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U.S. Supreme Court Narrows Scope of Whistleblower Definition Under Dodd-Frank

Lev Craig

On February 21, 2018, the U.S. Supreme Court ruled in favor of petitioner Digital Realty Trust (“Digital Realty”) in Digital Realty Trust Inc. v. Somers, narrowing the definition of “whistleblower” under the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd–Frank”). The decision clarifies that Dodd–Frank’s anti-retaliation provisions do not apply to employees who only report violations internally within their company. In order to be covered by Dodd–Frank’s employee whistleblower protections, employees reporting securities law misconduct must go to the Securities and Exchange Commission (SEC).

Dodd–Frank was passed in 2010 in response to the 2007–2008 financial crisis with the aim of increasing responsibility and transparency in the financial industry, ending bailouts and “too-big-to-fail” banks, and creating restrictions on abusive financial services practices that hurt consumers. The law made many significant changes to financial regulations in government agencies, banks, and other financial services entities, including creating whistleblower protections for those who report unlawful activities in the financial industry. As the SEC explains, Dodd–Frank “expressly prohibits retaliation by employers against whistleblowers and provides them with a private cause of action in the event that they are discharged or discriminated against by their employers in violation of the Act.”

In Digital Reality Trust, Paul Somers alleged that his former employer—Digital Realty, a real estate investment trust—terminated his employment after he internally reported suspected violations of securities law to Digital Realty’s management. Somers then brought suit against his former employer alleging whistleblower retaliation claims under Dodd–Frank, which Digital Realty moved to dismiss on the grounds that Somers was not covered by Dodd–Frank because he had brought his concerns only to internal management, not the SEC. The district court and U.S. Circuit Court of Appeals for the Ninth Circuit denied Digital Realty’s motion, allowing Somers’s whistleblower claim to proceed. Digital Realty then appealed to the U.S. Supreme Court, which reversed the Ninth Circuit’s decision and dismissed Somers’s Dodd–Frank whistleblower claim.

At issue in Digital Realty Trust was whether Dodd–Frank’s anti-retaliation provision protects an employee, like Somers, who reports a suspected securities law violation to their employer’s internal management, but does not alert the SEC. The Supreme Court found that it does not. In its February 21, 2018 opinion, the Court differentiated between Dodd–Frank and the Sarbanes–Oxley Act of 2002 (SOX), another law aimed at improving accountability, reliability, and transparency in financial services.

While both statutes create anti-retaliation protections for those who report misconduct, the plain text of SOX makes clear that SOX’s whistleblower protections apply to all employees who report misconduct to the SEC, another federal agency, Congress, or an internal supervisor. Dodd–Frank, on the other hand, limits the term “whistleblower” to an individual “who provides…information relating to a violation of the securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC].” As such, the Court found, an employee who does not engage in the specific activity described in Dodd–Frank’s definition of “whistleblower”—i.e., reporting illegal conduct to the SEC in accordance with the SEC’s procedures—is not covered by the law’s anti-retaliation provisions and cannot bring whistleblower claims under Dodd-Frank.

The Supreme Court’s decision in Digital Realty Trust makes clear that, in order to be covered by Dodd–Frank’s retaliation provisions, employees reporting securities law violations must go to the SEC. As a result, whistleblowers who are concerned about backlash from their employer may now be more likely to skip their company’s internal reporting procedures and instead make their reports of securities law violations directly to the SEC.

This could cause significant changes in the landscape of whistleblower claims. In the past, many whistleblowers have attempted to resolve issues internally before reporting to government agencies. A National Whistleblowers Center report to the SEC found that “the overwhelming majority of employees voluntarily utilized internal reporting processes” before filing whistleblower lawsuits or going to a government agency, including nearly 90% of individuals who ultimately filed a qui tam action. Now, however, those employees are more likely to fear retaliation and go directly to the federal government with their concerns, potentially leading to an increase in whistleblower reports to the SEC and heightened government scrutiny of corporations suspected of misconduct.

If your employer has retaliated against you for reporting illegal conduct, contact The Harman Firm, LLP.

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