High court whistleblower ruling could affect internal reportingReprints
Wednesday’s U.S. Supreme Court ruling, which says whistleblowers are not protected from retaliation under the Dodd-Frank Wall Street Reform and Consumer Protection Act if they only report wrongdoing internally, is likely to encourage them to go straight to the Securities and Exchange Commission, say attorneys.
These experts say although the business community had urged the court to issue this ruling, it could undermine firms’ opportunity to first address any issues themselves, before attracting the SEC’s regulatory scrutiny.
Paul Somers was a vice president at San Francisco-based Digital Realty, a real estate trust, who was allegedly terminated after he made several reports to senior management regarding possible securities law violations, according to court papers in Digital Realty Trust v. Paul Somers.
He was not able to report his concerns to the SEC before his termination, according to the 9th U.S. Circuit Court of Appeals in San Francisco in a 2017 ruling.
Mr. Somers sued Digital on charges including violation of Dodd-Frank. The company sought the case’s dismissal on the basis that Mr. Somers was not a whistleblower because he had reported possible violations only internally, and not to the SEC.
The U.S. District Court in San Francisco refused to dismiss the case, which was upheld by the appeals court in a divided ruling. The 9th Circuit held that Congress did not intend to limit Dodd-Frank’s anti-whistleblower provisions only to those who disclose information to the SEC.
That ruling conflicted with a 2013 ruling by the 5th U.S. Circuit Court of Appeals in New Orleans, which held that employeess must provide information to the SEC before they can get Dodd-Frank’s anti-retaliation protection.
Wednesday’s ruling, which was delivered by Justice Ruth Bader Ginsburg, states Dodd-Frank does not extend that protection to those who have not reported a securities law violation to the SEC.
“Our charge in this review proceeding is to determine the meaning of ‘whistleblower’…in Dodd-Frank’s anti-retaliation provision,” says the ruling.
“The definition section of the statue supplies an unequivocal answer: A ‘whistleblower’ is any individual who provides...information relating to a violation of the securities laws to the Commission,” said the ruling, in overturning the 9th Circuit’s decision. The ruling was unanimous, with two concurring opinions.
Observers say the ruling was expected, given the tenor of the justices’ questions during the case’s oral arguments in November.
It could have, though, the perhaps unintended consequence of discouraging employees from first reporting alleged wronging internally, and instead going straight to the SEC.
Under the Dodd-Frank Act, whistleblowers who voluntarily provide original information that leads to successful SEC enforcement action resulting in monetary sanctions of more than $1 million and successful related actions can receive an amount equal to 10% to 30% of the monetary sanctions collected.
According to the SEC’s latest November 2017 report to Congress in fiscal year 2017, the Commission ordered whistleblower awards of nearly $50 million to 12 individuals.
Experts say the ruling was expected. “I didn’t find it particularly surprising,” said Donald M. Falk, a partner with Mayer Brown L.L.P. in Palo Alto, California. “There was a very clear statutory provision defining whistleblower,” he said. “To me, (the case) just seemed like regulatory overreach.”
Mr. Falk said also the ruling will have little practical impact. “Firing someone because of internally reporting an SEC violation is still unlawful” under the Sarbanes Oxley Act of 2002, he said.
“It takes one weapon out of the holster of the plaintiffs bar, but it doesn’t leave employees without protections for the conduct that was at issue here,” he said.
But defense attorney Kit Addleman, a partner with Haynes and Boone L.L.P. in Dallas, who is a former SEC director, said, “In part, it could give rise to more whistleblowers going to the SEC. There is the potential for more company employees to be motivated” to do so “in order to be protected from retaliation, and it could give rise to everything that the Commission and Congress wanted in passing Dodd-Frank in the first instance,” she said.
This is an instance of “be careful what you wish for,” said Sean X. McKessy, a former chief of the SEC whistleblower office who is now a partner with plaintiff law firm Phillips & Cohen L.L.P.
People who are aware of wrongdoing are now being told if they fail to report it to the SEC, they do so “at their own peril,” said Mr. McKessy. It provides an incentive to those who would “otherwise be inclined to report internally,” to go to the SEC instead, he said. “I don’t think that’s what anyone wanted.”
As a result of this ruling, “I expect we’ll see an uptick in the number of people who come to us,” to represent them before the SEC, he said.
“It removes the incentives to give the company the first chance to fix the problem,” said James E. Barz, a partner with plaintiff law firm Robbins Geller Rudman & Dowd L.L.P. in Chicago, who added this may be an example “of winning the battle and losing the war.”
Ms. Addleman said, “Companies should continue to emphasize the benefits of internal reporting as well as take their own position on retaliation being against company policy.
“In that way, employees won’t feel that they have to go to the commission first, to obtain the protection against retaliatory conduct,” she said.
She added, “Most of our clients have great policies with respect to the processes for internal reporting, including sanctions against managers or other employees who engage in retaliatory behavior, so to ensure that companies are still getting good information and whistleblowing reports from its line employees, emphasizing those internal anti-retaliation provisions will continue to be important.”