Supreme Court Oral Argument Suggests Skepticism Over SEC Rule Protecting Internal Whistleblowers From Retaliation Under Dodd-Frank
On November 28, 2017, the Supreme Court heard oral arguments in Digital Realty Trust, Inc. v. Somers, No. 16-1276, a case that raises the question whether an employee who reported alleged misconduct internally, but did not make a report to the Securities and Exchange Commission (“SEC” or the “Commission”), is eligible for protections against retaliation afforded to whistleblowers by the Dodd-Frank Act of 2010 (“Dodd-Frank”). In 2011, the SEC issued a rule stating that internal whistleblowers were subject to protections under Dodd-Frank, even though the text of the statute defines “whistleblowers” as only those who reported information to the SEC. 16 C.F.R. 240.21F-2(b)(1). While a decision may remain months away, the questions from the Justices suggested considerable skepticism as to the SEC’s statutory interpretation and rulemaking process.
Respondent Paul Somers worked at Digital Realty Trust for four years before he was fired in 2014, allegedly in retaliation for reporting to senior management that his supervisor had eliminated internal controls in violation of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). Instead of utilizing the remedial scheme for retaliation against whistleblowers provided by Sarbanes-Oxley, Somers filed a lawsuit in the U.S. District Court for the Northern District of California seeking protection under a provision of Dodd-Frank that grants a remedy for retaliation against “whistleblowers” for, inter alia, internal reporting of Sarbanes-Oxley violations.
The definition of “whistleblower” under Dodd-Frank requires that the individual provide information to the SEC, which Somers did not do. The District Court denied Digital Realty’s motion to dismiss, applying the SEC’s interpretation of “whistleblower” under the aforementioned rule passed in 2011. The U.S. Court of Appeals for the Ninth Circuit affirmed. The Court of Appeals acknowledged that, while Dodd-Frank defines a “whistleblower” as one who provides information about violations of securities laws to the SEC, the definition of “whistleblower” should not be dispositive of the scope of the anti-retaliation provision. The Court of Appeals reasoned that applying the statutory definition of “whistleblower” would narrow the anti-retaliation provision “to the point of absurdity,” and that broader interpretation was necessary in order to give effect to all statutory language.
During oral argument before the Supreme Court, Digital Realty urged the Court to follow the plain language of the statute, noting that internal whistleblowers were still protected from retaliation under the provisions of Sarbanes-Oxley, even if not under Dodd Frank. By contrast, Somers and the Government (in support of Somers’ position) argued the SEC rule merited deference, particularly given that the plain language of the statute created an anomalous result that, under Dodd-Frank, anyone who reported information to the SEC would be protected from retaliation (even if what they were retaliated against was disconnected from the subject of their SEC reporting), while those who reported information internally would not be so protected.
While it is always somewhat risky to speculate as to a decision on the basis of oral argument, the Justices appeared highly skeptical of the SEC’s rule. Recognizing that there may be some anomalies in Dodd Frank’s provision of protection from retaliation only to “whistleblowers” who reported information to the Commission, the Justices seemed to accept this as simply the unavoidable result of the statutory text. Moreover, the Justices seemed troubled by the SEC’s decision to expand the definition of “whistleblower” in their final rule, when the notice of proposed rulemaking had given no indication that the SEC might do so. Particularly without such notice, it seems that the Justices did not believe the SEC rule merited any deference.
Ultimately, an adverse decision for the SEC should have no practical consequences for company practices, as companies should avoid retaliating against whistleblowers regardless whether they report only internally or also to the SEC (and, indeed, generally will not know whether employees have in fact reported to the SEC). Still, another adverse decision for the SEC could be a meaningful setback in terms of its rulemaking program, and may cause it to rethink certain practices with respect to how it issues new rules.