The Supreme Court Narrows Dodd-Frank Whistleblower Protection

On February 21, 2018, in Digital Realty Trust, Inc. v. Somers, the United States Supreme Court unanimously ruled that the anti-retaliation protections of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) are only available to employees (referred to as “whistleblowers”) who report suspected securities law violations directly to the Securities and Exchange Commission (the “SEC”). Accordingly, employees who report violations internally, for example to their employers’ human resources department, are not protected from retaliation.

The Dodd-Frank Act

Congress passed the Dodd-Frank Act in 2010 to bolster the SEC’s ability to regulate the securities industry. In furtherance of that purpose, Section 21F of the Dodd-Frank Act, entitled “Securities Whistleblower Incentives and Protection” (“21F”) establishes a program intended to incentivize employees to report original information regarding alleged violations of securities law. Specifically, 21F incentivizes employees to report violations in two ways: (1) by requiring the SEC to pay awards to whistleblowers, subject to certain limitations and conditions; and (2) by providing whistleblowers with protection against retaliation by their employer for reporting the violations. However, not all employees who report violations are entitled to the incentives of 21F. The 21F incentives only apply to individuals, not companies or other entities. Further, the SEC’s regulations state that for 21F purposes, a whistleblower is a person who provides the SEC with original information in accordance with the procedures of 21F for reporting alleged violation of federal securities laws that has occurred, is ongoing, or is about to occur.1 

Whistleblowers who meet the statutory requirements and follow the 21F procedures for reporting are entitled to awards of between 10% and 30% of the monetary sanctions collected in enforcement actions (provided monetary sanctions of greater than $1,000,000.00 are imposed). In addition to the monetary awards, 21F provides whistleblowers protection against retaliation by their employers. This means that employers from taking any adverse employment action, such as termination, demotion, etc., against an employee for reporting a suspected securities law violations. Anti-retaliation protection extends to individuals who: (1) have a reasonable belief that the information they are providing regards violations that have occurred, are ongoing, or are about to occur; and (2) adhere to the reporting requirements set forth by statute.2 The regulations provide that individuals are entitled to anti-retaliation protection regardless of whether or not they are entitled to an award.

Digital Realty Trust, Inc. v. Somers

In 2014, Paul Somers, then-employed by Digital Realty Trust, Inc. (“Digital Realty”), a real estate investment trust, suspected that Digital Realty was violating federal securities laws, specifically by hiding millions of dollars in cost overruns, being granted no-bid contracts, and making payments to friends. Mr. Somers reported his suspicions in accordance with Digital Realty’s internal complaint procedures for alleged securities violations. Shortly after reporting his suspicions, Digital Realty fired Mr. Somers.

Following his termination, Mr. Somers sued Digital Realty in the District Court for the Northern District of California, alleging that he was terminated3 in violation of the Dodd-Frank Act’s anti-retaliation protections. The District Court held that even though Mr. Somers did not report his allegations to the SEC, he was still entitled to whistleblower protection.

Unhappy with the District Court’s ruling, Digital Realty appealed the decision to the Ninth Circuit Court of Appeals. The Ninth Circuit held that the Dodd-Frank Act’s protections protect all employees who report violations, regardless of how the violations are reported (i.e., whether the violation is reported using an employer’s internal reporting procedures or directly to the SEC).

Digital Realty again appealed, this time to the United States Supreme Court. Following oral argument, the Supreme Court issued its opinion and reversed the lower courts’ rulings. In a unanimous opinion written by Justice Ruth Bader Ginsburg, the Court found that the Dodd-Frank Act is not ambiguous with regard to who qualifies for whistleblower protection. Directly quoting the language of the Dodd-Frank Act, the Court wrote that “[t]o sue under Dodd-Frank’s anti-retaliation provision, a person must provide … information relating to the violation of securities law to the Commission.”

Based on the language of the statute, the Court held that employees are only given 21F protection if they report their suspicions directly to the SEC. This means that employees who report violations internally are not protected against retaliation. Based on these findings, the Court held that Mr. Somers’ claim could not stand because he did not provide any information directly to the SEC prior to his termination.

Takeaways

Digital Realty clarifies the scope of the Dodd-Frank Act’s anti-retaliation protections, which will certainly aid both employers and employees. However, employers should continue to exercise caution when taking adverse action against employees who report violations. Based on this ruling, it is likely that employees will be less likely to report violations using internal procedures and more likely to report allegations directly to the SEC. As a result, employers will not have the chance to address allegations and correct potential issues independently before the SEC becomes involved.

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[1] 17 C.F.R. § 240.21F-2(a).

[2] 17 C.F.R. § 240.21F-2(b). 

[3] Mr. Somers also alleged that Digital Realty discriminated against him for being homosexual; however, that allegation did not have bearing on the Supreme Court’s decision as discussed in this article.

 

 


Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.

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