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Because of a split between two appellate courts over the issue, the U.S. Supreme Court is expected to consider whether corporate whistleblowers must first report issues to the U.S. Securities and Exchange Commission before they can receive anti-retaliation protection.
Experts say the question of protection from retaliation is an issue that arises frequently and can create significant consequences for companies and whistleblowing employees.
The 5th U.S. Circuit Court of Appeals in New Orleans held in its 2013 ruling in Khaled Asadi v. G.E. Energy (USA) L.L.C. that a whistleblower who had only reported alleged wrongdoing internally, but not to the SEC, did not qualify for anti-retaliation protection under the Dodd-Frank Wall Street Reform and Consumer Protection Act, based on its statutory language.
However, in a divided ruling issued Sept. 10, the 2nd U.S. Circuit Court of Appeals in New York held in Daniel Berman v. Neo@Ogilvy L.L.C. and WPP Group USA Inc. that because Dodd-Frank's language was ambiguous, it was deferring on the issue to an SEC rule that says internal reporting is sufficient to evoke the law's anti-retaliation provisions (see story, page 27).
New York-based marketing agency Neo@Ogilvy plans to seek Supreme Court review of the case, according to a motion filed with the 2nd Circuit.
Experts say the issue is significant.
“The great majority of (whistleblower) cases involve internal complaints, where the individual has not gone to the SEC,” said Edward E. Ellis, a shareholder with Littler Mendelson P.C. in Philadelphia.
“It is a significant issue because employees do not have protection against retaliatory conduct, generally speaking, unless there's a statute that provides for it or some kind of a contractual obligation,” said Holly H. Weiss, a partner with Schulte Roth & Zabel L.L.P. in New York. Until the Berman ruling, whistleblowers who complained only internally did not have any statutory protection, she said.
“The gold standard under (the Sarbanes-Oxley Act of 2002) was to have a robust code of conduct that included methods of internal reporting so that any issues that might arise would be brought to light and could get addressed before they became an issue,” said Joseph C. Toris, of counsel at Jackson Lewis P.C. in Morristown, New Jersey.
But Dodd-Frank, which largely took effect in 2010, “changed that by encouraging whistleblowers to go to the SEC and created a bounty program so that in certain situations the employee would be able to share in the recovery made by the SEC,” Mr. Toris said.
The SEC has sought to achieve a balance between bolstering its whistleblowing program and empowering compliance programs, said John T. Zach, a partner with Boies, Schiller & Flexner L.L.P. in New York. Now, with these two conflicting opinions “depending on what jurisdiction you're in, the incentives are different.”
Experts say the Supreme Court is expected to take on the issue because of the circuit split, which is also reflected in differing lower U.S. District Court rulings on the issue.
“There's a good chance” it will take the case, said Mr. Ellis. “You have a pretty clear difference of opinion as to what the statute says, and the Supreme Court is there to resolve those differences.”
Experts who are willing to hazard a prediction regarding how the court will rule differ on the likely outcome.
The 5th Circuit's opinion is “the more straightforward position,” said David Smyth, an attorney with law firm Brooks, Pierce, McLendon, Humphrey & Leonard L.L.P. in Raleigh, North Carolina.
“The statute doesn't say what the 2nd Circuit says it does,” said Thomas O. Gorman, a partner at Dorsey & Whitney L.L.P. in Washington. “I don't see how you can really rewrite the statute, which is what I think the 2nd Circuit did,” said Mr. Gorman, who believes it is unlikely the Supreme Court would support the 2nd Circuit's ruling.
“It really boils down to a statutory interpretation issue” and how much deference courts will give to the SEC's interpretation, said Richard J.L. Lomuscio, counsel with Drinker Biddle & Reath L.L.P. in New York.
Michael E. Clark, special counsel with Duane Morris L.L.P. in Houston said he believes the Supreme Court may uphold the 2nd Circuit's rule. “This seems to be the era of whistleblower protection,” he said.