Justices Seem Poised to Curtail SEC's Broad Whistleblower Protections
The U.S. Supreme Court on Tuesday seemed inclined to interpret the Dodd-Frank Act to exclude whistleblower protections for employees who report alleged securities violations only to company management and not to the government.
November 28, 2017 at 04:59 PM
13 minute read
U.S. Supreme Court building in Washington, D.C. (Photo: Diego M. Radzinschi)
The U.S. Supreme Court on Tuesday seemed inclined to interpret the Dodd-Frank Act to exclude whistleblower protections for employees who report alleged securities violations only to company management and not to the government.
The 2010 financial reform law, currently at the center of a separate fight over who should head the Consumer Financial Protection Bureau, defines “whistleblower,” creates a rewards program for them and protects them from retaliation.
During arguments in the case Digital Realty Trust v. Somers, most of the justices struggled to find in the whistleblower definition any anti-retaliation protection for those employees who only make internal reports of alleged violations. Dodd-Frank defines a “whistleblower” as an individual “who provides information relating to a violation of the securities laws to the [Securities and Exchange] Commission, in a manner established, by rule or regulation, by the commission.”
“How much clearer could [Congress] possibly have been?” asked Justice Neil Gorsuch, emphasizing the reporting requirement “to the commission.”
But Daniel Geyser of the Dallas firm Stris & Maher, counsel to whistleblower Paul Somers, argued Dodd-Frank should be read in context with the Sarbanes-Oxley Act of 2002. Dodd-Frank, Geyser said, expanded the categories of people covered and strengthened Sarbanes-Oxley which had been ineffective in getting lawyers and accountants, in particular, to report securities violations despite their obligations to do so.
“The entire point that Congress had made in this statute [Dodd-Frank), and consistent again with every piece of modern, major whistleblowing legislation is to protect internal whistleblowing,” he told the justices. “This is the ordinary progression of getting information to the government. You first give the corporation a chance for self-governance. If they refuse to do it, then you go to the government.”
Kannon ShanmugamWilliams & Connolly's Kannon Shanmugam countered that the definition's plain text and the act's legislative history proved that those who make only internal reports are not protected by the Dodd-Frank anti-retaliation provision. An employee who reports internally and suffers retaliation is covered by the broader protections in Sarbanes-Oxley, he said.
“The Dodd-Frank Act's anti-retaliation provision prohibits retaliation only against a particular category of persons; namely, whistleblowers,” Shanmugam said. Dodd-Frank's definition of whistleblower, he said, covers only individuals who provide information to the SEC.
The U.S. Justice Department backed the SEC's broad interpretation of whistleblower protections. Christopher Michel, an assistant to the U.S. solicitor general arguing in support of Somers, said Shanmugam's interpretation would “eviscerate the incentive for internal reporting.”
The two sides also battled over the effect of an SEC rule that, after enactment of Dodd-Frank, changed the whistleblower definition to cover individuals who did not report alleged violations directly to the SEC.
Shanmugam argued the SEC rule deserved no deference from the high court because the rulemaking process was defective. The commission did not provide notice and time for comment that it intended to change the definition. Geyser said the agency did ask for comment on whether it should broaden or narrow the act's protections.
Geyser, however, did not persuade Gorsuch on whether there was fair notice of a proposed change. The justice expressed astonishment that two federal courts of appeals gave so-called Chevron deference to the agency's rule.
“From a policy perspective, this is an easy call. Reporting internally is far riskier than simply alerting the SEC, and thus the need to extend protection to internal reporting is most important,” said whistleblower litigator David Chizewer, principal at Chicago's Goldberg Kohn. “But the Supreme Court does not decide cases based on what policy makes the most sense.”
Both sides made reasonable arguments, Chizewer said. “Notably, businesses have often argued that whistleblowers should be required to report internally before taking advantage of whistleblower rights,” he said. “But here they argue that internal reporting alone doesn't qualify a whistleblower for protection.”
Greg Keating, chair of the whistleblower defense and labor and employment benefits practice groups at Choate Hall & Stewart, predicted a “massive expansion of potential liability” for employers if the court rules that internal complaints constitute whistleblowing under Dodd-Frank.
The Sarbanes-Oxley law only provides protection to employees of publicly traded companies and their contractors, he said. But Dodd-Frank applies more broadly to any company that is subject to SEC regulation. Sarbanes-Oxley also has a 180-day statute of limitations while Dodd-Frank gives employees as many as six years to file a claim of retaliation.
But if the company wins the case, Keating said, “It may have the result of steering individuals away from internal reporting and going directly to the SEC. This poses a meaningful risk to compliance programs nationwide and undermines the goal of a transparent workplace where problems are raised and resolved without reprisal.”
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U.S. Supreme Court building in Washington, D.C. (Photo: Diego M. Radzinschi)
The U.S. Supreme Court on Tuesday seemed inclined to interpret the Dodd-Frank Act to exclude whistleblower protections for employees who report alleged securities violations only to company management and not to the government.
The 2010 financial reform law, currently at the center of a separate fight over who should head the Consumer Financial Protection Bureau, defines “whistleblower,” creates a rewards program for them and protects them from retaliation.
During arguments in the case Digital Realty Trust v. Somers, most of the justices struggled to find in the whistleblower definition any anti-retaliation protection for those employees who only make internal reports of alleged violations. Dodd-Frank defines a “whistleblower” as an individual “who provides information relating to a violation of the securities laws to the [Securities and Exchange] Commission, in a manner established, by rule or regulation, by the commission.”
“How much clearer could [Congress] possibly have been?” asked Justice Neil Gorsuch, emphasizing the reporting requirement “to the commission.”
But Daniel Geyser of the Dallas firm Stris & Maher, counsel to whistleblower Paul Somers, argued Dodd-Frank should be read in context with the Sarbanes-Oxley Act of 2002. Dodd-Frank, Geyser said, expanded the categories of people covered and strengthened Sarbanes-Oxley which had been ineffective in getting lawyers and accountants, in particular, to report securities violations despite their obligations to do so.
“The entire point that Congress had made in this statute [Dodd-Frank), and consistent again with every piece of modern, major whistleblowing legislation is to protect internal whistleblowing,” he told the justices. “This is the ordinary progression of getting information to the government. You first give the corporation a chance for self-governance. If they refuse to do it, then you go to the government.”
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