Justices Say Dodd-Frank’s Whistleblower Protections Cover Only Those Who Report to SEC

February 22, 2018 Securities Industry Alert

In a unanimous ruling that narrows the class of would-be whistleblowers under the Dodd-Frank Act, the U.S. Supreme Court held that the statute requires whistleblowers to first report potential securities violations to the SEC in order to obtain its protections.

Passed in the wake of the financial crisis, Dodd-Frank aimed to increase the reporting of securities violations by offering both financial rewards and anti-retaliation protections for those who “blew the whistle.” In its definition section, Dodd-Frank defines “whistleblowers” as employees who provide “information relating to a violation of the securities laws to the Commission.” However, Dodd-Frank’s anti-retaliation provision also offers remedies for those who would be protected under the Sarbanes-Oxley Act. As the Supreme Court held in Lawson v. FMR LLC, 134 S.Ct. 1158 (2014), Sarbanes-Oxley protection does not turn on SEC reporting. This disconnect quickly led to divergent interpretations among lower courts. In response, the SEC issued a 2011 regulation signaling that it would interpret Dodd-Frank as protecting both internal and SEC reports.

Against this backdrop, Paul Somers sued Digital Realty for violating Dodd-Frank after he was fired for reporting potential securities violations to senior management. Somers did not report the violations to the SEC before his termination. Digital Realty moved to dismiss, arguing that Somers did not qualify as a whistleblower because he failed to report to the SEC. After the district court and the Ninth Circuit Court of Appeals rejected Digital Realty’s position, the case came before the Supreme Court.

In its February 21, 2018, decision in Digital Realty Trust Inc. v. Somersthe Court disagreed, unanimously finding that “Dodd-Frank’s anti-retaliation provision does not extend to an individual, like Somers, who has not reported a violation of the securities laws to the SEC.”

Writing for the court, Justice Ruth Bader Ginsburg – who also authored the Lawson opinion – first reasoned that the definition of whistleblower was limited to only those who made reports to the SEC. Turning to the Act’s legislative history, Justice Ginsburg next reasoned that the core purpose of Dodd-Frank’s whistleblower provision was “to motivate people who know of securities law violations to tell the SEC.” This stood in contrast to Sarbanes-Oxley, which had a “more far-reaching objective” that “sought to disturb the corporate code of silence that discouraged employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally.”

Unsurprisingly, Justice Clarence Thomas, joined by Justices Samuel Alito and Neil Gorsuch, agreed in the result but reasoned that the issue should have been resolved solely by reference to the text of Dodd-Frank.

A Victory for Employers With Unintended Consequences?

It will be interesting to watch the practical effects of Somers. On its face, the ruling provides a victory to employers by limiting the class of potential whistleblowers. By narrowing the definition, Somers forecloses suits by those who claim to be whistleblowers only after the fact, discourages dubious reporting, and encourages those with knowledge of potential violations to report directly to the SEC.

However, by incentivizing government reporting, Somers seemingly disincentivizes the use of internal compliance systems. If this proves true, employers would be unable to get out in front of potential securities violations.

This publication is intended for general information purposes only. It does not constitute legal advice. The reader should consult with knowledgeable legal counsel to determine how applicable laws apply to specific facts and situations. This publication is based on the most current information at the time it was written. Since it is possible that the laws or other circumstances may have changed since publication, please call us to discuss any action you may be considering as a result of reading this publication.