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Hold the line! Flood of SEC Whistleblowers? By: Jacob Shulman

Hold the line! Flood of SEC Whistleblowers? By: Jacob Shulman

In Digital Realty Trust, Inc. v. Somers,[1] the Supreme Court of the United States narrowly defined whistleblower protections under the Dodd-Frank Act. In the opinion, issued February 21, 2018, all the justices found that the text of Dodd-Frank expressly limits the definition of whistleblowers to those who report suspected fraud to the United States Securities and Exchange Commission (“SEC” or “Commission”).[2]In short, employees who informed their supervisors, but not the SEC, are not availed of whistleblower protection.[3]

Background & Introduction:

Digital Realty Trust, Inc. is a real-estate investment trust, whose employee was fired for internally reporting possible securities violations. The former employee did not report the possible securities violations to the SEC. In Digital Realty Trust, Inc. v. Somers, the petitioner allegedhis employment was terminated shortly after a report of suspected securities-law violations by the company to senior management. Respondent Paul Somers, filed for a claim of whistleblower retaliation[4], while Petitioner moved to dismiss on the grounds that Somers did not meet the definition of a whistleblower under 15 U. S. C. §78u– 6(h).

Dodd-Frank defines a “whistleblower” as “any individual who provides . . . information relating to aviolation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”[5]Whistleblowers are eligible for an award if their tip to the SEC leads to a successful enforcement action.[6] Additionally, whistleblowers are protected from retaliation in three situations,[7] including for  “making disclosures  that  are  required  or  protected  under”  Sarbanes-Oxley  or  other  specified  laws.[8]Further, SEC implementing regulations contain two whistleblower definitions: 1) For purposes of the award, and 2) for the purposes of the anti-retaliation protections. Under the regulatory rules, an award requires SEC reporting, while anti-retaliation protection does not.[9]

The Court of  Appeals  concluded  that  §78u–6(h)does  not  require reporting to the SEC  prior  to  gaining  “whistleblower”status, and it accorded deference to the SEC’s regulation under Chevron U. S. A. Inc. v. Natural  Resources  Defense  Council,  Inc.,467 U. S. 837.[10]The Supreme Court held that anti-retaliatory relief does not extend to an individual who has not reported a securities law violation to the SEC.

Chevron Deference Avoided:

The majority opinion finds that because  “Congress has  directly spoken  to  the  precise  questionat issue,”[11] deference is not accorded to the contrary view advanced by the SEC in Rule 21F–2.The statute’s unambiguous whistleblower definition, in short,precludes the Commission from more expansively interpreting that term.[12]Because the first prong of the Chevron deference test is whether the underlying statute is ambiguous, the Court did not reach the second prong. The second prong is whether the agency’s statutory interpretation is reasonable.

Ramifications:

This decision may lead to employees filing tips with the SEC, and possibly circumventing internal reporting and compliance procedures.[13] The protections under Dodd-Frank are more powerful than under Sarbanes-Oxley, and include longer statute of limitations, fewer administrative hurdles, higher potential recovery.[14] The Dodd-Frank benefits are attainable, due to Digital Realty, only by reporting concerns to the Commission.[15] According to Sean McKessy, the founding director of the SEC Office of the Whistleblower, this constitutes a “mixed blessing” for employers.[16] In an email statement, McKessy said “[p]reviously, we might have advised whistleblowers to report their concerns through internal compliance systems, when those systems were legitimate and strong, as well as report claims to the SEC[.]” McKessy continued that “[n]ow we will tailor our advice to whistleblowers to take the Supreme Court decision into account, so as to avoid the risk of losing the right to be protected from retaliation.”[17]The potential flooding of whistleblower claims may in turn shift investigations from being handled internally, to being pushed out to the SEC. In order for the SEC to properly perform its due diligence, this may require the SEC to allocate more time and resources to handling and investigating tips. With more money on the table, as well as other protections, whistleblowers may be more likely to approach the SEC in conjunction with, or instead of, following internal reporting procedures.

[1]Digital Realty Trust, Inc. v. Somers, 583 U.S. ___ (2018) (Slip Op. 16-1276. https://www.supremecourt.gov/opinions/17pdf/16-1276_b0nd.pdf.).

[2]Id. Justice Ginsburg delivered the opinion of the Court and was joined by Chief Justice Roberts, and Justices Kennedy, Breyer, Sotomayor, and Kagan. Justice Sotomayor filed a concurring opinion, in which Justice Breyer joined. Justice Thomas concurred in part and concurring in the judgment, was joined by Justices Alito and Gorsuch. Justice Thomas wrote that the court should have limited its analysis to the text of the statute, without consulting the Senate report.

[3]See generally id.

[4] Paul Somers also alleges discrimination based on sexual orientation.

[5]15 U. S. C. §78u– 6(a)(6).

[6]15 U. S. C.§78u–6(b)–(g).

[7]See  §78u–6(h)(1)(A)(i)–(iii).

[8][8]§78u–6(h)(1)(A)(iii). Sarbanes-Oxley’s  anti-retaliation  provision  contains  an  administrative-exhaustion  requirement  and  a  180-day  administrative  complaint-filing  deadline,  see  18  U. S. C. §1514A(b)(1)(A), (2)(D), whereas Dodd-Frank permits a whistleblower to sue an employer directly in federal district court, with a default six-year limitation period, see §78u–6(h)(1)(B)(i), (iii)(I)(aa).

[9]See 17 C.F.R. §240.21F–2(a)(1); see also 17 C.F.R. §240.21F–2(b)(1)(i)–(ii).

[10]See Somers v. Digital Realty, 119 F. Supp. 3d 1088, 1096–1106 (N.D. Cal. 2015); see also Somers v. Digital Realty Trust Inc., 850 F.3d 1045, 1049 (9th Cir. 2017).

[11]Chevron, 467 U. S., at 842

[12]See Burgess v. United  States,  553  U.  S.  124,  130  (2008).

[13]Alison Frankel, SCOTUS whistleblower ccase dodges Chevron deference showdown, Reuters, (Feb. 21, 2018) https://www.reuters.com/article/legal-us-otc-whistleblower/scotus-whistleblower-case-dodges-chevron-deference-showdown-idUSKCN1G52J4.

[14]Id.

[15] Id.

[16] Id.

[17] Id.