Written by Robert W. Staley, Alan P. Gardner and Douglas Fenton
The Supreme Court of the United States has refused to broaden protections for employee-whistleblowers under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). In Digital Realty Trust Inc v. Somers, a decision with potentially far-reaching consequences, the Court held that the anti-retaliatory provisions of the Dodd-Frank Act apply only where a whistleblower reports directly to the United States Securities and Exchange Commission (SEC).
Background: The Dodd-Frank Act
Passed in the wake of the 2008 financial crisis, the Dodd-Frank Act amended the Securities Exchange Act, 1934 and introduced new protections and incentives to encourage greater reporting of potential securities violations. The Act defines a "whistleblower" to be "any individual who provides information relating to the violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission."
To encourage preemptive reporting of potential securities laws violations, the Dodd-Frank Act authorized the SEC to implement a "bounty for tips" program—whereby whistleblowers who voluntarily provide "original information" to the Commission that leads to a successful enforcement action are eligible to receive a cash award of 10 to 30 percent of the monetary sanctions collected by the SEC. Since the program's inception, the SEC has paid out over $1 billion in financial rewards.
The Dodd-Frank Act also introduced "anti-retaliatory" protections to the Securities Exchange Act, 1934—designed to protect "whistleblowers" from retribution by their employers for reporting potential securities violations. Under the Act, an employer is prohibited from dismissing, harassing or otherwise discriminating against a "whistleblower" on the basis that the whistleblower has (1) provided information to the SEC; (2) initiated, testified or assisted in a SEC investigation or enforcement action; or (3) otherwise provided information to a federal regulatory or law enforcement agency, Congress or an internal supervisor.
If an employer retaliates against a whistleblower, the whistleblower is entitled to sue the employer in Federal Court. If the whistleblower is ultimately successful, the Act directs that the whistleblower will be entitled to receive "double-pay back with interest" (i.e., an amount equal to double the whistleblowers 'actual' costs and damages).
The anti-retaliatory provisions in the Dodd-Frank Act supplemented the pre-existing protections from retribution in the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), which applied more broadly to any "employee" that reports fraud or a potential securities violation to a government agency or supervisor. The Sarbanes-Oxley Act protections, however, are markedly less advantageous for employees than the Dodd-Frank Act. Among other things, the Sarbanes-Oxley Act requires the employee to "exhaust" administrative avenues of redress by filing a complaint with the Secretary of Labor before commencing a lawsuit against their employer directly. The employee's initial complaint must also be filed within a relatively short 180-day limitation period and there is no possibility of recovering "double-pay back" (as is the case under the Dodd-Frank Act).
Digital Realty Trust: Who Is a Whistleblower?
The legal issue in Digital Realty Trust Inc v. Somers was whether the definition of "whistleblower" in the Dodd-Frank Act limited application of the anti-retaliatory provisions only to those whistleblowers that report to the SEC.
Paul Somers was employed from 2010-2014 as the Vice-President of Digital Realty Trusts (Digital Realty), a real estate investment trust focused on acquiring data centers. Somers alleged that he was terminated by Digital Realty shortly after reporting his concerns about potential securities laws violations to senior management. Importantly, Somers never reported these concerns to the SEC, even after he had been terminated. Somers subsequently commenced a lawsuit against Digital Realty under the anti-retaliatory provisions of the Dodd-Frank Act, alleging that he had been terminated as retribution for raising the potential securities violations with senior management.
Digital Realty moved to dismiss Somers' claim, arguing that he did not meet the definition of a "whistleblower" under the Dodd-Frank Act because he had never reported his concerns to the SEC. In response, Somers argued that the Dodd-Frank Act definition of "whistleblower" could not be applied literally to the anti-retaliatory provisions, as it would "gut" the protective force of those provisions.
Somers further argued that the Court should defer to the rules passed by the SEC to implement the provisions of Dodd-Frank Act and establish a whistleblower program. The SEC Rules advanced two different definitions of "whistleblower." For the purposes of the reward program, the SEC Rules defined a "whistleblower" as a person who provided information to the Commission. For the purposes of the anti-retaliatory provisions, the SEC Rules defined a "whistleblower" as a person who possesses a reasonable belief that they have information about potential securities violations and reports that information to any government agency or internally.
Somers prevailed at first instance at the United States District Court (Northern District of California) and on appeal to the 9th Circuit Court of Appeal. Both Courts were of the view that applying the Dodd-Frank Act definition of "whistleblower" mechanically to the anti-retaliatory provisions would narrow the Act's protections "to the point of absurdity" by failing to protect employees that report potential securities violations internally or to government agencies other than the SEC. Digital Realty appealed to the Supreme Court.
A unanimous Supreme Court agreed with Digital Realty's argument and overturned the 9th Circuit Court of Appeal. Justice Ginsburg, writing for the Court, was of the view that "Dodd-Frank's text and purpose leave no doubt as to who the term whistleblower applies to." The definition section of Dodd-Frank was "unequivocal": a "whistleblower" is a person that reports to the SEC. Since the anti-retaliatory protections applied only to "whistleblowers" and because Somers had not reported to the SEC, he could not bring a lawsuit against Digital Trust for the alleged retribution. In Justice Ginsburg's view, this result was consistent with Congress' goal in enacting Dodd-Frank: namely, to "to motivate people to know of securities laws violations to tell the SEC."
In result, the Supreme Court allowed the appeal and dismissed Somers lawsuit against Digital Realty.
Implications: Will Employees Still Report Internally?
While the legal analysis and result in Digital Realty is perhaps unremarkable—with the Supreme Court concluding, in effect, that the Dodd-Frank Act means exactly what it says—the decision could have far-reaching implications for both the American and Canadian capital markets.
The ruling in Digital Realty may engender a "race to report" and increase the number of meritless tips received by the SEC because the only to way ensure the protection of the Dodd-Frank Act anti-retaliatory provisions is to report directly to the SEC. A whistleblower that would otherwise be inclined to only report their concerns internally, and await the company's response, might conclude that they must simultaneously report to the SEC to protect themselves from future reprisal. Even where a whistleblower reports internally and the company conducts a thorough investigation that clears the impugned parties of any wrongdoing, the whistleblower is still incentivized to report to the SEC to protect against future reprisal. As a result, the Digital Realty decision may challenge the ability of public companies to resolve alleged securities violations through internal reporting mechanisms, short of the SEC becoming involved.
Importantly, however, the decision in Digital Realty does not affect the anti-retaliatory provisions of the Sarbanes-Oxley Act. While the Sarbanes-Oxley Act is less generous to employees than the Dodd-Frank Act, employers may still be taken to task if they retaliate against an employee that has blown the whistle on corporate fraud or securities laws violations.
Reporting issuers under Ontario securities laws should also be aware that the anti-reprisal protections provided to whistleblowers under section 121.5 Securities Act are broader than the Dodd-Frank Act provisions, and expressly extend to whistleblowers who report their concerns internally without reporting directly to the Ontario Securities Commission (OSC). Importantly, however, section 121.5 does not provide whistleblowers with a private cause of action against employers. Rather, it allows the OSC to commence proceedings to sanction the employer for retaliatory behavior.