On Wednesday, March 8, 2017, a divided panel of the Ninth Circuit Court of Appeals held that Dodd-Frank anti-retaliation protection extends to whistleblowers who report alleged unlawful activity internally but not to the Securities and Exchange Commission. Somers v. Digital Realty Trust Inc., No. 15-17352, 2017 WL 908245 (9th Cir. Mar. 8, 2017). In so doing, the Ninth Circuit sided with the Second Circuit and against the Fifth Circuit on this issue.
As has been discussed in more detail in prior articles (“If a Whistle Blows In-House, Does It Still Make a Sound?: Issues Regarding Internal Whistleblowers under Dodd-Frank,” Part 1 and Part 2), federal courts are split on whether an individual who reports potential violations of law internally, but not to the SEC, is a “whistleblower” entitled to protection under Dodd-Frank’s anti-retaliation provision.
The issue dividing the circuits is one of statutory interpretation and depends upon whether the anti-retaliation provision of Dodd-Frank is ambiguous. The anti-retaliation provision at issue states: “No employer may [retaliate against] a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower … in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 ….” 15 U.S.C. § 78u-6(h)(1)(A)(iii) (emphasis added). Earlier in Section 78u-6, the term “whistleblower” is given the following definition:
In this section the following definitions shall apply: …
The term ‘whistleblower’ means any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.
15 U.S.C. § 78u-6(a)(6) (emphasis added).
One line of cases, led by the Fifth Circuit in Asadi v. G.E. Energy (USA) L.L.C., 720 F.3d 620 (5th Cir. 2013), follows strict construction principles, finds no ambiguity in the anti-retaliation provision, and construes it as written, to apply only to whistleblowers who have reported alleged misconduct to the SEC.
The other line of cases, articulated by the Second Circuit in Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015), and reinforced by the SEC in an Interpretive Rule, SEC Rel. No. 75592, 2015 WL 4624264 (Aug. 4, 2015), finds that the provision is ambiguous and offers a broader interpretation that does not limit Dodd-Frank anti-retaliation protections to those who report to the SEC. By a fairly narrow margin, Asadi represents the minority view, and Berman the majority.
In Somers, the plaintiff-appellee made several reports to senior management while employed as a vice president by Digital Realty regarding possible securities law violations by the company. He was terminated soon after making these internal reports; he had not yet reported his concerns to the SEC. Somers sued Digital Realty on a number of theories, including Section 21F of the Exchange Act, which includes the anti-retaliation protections created by Dodd-Frank. Digital Realty moved to dismiss this claim on the ground that because Somers had only reported his allegations internally and not to the SEC, he was not a “whistleblower” entitled to Dodd-Frank’s protection. The district court denied the motion to dismiss and certified the question for interlocutory appeal. The Ninth Circuit affirmed in a 2-1 decision.
The majority stated that Dodd-Frank’s statutory definition “should not be dispositive of the scope of [Dodd-Frank’s] later anti-retaliation provision. Terms can have different operative consequences in different contexts.” In support, the majority cited King v. Burwell, 135 S. Ct. 2480, 2493 n.3 (2015) (“‘the presumption of consistent usage readily yields to context,’ and a statutory term may mean different things in different places”). The majority also invoked a treatise co-authored by Justice Scalia to the effect that “[Statutory d]efinitions are, after all, just one indication of meaning – a very strong indication, to be sure, but nonetheless one that can be contradicted by other indications.” Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 228 (2012).
The majority reasoned that subsection (iii), which added internal disclosures under Sarbanes-Oxley to the list of protected acts in the Dodd-Frank anti-retaliation provision, was added at the last minute with no legislative history, but nonetheless indicated a congressional intent to include internal reports of potential unlawful acts under the umbrella of Dodd-Frank protections. The majority added that the SEC, as the agency responsible for enforcing the securities law, had “resolved any ambiguity” through its Interpretive Rule and that “its regulation is entitled to deference” under Chevron U.S.A. v. National Resources Defense Council, 467 U.S. 837 (1984).
A brief dissent advocated for following Asadi and, in a nod to The Thing, stated, “we should quarantine King and its potentially dangerous shapeshifting nature to the specific facts of that case to avoid jurisprudential disruption on a cellular level.”
Though the Somers majority invoked both Justice Scalia and King v. Burwell in support of its more lenient statutory construction, it is noteworthy that Justice Scalia, known as a strict constructionist, dissented vigorously from the decision in King v. Burwell, which upheld the Affordable Care Act: “‘[T]he plain, obvious, and rational meaning of a statute is always to be preferred to any curious, narrow, hidden sense that nothing but the exigency of a hard case and the ingenuity and study of an acute and powerful intellect would discover.’” King, 135 S. Ct. at 2497 (Scalia, J., dissenting) (quoting Lynch v.Alworth StephensCo., 267 U.S. 364, 370 (1925)). He added that the Constitution “made Congress, not this Court, responsible for both making laws and mending them.” Id. at 2505. Additionally, the sentence in Justice Scalia’s treatise preceding the one quoted (and somewhat altered) by the majority states, “It is very rare that a defined meaning can be replaced with another permissible meaning of the word on the basis of other textual indications; the definition is virtually conclusive.”
Somers is but the most recent demonstration of the tensions that can result from the interplay between the Dodd-Frank Whistleblower Program and the internal corporate governance mechanisms called for under Sarbanes-Oxley. Courts continue to struggle with the desire to encourage use of effective internal compliance systems and the desire to encourage people with knowledge of wrongdoing to report what they know promptly to the authorities. The struggle is exacerbated by Congress’s last-minute and unexplained inclusion of internal reports under Sarbanes-Oxley to the scope of an anti-retaliation provision that by its express terms only applies to reports to the SEC. One line of authority holds that Congress should not look to the courts to fix its own errors in statutory draftsmanship; the other, aided by a recent Supreme Court decision, seems to relegate express statutory definitions to an advisory “indication of meaning” in order to give a terminated employee his day in court. It remains to be seen whether the latter course of action will result in less statutory ambiguity, rather than more.