On Wednesday this week, all nine justices agreed that the Dodd-Frank Act’s anti-retaliation provision does not extend to an individual who has not reported a violation of the securities laws to the Securities and Exchange Commission (“SEC”). In other words, making only internal complaints does not shroud an employee in whistleblower protection under the Dodd-Frank Act.
In the case that was before the Court, Digital Realty Trust, Inc. v. Somers, Paul Somers was a vice president at Digital Realty Trust, a real estate investment company. Believing that the company was violating securities law, including hiding millions of dollars in cost overruns, he alerted senior management. Not long after, the company terminated his employment, and Mr. Somers sued for retaliation. Mr. Somers had not tipped the SEC about the violations before he was fired.
Writing for the unanimous court, Justice Ginsburg found the statutory language to be unambiguous and abundantly clear: the Dodd-Frank Act defines “whistleblower” to mean a person who provides “information relating to a violation of the securities laws to the [Securities and Exchange] Commission.” A Dodd-Frank whistleblower is eligible for an award if original information he or she provides to the SEC leads to a successful enforcement action. Moreover, a Dodd-Frank whistleblower is protected from retaliation for, among other things, “making disclosures that are required or protected under” Sarbanes-Oxley, the Securities Exchange Act of 1934, the criminal anti-retaliation proscription at 18 U. S. C. §1513(e), or any other law subject to the SEC’s jurisdiction.
Because the Court found the statute to be unambiguous, it did not accord any deference to the rules promulgated by the SEC that left room for internal whistleblowers. The Court found the agency’s rules contrary to the plain language of the Act, which explicitly affords protection only for reporting to the SEC.
The Dodd-Frank Act is one of a pair of laws regulating the financial industry that contains robust whistleblower provisions. Like the Sarbanes-Oxley Act, the Dodd-Frank Act forbids retaliation for reporting unlawful conduct. But these two Acts’ anti-retaliation provisions differ in material ways, including the definition of a whistleblower. Dodd-Frank instructs a court to award to a prevailing plaintiff double backpay with interest, while Sarbanes-Oxley limits recovery to actual backpay with interest. Both Acts authorize reinstatement and compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees. Sarbanes-Oxley contains an administrative exhaustion requirement, meaning that to be able to initiate and maintain a retaliation claim, an aggrieved whistleblower must first file an administrative complaint with the United States Department of Labor within 180 days of the termination. No such administrative exhaustion is required under Dodd-Frank.
The outcome of this case is a double-edged sword for employers. On the one hand, employers may be pleased that they will not be exposed to retaliation liability under Dodd-Frank for taking an adverse against a whistleblower who has only reported internally. On the other hand, sophisticated whistleblowers, including those being advised by counsel, will now probably not limit themselves to internal reporting; instead, they will go to the SEC in order to qualify for protection under Dodd-Frank’s anti-retaliation provisions. Moreover, employees who only report perceived misconduct internally are still protected under Sarbanes-Oxley, even if the potential damages for retaliation under that statute are lower.
Employers should take all internal complaints seriously. And of course, if you receive a complaint or report of any misconduct, employers should immediately involve legal counsel, undertake an investigation where appropriate, and keep open the lines of communication to the complaining individual, including by letting them know what steps you are taking to deal with their complaint. Finally, employers should be careful to ensure that decision makers do not take adverse action against a whistleblower without first reviewing the basis for such action with company counsel.