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Article Summary

If Tuesday's arguments in Digital Realty Trust, Inc. v. Somers are a guide, corporate whistleblowers soon will be unable to claim a remedy under the Dodd-Frank Act if they suffer retaliation before reporting wrongdoing to the SEC. Such a decision by the U.S. Supreme Court would be unfortunate and may have some perverse side effects — but whistleblowers still can rely on the protections of the Sarbanes-Oxley Act, or SOX.

This expert analysis by TELG managing principal R. Scott Oswald was published by Law360 on November 28, 2017.

Reprinted from:

It’s OK, Whistleblowers Will Always Have SOX

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By R. Scott Oswald

Based on arguments Tuesday at the U.S. Supreme Court, corporate whistleblowers are headed back to a world in which their main protection against retaliation will be the stalwart Sarbanes-Oxley Act of 2002, also known as SOX.

The stronger medicine of the Dodd-Frank Act, meanwhile, likely will be available only to employees who have reported wrongdoing to the U.S. Securities and Exchange Commission (SEC) before being fired or otherwise punished.

The upshot: While some whistleblowers still have reasons to report internally, others may run first to the SEC simply to preserve their legal options.

Even the court’s liberal justices seemed unfazed by such an outcome, which would roll back six years of SEC policy and dozens of lower-court precedents that had applied Dodd-Frank to internal whistleblowing — including the opinion of the U.S. Court of Appeals for the Ninth Circuit in Digital Realty Trust, Inc. v. Somers, the case argued on Tuesday.

“What’s the big deal?” shrugged Justice Stephen Breyer, presenting SOX as an adequate backstop against retaliation. In essence, he and his colleagues couldn’t find adequate reasons to ignore a clearly stated — if legally confounding — definition of “whistleblower” within the Dodd-Frank Act.

The definition, which requires Dodd-Frank whistleblowers to report to the SEC, “says what it says,” said Justice Elena Kagan, even as she noted that Congress may have intended to protect a larger group. “And you have to have a really, really severe anomaly to get over that.”

Oral arguments aren’t a reliable indicator of final vote tallies. Still, Tuesday’s session was notably one-sided: Literally none of the justices seemed to support the expansive view of Dodd-Frank that was pressed by whistleblower Paul Somers — not even Justice Ruth Bader Ginsburg, who wrote the 2014 opinion in Lawson v. FMR LLC, a case that broadened whistleblower protections under SOX.

Indeed, Digital Realty may turn out to be the evil twin of Lawson, in which ambiguous statutory language also was applied literally, but to the benefit of whistleblowers.

“If the statute gives a definition,” said Justice Ginsburg, echoing her Lawson logic, “you follow the definition in the statute unless it would lead not merely to an anomaly, but to an absurd result.”

Easy Ride for Employers

Arguments in the case started slowly, as the justices gave a relatively free rein to the voluble Kannon K. Shanmugam of Williams & Connolly, who argued for Digital Realty Trust. The Dodd-Frank Act, he said, aims both to reward and to protect whistleblowers — and it provides a clear definition of “whistleblower” that applies equally to both situations.

Skating past the fact that the SEC and numerous courts have found that this definition thwarts the law’s aim of encouraging internal disclosures, Mr. Shanmugam painted a world in which the only downside of Dodd-Frank is that it might be too generous to whistleblowers, since a literal reading of the statute would protect them from retaliation for activity entirely unrelated to their SEC report — possibly indefinitely.

The court’s conservative justices remained entirely silent as the liberal wing picked around the edges of Mr. Shanmugam’s argument but inflicted little harm; the advocate sat down with a hefty seven minutes remaining for rebuttal.

At the lectern for Mr. Somers, Daniel L. Geyser of Stris & Maher had a much harder time. Evidently thrown by Justice Breyer’s early “no big deal” comment, he struggled with skepticism from Justice Sonia Sotomayor before Justice Neil Gorsuch piled on with a textualist critique of Mr. Geyser’s main point — that Dodd-Frank facially protects internal whistleblowing because it forbids retaliation for actions taken under SOX, which protects such whistleblowing.

But “how much clearer could Congress have been [with its definition]?” asked Justice Gorusch — perhaps rhetorically, yet still badgering Mr. Geyser to reply with specific language. The advocate struggled to comply, and remained off-balance for several minutes as he weathered attacks from both wings of the bench.

Later in the session, Justice Gorsuch also challenged Mr. Geyser’s backup argument: That even if the law isn’t clear, the SEC’s interpretation demands deference. Not so, said Justice Gorsuch, if the SEC formed its interpretation without adequate notice to the public. Again Mr. Geyser was drawn into the weeds, again to his disadvantage — all the more so because Justice Breyer offered unexpected backup to Justice Gorsuch.

The attorney seemed grateful when his time expired, and he readily surrendered the lectern to Christopher G. Michel, assistant to the U.S. Solicitor General, who also argued for the SEC’s whistleblower-friendly interpretation of Dodd-Frank.

Mr. Michel had a clearer presentation and a better rapport with the bench, yet it was during his argument that the likely outcome became clear. Justice Kagan, Justice Ginsburg, and Justice Samuel Alito all focused on what it would take for the Supreme Court to ignore a statutory definition — and all set the bar higher than a mere “anomaly.”

It was here that Justice Ginsburg mentioned the “absurd result” standard; Justice Gorsuch pounced and extracted a damaging concession from the eager-to-please Mr. Michel.

“You agree you don’t have an absurdity here?” asked the newest justice. A literal reading of the “whistleblower” definition, while not preferred by the SEC, is “not an absurd reading, right?”

“We’re not arguing that it’s absurd,” admitted Mr. Michel. “That — that’s correct, Justice Gorsuch.”

And with that, the opinion of all the justices seemed to gel: They had a standard, and both sides seemed in agreement on its application.

When Mr. Shanmugam reappeared for rebuttal, he did a brief victory lap on the “absurdity” standard and — facing no resistance — sat down without exhausting his time allotment.

While we’ll await the result, it seems clear that the court favors a narrow interpretation of Dodd-Frank’s anti-retaliation measure. Regardless, the law retains some incentives for internal whistleblowing: In particular, a requirement for certain employees to report internally before they can claim a whistleblower reward, and an implied promise of a higher reward for reports that are first made internally.

Still, corporate whistleblowers must face the fact that, while they may be rewarded under this law, they may no longer be protected by it unless they file quickly with the SEC. The tradeoff will likely promote an increase in SEC claims and, possibly, some conscious violation of internal disclosure protocols. Employers must live with this perversity, since it’s the natural outcome of the result they sought in this case.

In the meantime, most employees who would have claimed Dodd-Frank protection will still likely be protected against retaliation under SOX — as long as they file a complaint within its shorter statute of limitations.

—–

R. Scott Oswald is managing principal of The Employment Law Group, P.C., which is based in Washington, D.C. He represents whistleblowers under SOX and Dodd-Frank, but he was not involved in Digital Realty Trust, Inc. v. Somers.

(Note: This version has been slightly edited from the version published by Law360.)

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