will ultimately have on the overall number of whistleblower actions remains to be seen. Most likely, the decision will trigger some change, but the degree and type of change is educated guesswork at this point. Employees have always had the option of going directly to the SEC, but historically less than 20 percent have done so. How much the needle moves as a result of the Court’s decision will be closely scrutinized in the months and years ahead.

On the micro level, this case was a win for the employer, but in the bigger picture, it is far from a clear-cut employer victory.  To the contrary, it falls into the category of a proverbial double-edged sword.  While the definition specified in the statute and adopted by the Court narrows whistleblower status and covers fewer individuals, it also removes incentives for employees to go through an internal complaint process before going to the SEC.

The likely effect is that more aggrieved employees will do exactly what the Court dictated and disclose their concerns to the SEC in order to preserve the benefit of the anti-retaliation provisions.  On the other hand, the SEC reporting requirement could deter some would-be whistleblowers who are reluctant to involve the government right out of the gate.

The SEC is also directly impacted by Digital Realty, and its Office of the Whistleblower could issue new guidance a result of the decision. It is likely that the SEC will see an increase in the number and quality of complaints received. If more (and better) complaints are filed, the Commission will also be tasked with allocating limited resources among more investigations.

Should Employers Change the Way Whistleblower Complaints are Treated?

This case does not create a new concern for employers, but it does unquestionably magnify an existing worry. Because employees have always had the option of going directly to the SEC, an increase in the number of complaints to the government is a change of scale, not of kind.

The biggest change employers are likely to encounter is difficulty in encouraging employees to blow the whistle internally before going to the government. Employees who seek legal advice before filing a complaint will likely be advised to go to the SEC first. Consequently, employers should assume that the SEC has already been notified by the time an employee reports alleged misconduct internally.

This decision does not create a compelling reason for employers to make wholesale changes, but it should motivate companies to re-evaluate and strengthen existing compliance programs.  Rigorous compliance programs remain important; the government will continue to closely scrutinize such programs in any investigation. It will also remain important for employers to work with outside counsel proactively, to implement and refresh compliance programs, as well as reactively, when potential concerns surface.

A crucial employer concern going forward is the possibility that the SEC arrives and catches a company completely off-guard with whistleblower allegations.  The worst case scenario for a company in that position is not having a robust and thorough internal investigation process already in place. Obviously, that is not the opportune time for all of the input and effort that goes into developing and applying a system for handling misconduct claims. As important as it is for internal procedures to run like a well-oiled machine when trying to work ahead of a government investigation, it becomes even more imperative when attempting to catch up to an existing one.

Even if comprehensive changes are unnecessary, companies should view this decision as an opportunity to fine-tune and strengthen every aspect of compliance. Employers should make sure employees are aware of reporting policies and provide both incentives and protection for employees who do come forward with well-founded complaints.  In the aftermath of Digital Realty, the upshot for employers remains the same: reports have to continue to be taken seriously, internal investigations have to be thorough and retaliation cannot be tolerated.

[1] 583 U.S. __ (2018); opinion available at https://www.supremecourt.gov/opinions/17pdf/16-1276_b0nd.pdf.

[2] 15 U.S.C. § 78u-6(a)(6).

[3] Asadi v. G. E. Energy (USA), L.L.C., 720 F. 3d 620, 630 (5th Cir. 2013).

[4] Ber­man v. NEO@OGILVY LLC, 801 F. 3d 145, 155 (2d Cir. 2013).

[5] Digital Realty Trust, Inc. v. Somers, 850 F. 3d 1045 (9^th Cir. 2017).

[6] Jon O. Shimabukuro, et al., Survey of Federal Whistleblower and Anti-Retaliation Laws, CRS Report No. 43045 (Washington, D.C.: Congressional Research Service, 2013); https://fas.org/sgp/crs/misc/R43045.pdf.