In a unanimous decision, the U.S. Supreme Court has limited the anti-retaliation provisions of the Dodd-Frank Act to whistleblowers harmed after filing a wrongdoing report with the SEC. The Court rehashed its logic from a similar 2014 case under the Sarbanes-Oxley Act, but this time reached an outcome that's opposite in spirit. The real-world consequences will be immediate — and likely unwelcome to all parties.
This expert analysis by TELG managing principal R. Scott Oswald was published by Law360 on February 21, 2018.
Somers Retreads the Logic of Lawson — This Time to Opposite Effect
By R. Scott Oswald
With its unanimous decision in Digital Realty Trust, Inc. v. Somers, the U.S. Supreme Court has offered corporate whistleblowers a lesson that might have been lifted from the Book of Job: Statutory text giveth — and statutory text taketh away.
Justice Ruth Bader Ginsburg’s opinion in Somers, which put a tight limit on anti-retaliation protections under the Dodd-Frank Act, emerged on Wednesday as the obverse of her 2014 opinion in Lawson v. FMR LLC, which applied the same literalist logic to broaden the whistleblower protections offered by the Sarbanes-Oxley Act of 2002 (SOX).
In both whistleblower cases — now viewable as bookends, or perhaps as evil twins — Justice Ginsburg asserted that each statute’s disputed text was actually clear and in harmony with Congress’ “core objective” in each case, mooting executive-branch interpretations and pooh-poohing scenarios spun around extreme hypotheticals.
In each case, the most conservative justices endorsed liberal Justice Ginsburg’s conclusion even as they ridiculed her efforts to bolster it by citing Congressional intent. In Lawson, the late Justice Antonin Scalia had rejected as credulous any examination of the purported views of legislators, whom he scorned as “unaware of the [relevant] issues entirely.”
On Wednesday that crabby role fell to Justice Clarence Thomas, who quoted milder passages from Justice Scalia’s Lawson concurrence in a clear callback to 2014.
The outcome was unsurprising given the tenor of oral arguments in November, when virtually every justice seemed to find the Dodd-Frank Act to be clear on its face. Still, Justice Ginsburg’s decision overturns almost seven years of policy at the U.S. Securities and Exchange Commission — and dozens of lower-court precedents.
The real-world impact of Somers is likely to be immediate and somewhat perverse. Corporate employees who suspect securities violations, if they wish to maximize their legal protection, now should report their reasonable beliefs to the SEC at the same time — or even before — they report internally, if the law permits them to do so.
Employees who want to disclose violations outside the SEC’s direct purview, meanwhile, can no longer look to the Dodd-Frank Act for protection against retaliation. The stalwart SOX still protects them, however, albeit with a fast 180-day fuse on complaints.
What Is a “Whistleblower”?
Congress passed the Dodd-Frank Act in 2010, in the wake of the financial crisis. Among other things, the law sought to boost whistleblowing about securities violations, offering both financial rewards and robust protections against firing and other forms of whistleblower punishment.
The standard for rewards was clear enough: In order to be eligible, a whistleblower needed to report wrongdoing to the SEC. On anti-retaliation measures, however, the law seemed murkier. On the one hand, Dodd-Frank defined a “whistleblower” as someone who reports misdeeds to the SEC. On the other hand, the statute explicitly offered remedies for whistleblowers eligible for protection under SOX, a law that doesn’t require SEC reporting.
Faced with this disconnect, the SEC clarified matters in 2011 with a regulation: In order to promote internal disclosure and SEC reporting — both of which were Dodd-Frank goals — the agency would interpret the law’s protections as covering all manner of disclosures, not just SEC reports. Many courts followed this interpretation, sometimes noting Justice Ginsburg’s expansive take on Dodd-Frank in Lawson, which she had used to justify sweeping whistleblower protections in SOX:
If anything relevant to our inquiry can be gleaned from Dodd-Frank, it is that Congress apparently does not share [employer/defendant’s] concerns about extending protection comprehensively to corporate whistleblowers.
In deciding Somers, however, Justice Ginsburg would offer a far narrower view of Dodd-Frank.
The Lesson of Lawson
Whistleblower Paul Somers was fired in 2014, shortly after expressing securities-law concerns to his superiors at Digital Realty Trust, a developer of data centers. Although he hadn’t reported matters to the SEC, he still sought his remedy under the Dodd-Frank Act — exactly as envisioned by the agency’s 2011 regulation.
Digital Realty moved to dismiss the complaint: Mr. Somers doesn’t meet the law’s definition of a “whistleblower,” it argued. Both the trial court and the U.S. Court of Appeals for the Ninth Circuit rejected the employer’s motion — and so the dispute landed at the Supreme Court, where the earlier Lawson case had pivoted on a similar definitional issue.
A direct predecessor of Dodd-Frank, SOX protects “employees” against retaliation for blowing the whistle on a number of specific violations. The statute covers employees of public companies, their officers, and their employees. But does it extend to contractors and subcontractors?
Does it, for that matter, extend to babysitters employed by Wal-Mart workers, one of the wilder hypothetical applications?
The question was settled by Lawson, in which mutual fund giant FMR was accused of SOX retaliation by plaintiffs who worked for an FMR contractor. FMR claimed the plaintiffs weren’t “employees” under SOX, and so weren’t protected. In her 2014 opinion, Justice Ginsburg sided with the whistleblowers on two mutually reinforcing grounds.
First, she said, the term “employees” included the whistleblowers via a plain reading. Indeed, it even included the hypothetical Wal-Mart babysitters, if they complained properly about a covered violation.
And second, said Justice Ginsburg, her interpretation was doubly correct because it accorded with the broad remedial purpose of SOX, as expressed in legislative reports. (It was this second argument that triggered Justice Scalia’s ire.)
But how to apply the lesson of Lawson in Somers, where Dodd-Frank’s stingy definition of “whistleblower” seems manifestly at odds with that law’s broad remedial purpose — since it fails to protect at least some people who report wrongdoing in good faith?
Rather than square the circle, Justice Ginsburg proposed that Dodd-Frank has a different, narrower “core objective” than SOX: To encourage reporting to the SEC, not whistleblowing in general. A literal reading of the “whistleblower” definition in Dodd-Frank is in harmony with this narrow purpose, she wrote.
“When enacting Sarbanes-Oxley’s whistleblower regime … Congress had a more far-reaching objective” than with Dodd-Frank, she wrote in Somers — and that’s why SOX protects internal whistleblowing while Dodd-Frank mostly does not.
“[A]n individual who falls outside the protected category of ‘whistleblowers’ [as defined] is ineligible to seek redress under [Dodd-Frank], regardless of the conduct in which that individual engages,” she said. “Courts are not at liberty to dispense with the condition … Congress imposed.”
Whether Justice Ginsburg is right that Dodd-Frank’s remedial purpose is narrower than that of Sarbanes-Oxley — surely debatable — her decision is written so plainly as to defy dispute: Potential whistleblowers must adjust accordingly.
Advice for Whistleblowers
Under Somers, corporate whistleblowers who seek Dodd-Frank’s generous protection against retaliation now must report suspected securities violations to the SEC before they are punished. As a practical matter, this requires a simultaneous (or near-simultaneous) report internally and to the SEC — and probably some legal advice along the way, especially if retaliation is expected.
Whistleblowers also could report to the SEC first, if that’s permitted by law and their corporate policies. SOX requires many professionals, such as accountants, to make an initial report internally. It’s likely unlawful, under Section 21F-17 of the Securities Exchange Act, for a company to require most employees to wait until an internal investigation is completed before filing a report with the SEC — and post-Somers, such a delay may amount to, in the words of a Senate report cited by Justice Ginsburg, “committing ‘career suicide.'”
SOX continues to offer fallback protection against retaliation for most employees, and it is now the primary remedy for punishment based on reports of non-SEC-related violations. Its procedures are much more demanding than Dodd-Frank, however, and its 180-day statute of limitations means that whistleblowers can’t tarry on their retaliation complaints.
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 edited slightly from the version published by Law360, and carries a different headline.)