Rejecting contrary SEC regulation, Court holds that Dodd-Frank does not protect whistleblowers who report up internally but do not report out to the SEC.

Takeaways

• Supreme Court resolves circuit split over Dodd-Frank Act’s whistleblower anti-retaliation protections, following Fifth Circuit and rejecting broader reading of Second and Ninth Circuits.
• Unanimous ruling narrows employer liability for retaliation but may undercut corporate programs encouraging employees to report up internally before running to the SEC.
• Retaliation against whistleblowing employees who only report up remains actionable under Sarbanes-Oxley and various state laws.

The Somers Case and the Circuit Split

Peter Somers, while vice president of a real estate investment trust (Digital Realty Trust Inc.), told senior management—but not the SEC—that he suspected securities-law violations by the company. Digital Realty terminated him. Somers sued Digital Realty in federal district court, alleging a claim of whistleblower retaliation under Dodd-Frank. Digital Reality moved to dismiss, arguing that Somers was not covered by Dodd-Frank because he had not reported out to the SEC. The district court denied the motion; a divided panel of the Ninth Circuit affirmed. Somers v. Digital Realty Trust, 850 F.3d 1045 (9th Cir. 2017). Earlier, the Second Circuit (also 2-1) had reached a similar conclusion (Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015)) while the Fifth Circuit had reached the opposite conclusion (Asadi v. G.E. Energy (USA) L.L.C., 720 F.3d 620 (5th Cir. 2013)).

In a nutshell: The Fifth Circuit, and the dissenters in the Second and Ninth Circuits, say the definition of “whistleblower” is controlling and covers only those who report out. The Second and the Ninth Circuits say that denying whistleblower protection to those who report up would both nullify Section 78u-6(h)(1)(A)(iii) and violate the deference to agency interpretations of statutes said to be mandated by Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984).

The Supreme Court’s Ruling

In an opinion by Justice Ginsberg, the Court unanimously held that Dodd-Frank’s clear definition of “whistleblower” in Section 78u-6(a)(6) controls. Digital Realty Trust, Inc. v. Somers, No. 16-1276, 2018 WL 987345 (U.S. Feb. 21, 2018). In so holding, the Court rejected the arguments of Somers and the Solicitor General that this reading of “whistleblower” guts Dodd-Frank’s protection against retaliation, especially for auditors, attorneys and others subject to internal-reporting requirements.

The Court found no contradiction in the fact that Dodd-Frank protects a “whistleblower” (defined as one who reports to the SEC) from retaliation for also reporting up. Noting that the SEC is required to keep the identity of whistleblowers confidential, the Court reasoned that an employer might retaliate against an employee for reporting up without knowing that the employee had qualified as a “whistleblower” by also reporting out.

While some thought the case might become a vehicle for reexamining Chevron deference—the doctrine that courts should defer to statutory interpretations by administrative agencies—that did not happen. Instead, the Court tersely held: “Because ‘Congress has directly spoken to the precise question at issue,’ Chevron, 467 U. S., at 842, we do not accord deference to the contrary view advanced by the SEC in Rule 21F–2. See 17 CFR §240.21F–2(b)(1).”

The only disagreement among the Justices was whether to consider legislative history at all. Justice Ginsberg based her opinion on the statute’s plain meaning but then buttressed that by reference to the statute’s “purpose and design,” as revealed in a Senate Report. Justice Thomas, joined by Justices Alito and Gorsuch, joined in the Court’s opinion only insofar as it relied on the statute’s text and declined to join in those parts of the opinion that “venture beyond the statutory text.” This is another example of the increasing tendency of the high court to decide cases based on a literal reading of statutory language rather than a broader assumed intention of Congress.

A Pyrrhic Victory for Employers?

This employer won as to one of six claims. But the Court’s decision leaves Somers with claims under Sarbanes-Oxley and under state statutes and common law. In addition to Sarbanes-Oxley, employees who make internal complaints may be protected by various state law whistleblower protection statutes. For example, Somers also has asserted a claim under California Labor Code Section 1102.5, which provides whistleblower protection to employees who disclose information to a government or law enforcement agency or to a person with authority over the employee or to another employee who has the authority to investigate, discover or correct a violation of state or federal statute or a violation of or noncompliance with a local state or federal rule or regulation. Thus, employers still need to be cautious when taking adverse action against employees who have made internal complaints of reasonably based suspicions of illegal activity—especially because employers have no sure way of knowing whether the employee also has reported out to the SEC.

In short, the result may represent a marginal gain for employers in litigation but a real loss if in response to this decision employees start routinely reporting out to the SEC rather than reporting up first.