Joseph M. McLaughlin and Yafit Cohn
Joseph M. McLaughlin and Yafit Cohn ()

As part of its comprehensive reform of the U.S. financial regulatory system, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 enhanced and expanded pre-existing protections and bounty incentives to encourage whistleblowing, including those contained in the Sarbanes-Oxley Act (SOX). It did so by amending the Securities Exchange Act of 1934 (Exchange Act) to add a new provision, §21F, titled “Securities Whistleblower Incentives and Protection.” This new section, however, left open a fundamental question that has engendered significant dispute: Is a corporate employee who reports an employer’s possible violation of the securities laws to a supervisor or internal compliance officer—but not to the Securities and Exchange Commission—considered a “whistleblower” entitled to protection from retaliation under Dodd-Frank?

Courts that have considered this question have reached differing conclusions. Notably, the U.S. Courts of Appeals for the Second and Fifth Circuits have split on this issue. Last month, the Ninth Circuit in Somers v. Digital Realty Trust joined the Second Circuit in concluding that the protection from employment retaliation afforded by §21F covers employees who report a suspected violation of the securities laws internally—not only those who report to the SEC.1

Section 21F and Rule 21F-2

The question of whether Dodd-Frank’s anti-retaliation protection covers employees who report the suspected violation only internally stems from textual ambiguity in §21F. Section 21F defines a “whistleblower” as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”2

A subsequent provision in §21F, however, which protects whistleblowers from retaliation by employers, prohibits, in relevant part, all types of discrimination against “a whistleblower in the terms and conditions or employment because of any lawful act done by the whistleblower … in providing information to the Commission in accordance with this section” or “in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.”3 Section 806 of the Sarbanes-Oxley Act, in turn, prohibits retaliation against employees of publicly traded companies who provide information or otherwise assist in an investigation relating to fraud, “when the information or assistance is provided to or the investigation is conducted by” a federal regulatory or law enforcement agency, any member or committee of Congress, or “a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct).”4

In 2011 the SEC issued an interpretive rule, Rule 21F-2. The first half of the rule reiterates §21F’s definition of a whistleblower as an individual who provides the SEC with information pursuant to specified procedures regarding possible violation of federal securities laws. The provision further notes that, “[t]o be eligible for an award, you must submit original information to the Commission.” The second half of Rule 21F-2 indicates that, “[f]or purposes of the anti-retaliation protections afforded by” the §21F, a whistleblower is one who provides information reasonably believed to relate to a possible securities law violation “in a manner described in” §21F’s whistleblower protection provision. Rule 21F-2 proceeds to explain that these “anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.”

In interpretive guidance issued in 2015, the SEC stated that it sought to resolve the ambiguity in §21F by providing in Rule 21F-2 “two separate definitions of ‘whistleblower’” that “apply in different circumstances”: The first “applies only to the … provisions of Section 21F” that allow for monetary awards for supplying information about the violation and provide heightened confidentiality assurances, while the second applies for purposes of §21F’s anti-retaliation protections and does not require reporting to the SEC.5

Prior Circuit Court Decisions

In spite of the SEC’s interpretive rule, the scope of Dodd-Frank’s anti-retaliation protections has divided the courts.

In 2013, the Fifth Circuit in Asadi v. GE Energy agreed with the defendant that the purported whistleblower had no claim under Dodd-Frank’s whistleblower protection provision, “start[ing] and end[ing]” its analysis “ with the text of the relevant statute,” which defines “whistleblower” as “any individual who provides … information relating to a violation of the securities laws to the Commission.”6 The court held that “[t]his definition, standing alone, expressly and unambiguously requires that an individual provide information to the SEC to qualify as a ‘whistleblower’ for purposes of” the Dodd-Frank Act’s anti-retaliation provision.

While acknowledging that the plaintiff had “some case law, as well as the SEC regulation on this issue, in his corner,” the Fifth Circuit found that the SEC’s implementing rule “expands the meaning of a ‘whistleblower’ beyond the statutory definition” by “providing that an individual qualifies as a whistleblower even though he never reports any information to the SEC, so long as he has undertaken the protected activity listed in” the anti-retaliation provision of §21F. The Fifth Circuit rejected this “expansive interpretation,” holding that the “plain language and structure” of the Dodd-Frank Act establishes “only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.”

In contrast, in 2015, the Second Circuit deferred to the interpretation of the SEC, holding that the Dodd-Frank Act’s anti-retaliation provision protects employees who reported suspected wrongdoing only internally. In Berman v. Neo@Ogilvy, the Second Circuit acknowledged the tension between §21F’s definition of “whistleblower” and the language used in its whistleblower protection provision.7 In attempting to resolve this “significant tension,” the Second Circuit first consulted the legislative history of the subdivision containing the cross-reference to SOX. Noting that such an inquiry “yields nothing,” the court stated that the tension within §21F “renders section 21F as a whole sufficiently ambiguous” to warrant deference to “the reasonable interpretation of the agency charged with administering the statute”—in this case, the SEC. Accordingly, without “definitively constru[ing] the statute” itself, the Second Circuit adopted the SEC’s position that Dodd-Frank’s anti-retaliation protection extends to individuals who report suspected violations either to “persons or governmental authorities other than the Commission” or to the SEC itself.

‘Somers’

In Somers, plaintiff Paul Somers made reports to senior management of his employer, Digital Realty Trust, regarding possible securities law violations by the company. Somers was terminated before he was able to report his concerns to the SEC. Somers sued Digital Realty, alleging a violation of §21F. The company moved to dismiss the claim, arguing that Somers was not a “whistleblower” entitled to Dodd-Frank protection , since he only reported the suspected violations internally. The district court declined to dismiss the suit, deferring to “the SEC’s interpretation that individuals who report internally only are nonetheless protected from retaliation” under Dodd-Frank.

On appeal, the Ninth Circuit, like the Second Circuit, preliminarily observed that there is “no legislative history” explaining the purpose behind the provision in §21F that provides anti-retaliation protection to whistleblowers who make “disclosures that are required or protected under” SOX. The Ninth Circuit opined, however, that the language of this provision “illuminates congressional intent”; through its reference to SOX’s disclosure requirements and protections, the Dodd-Frank Act “necessarily bars retaliation against an employee of a public company who reports violations to the boss.” The court noted that other provisions of SOX and the Exchange Act require certain individuals, such as auditors or attorneys, to report violations of law internally before reporting them externally. “Leaving employees without protection for that required preliminary step,” explained the court, “would result in early retaliation before the information could reach the regulators.”

The Ninth Circuit concluded that §21F’s definition of “whistleblowers” as employees who report violations to the SEC, “should not be dispositive of the scope of [Dodd-Frank's] later anti-retaliation provision.” According to the court, “[t]he use of a term in one part of a statute ‘may mean [a] different thing[]‘” in a different part, depending on context,” “even where, as here, the statute includes a definitional provision.” The court interpreted the anti-retaliation provision in §21F to “unambiguously and expressly protect[] from retaliation all those who report to the SEC and who report internally.” Reading the word “whistleblower” in the anti-retaliation provision to mean “whistleblower” as it was defined earlier in §21F “would make little practical sense and undercut congressional intent,” as the only class of employees protected from retaliation would be “those who had reported possible securities violations both internally and to the SEC, when the employer—unaware of the report to the SEC—fires the employee solely on the basis of the employee’s internal report.” The court found this reading “illogical,” asserting that employees are unlikely to report both internally and externally. Because a strict application of §21F’s definition of whistleblower would thus effectively read out of the statute the subdivision protecting those who make SOX-protected disclosures, the court held that §21F’s anti-retaliation provision should be read to extend protection to those who report internally as well as those who report to the SEC.

Finally, the Ninth Circuit explicitly agreed with the Second Circuit that, “even if the use of the word ‘whistleblower’ in the anti-retaliation provision creates uncertainty because of the earlier narrow definition of the term, the agency responsible for enforcing the securities laws has resolved any ambiguity[,] and its regulation is entitled to deference.” In the court’s view, Rule 21F-2, which clearly indicates that Dodd-Frank’s anti-retaliation protection extends to those who make internal disclosures under SOX, “accurately reflects congressional intent that [Dodd-Frank] protect employees whether they blow the whistle internally, as in many instances, or they report directly to the SEC.”

Implications of ‘Somers’

Somers adds the Ninth Circuit’s view to the existing circuit split regarding the scope of Dodd-Frank’s anti-retaliation protection, continuing the debate on whether employees who report a suspected securities law violation internally are entitled to Dodd-Frank whistleblower protection. Though the Ninth Circuit’s decision accords with the Second Circuit’s, it introduced an alternative rationale, reaching its conclusion on different legal grounds than the Second Circuit. This widened circuit split increases the likelihood of Supreme Court review. The scope of Dodd-Frank’s whistleblower protection provision was ripe for Supreme Court review following the Second Circuit’s Berman, but the defendant employer in that case did not seek Supreme Court review. It remains to be seen whether Somers will ultimately reach the Supreme Court for a resolution of the circuit split.

In the meantime, public companies should bear in mind that in some parts of the country, including within the jurisdictions of the Second and Ninth Circuits, individuals who report suspected securities law violations within the company but not also to the SEC will be entitled to the anti-retaliation protection afforded Dodd-Frank. Public companies should therefore ensure that they have effective systems in place to prevent any type of employment retaliation against employees who report potential securities law violations internally.

Endnotes:

1. 850 F.3d 1045 (9th Cir. 2017).

2. Exchange Act §21F(a)(6) (emphasis added).

3. Exchange Act §21F(h)(1)(A).

4. Sarbanes-Oxley Act §806(a) (emphasis added).

5. Interpretation of the SEC’s Whistleblower Rules Under Section 21F of the Securities Exchange Act of 1934, Release No. 34-75592 (Aug. 4, 2015).

6. 720 F.3d 620, 623 (5th Cir. 2013).

7. 801 F.3d 145 (2d Cir. 2015).

As part of its comprehensive reform of the U.S. financial regulatory system, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 enhanced and expanded pre-existing protections and bounty incentives to encourage whistleblowing, including those contained in the Sarbanes-Oxley Act (SOX). It did so by amending the Securities Exchange Act of 1934 (Exchange Act) to add a new provision, §21F, titled “Securities Whistleblower Incentives and Protection.” This new section, however, left open a fundamental question that has engendered significant dispute: Is a corporate employee who reports an employer’s possible violation of the securities laws to a supervisor or internal compliance officer—but not to the Securities and Exchange Commission—considered a “whistleblower” entitled to protection from retaliation under Dodd-Frank?

Courts that have considered this question have reached differing conclusions. Notably, the U.S. Courts of Appeals for the Second and Fifth Circuits have split on this issue. Last month, the Ninth Circuit in Somers v. Digital Realty Trust joined the Second Circuit in concluding that the protection from employment retaliation afforded by §21F covers employees who report a suspected violation of the securities laws internally—not only those who report to the SEC.1

Section 21F and Rule 21F-2

The question of whether Dodd-Frank’s anti-retaliation protection covers employees who report the suspected violation only internally stems from textual ambiguity in §21F. Section 21F defines a “whistleblower” as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”2

A subsequent provision in §21F, however, which protects whistleblowers from retaliation by employers, prohibits, in relevant part, all types of discrimination against “a whistleblower in the terms and conditions or employment because of any lawful act done by the whistleblower … in providing information to the Commission in accordance with this section” or “in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.”3 Section 806 of the Sarbanes-Oxley Act, in turn, prohibits retaliation against employees of publicly traded companies who provide information or otherwise assist in an investigation relating to fraud, “when the information or assistance is provided to or the investigation is conducted by” a federal regulatory or law enforcement agency, any member or committee of Congress, or “a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct).”4

In 2011 the SEC issued an interpretive rule, Rule 21F-2. The first half of the rule reiterates §21F’s definition of a whistleblower as an individual who provides the SEC with information pursuant to specified procedures regarding possible violation of federal securities laws. The provision further notes that, “[t]o be eligible for an award, you must submit original information to the Commission.” The second half of Rule 21F-2 indicates that, “[f]or purposes of the anti-retaliation protections afforded by” the §21F, a whistleblower is one who provides information reasonably believed to relate to a possible securities law violation “in a manner described in” §21F’s whistleblower protection provision. Rule 21F-2 proceeds to explain that these “anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.”

In interpretive guidance issued in 2015, the SEC stated that it sought to resolve the ambiguity in §21F by providing in Rule 21F-2 “two separate definitions of ‘whistleblower’” that “apply in different circumstances”: The first “applies only to the … provisions of Section 21F” that allow for monetary awards for supplying information about the violation and provide heightened confidentiality assurances, while the second applies for purposes of §21F’s anti-retaliation protections and does not require reporting to the SEC.5

Prior Circuit Court Decisions

In spite of the SEC’s interpretive rule, the scope of Dodd-Frank’s anti-retaliation protections has divided the courts.

In 2013, the Fifth Circuit in Asadi v. GE Energy agreed with the defendant that the purported whistleblower had no claim under Dodd-Frank’s whistleblower protection provision, “start[ing] and end[ing]” its analysis “ with the text of the relevant statute,” which defines “whistleblower” as “any individual who provides … information relating to a violation of the securities laws to the Commission.”6 The court held that “[t]his definition, standing alone, expressly and unambiguously requires that an individual provide information to the SEC to qualify as a ‘whistleblower’ for purposes of” the Dodd-Frank Act’s anti-retaliation provision.

While acknowledging that the plaintiff had “some case law, as well as the SEC regulation on this issue, in his corner,” the Fifth Circuit found that the SEC’s implementing rule “expands the meaning of a ‘whistleblower’ beyond the statutory definition” by “providing that an individual qualifies as a whistleblower even though he never reports any information to the SEC, so long as he has undertaken the protected activity listed in” the anti-retaliation provision of §21F. The Fifth Circuit rejected this “expansive interpretation,” holding that the “plain language and structure” of the Dodd-Frank Act establishes “only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC.”

In contrast, in 2015, the Second Circuit deferred to the interpretation of the SEC, holding that the Dodd-Frank Act’s anti-retaliation provision protects employees who reported suspected wrongdoing only internally. In Berman v. Neo@Ogilvy, the Second Circuit acknowledged the tension between §21F’s definition of “whistleblower” and the language used in its whistleblower protection provision.7 In attempting to resolve this “significant tension,” the Second Circuit first consulted the legislative history of the subdivision containing the cross-reference to SOX. Noting that such an inquiry “yields nothing,” the court stated that the tension within §21F “renders section 21F as a whole sufficiently ambiguous” to warrant deference to “the reasonable interpretation of the agency charged with administering the statute”—in this case, the SEC. Accordingly, without “definitively constru[ing] the statute” itself, the Second Circuit adopted the SEC’s position that Dodd-Frank’s anti-retaliation protection extends to individuals who report suspected violations either to “persons or governmental authorities other than the Commission” or to the SEC itself.

‘Somers’

In Somers, plaintiff Paul Somers made reports to senior management of his employer, Digital Realty Trust, regarding possible securities law violations by the company. Somers was terminated before he was able to report his concerns to the SEC. Somers sued Digital Realty, alleging a violation of §21F. The company moved to dismiss the claim, arguing that Somers was not a “whistleblower” entitled to Dodd-Frank protection , since he only reported the suspected violations internally. The district court declined to dismiss the suit, deferring to “the SEC’s interpretation that individuals who report internally only are nonetheless protected from retaliation” under Dodd-Frank.

On appeal, the Ninth Circuit, like the Second Circuit, preliminarily observed that there is “no legislative history” explaining the purpose behind the provision in §21F that provides anti-retaliation protection to whistleblowers who make “disclosures that are required or protected under” SOX. The Ninth Circuit opined, however, that the language of this provision “illuminates congressional intent”; through its reference to SOX’s disclosure requirements and protections, the Dodd-Frank Act “necessarily bars retaliation against an employee of a public company who reports violations to the boss.” The court noted that other provisions of SOX and the Exchange Act require certain individuals, such as auditors or attorneys, to report violations of law internally before reporting them externally. “Leaving employees without protection for that required preliminary step,” explained the court, “would result in early retaliation before the information could reach the regulators.”

The Ninth Circuit concluded that §21F’s definition of “whistleblowers” as employees who report violations to the SEC, “should not be dispositive of the scope of [Dodd-Frank's] later anti-retaliation provision.” According to the court, “[t]he use of a term in one part of a statute ‘may mean [a] different thing[]‘” in a different part, depending on context,” “even where, as here, the statute includes a definitional provision.” The court interpreted the anti-retaliation provision in §21F to “unambiguously and expressly protect[] from retaliation all those who report to the SEC and who report internally.” Reading the word “whistleblower” in the anti-retaliation provision to mean “whistleblower” as it was defined earlier in §21F “would make little practical sense and undercut congressional intent,” as the only class of employees protected from retaliation would be “those who had reported possible securities violations both internally and to the SEC, when the employer—unaware of the report to the SEC—fires the employee solely on the basis of the employee’s internal report.” The court found this reading “illogical,” asserting that employees are unlikely to report both internally and externally. Because a strict application of §21F’s definition of whistleblower would thus effectively read out of the statute the subdivision protecting those who make SOX-protected disclosures, the court held that §21F’s anti-retaliation provision should be read to extend protection to those who report internally as well as those who report to the SEC.

Finally, the Ninth Circuit explicitly agreed with the Second Circuit that, “even if the use of the word ‘whistleblower’ in the anti-retaliation provision creates uncertainty because of the earlier narrow definition of the term, the agency responsible for enforcing the securities laws has resolved any ambiguity[,] and its regulation is entitled to deference.” In the court’s view, Rule 21F-2, which clearly indicates that Dodd-Frank’s anti-retaliation protection extends to those who make internal disclosures under SOX, “accurately reflects congressional intent that [Dodd-Frank] protect employees whether they blow the whistle internally, as in many instances, or they report directly to the SEC.”

Implications of ‘Somers’

Somers adds the Ninth Circuit’s view to the existing circuit split regarding the scope of Dodd-Frank’s anti-retaliation protection, continuing the debate on whether employees who report a suspected securities law violation internally are entitled to Dodd-Frank whistleblower protection. Though the Ninth Circuit’s decision accords with the Second Circuit’s, it introduced an alternative rationale, reaching its conclusion on different legal grounds than the Second Circuit. This widened circuit split increases the likelihood of Supreme Court review. The scope of Dodd-Frank’s whistleblower protection provision was ripe for Supreme Court review following the Second Circuit’s Berman, but the defendant employer in that case did not seek Supreme Court review. It remains to be seen whether Somers will ultimately reach the Supreme Court for a resolution of the circuit split.

In the meantime, public companies should bear in mind that in some parts of the country, including within the jurisdictions of the Second and Ninth Circuits, individuals who report suspected securities law violations within the company but not also to the SEC will be entitled to the anti-retaliation protection afforded Dodd-Frank. Public companies should therefore ensure that they have effective systems in place to prevent any type of employment retaliation against employees who report potential securities law violations internally.

Endnotes:

1. 850 F.3d 1045 (9th Cir. 2017).

2. Exchange Act §21F(a)(6) (emphasis added).

3. Exchange Act §21F(h)(1)(A).

4. Sarbanes-Oxley Act §806(a) (emphasis added).

5. Interpretation of the SEC’s Whistleblower Rules Under Section 21F of the Securities Exchange Act of 1934, Release No. 34-75592 (Aug. 4, 2015).

6. 720 F.3d 620, 623 (5th Cir. 2013).

7. 801 F.3d 145 (2d Cir. 2015).