Majority of District Courts Are Construing Dodd-Frank to Cover Internal Whistleblowing

A split of authority has emerged regarding whether internal disclosures are protected under Section 929A of the Dodd-Frank Act, 15 U.S.C. § 78u-6(h) (“Section 929A” or “Dodd-Frank”). The split stems from what appears to have been a drafting error. Under § 78u-6(a)(6), 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.” The anti-retaliation provision in Section 929A, however, defines protected conduct as lawful actions taken by a whistleblower:

(i) in providing information to the Commission in accordance with this section;

(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or

(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7201 et seq.), this chapter, including section 78j-1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

While the definition of “whistleblower” appears to require a disclosure to the SEC, the “catch-all” provision in Section 78u-6(h)(1)(A)(iii)) encompasses conduct protected by Section 806 of SOX, which includes internal disclosuresmade to supervisory personnel irrespective of whether the employee separately reports the information to the SEC.

The Fifth Circuit held that the statutory language is not ambiguous and that Section 929A protects only disclosures to the SEC.Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620, 629-31 (5th Cir. 2013).Post-Asadi, the majority of district courts that have considered the issue have rejected the Fifth Circuit's restrictive analysis and have held that Section 929A protects internal disclosures. For example,in an October 2013 decision, the Southern District of New York disagreed withAsadiand found that the differing statutory definitions of “whistleblower” created an ambiguity that was best resolved by deferring to the SEC’s implementing regulations.Rosenblum v. Thomson Reuters (Markets) LLC, 984 F. Supp. 2d 141, 148 (S.D.N.Y. 2013). The U.S. District Court for the District of New Jersey took a similar approach inKhazin v. TD Ameritrade Holding Corp., No. 13-4149, 2014 WL 940703 (D.N.J. Mar. 11, 2014). In that case, the employee, an investment oversight officer at a securities firm, was terminated after reporting a compliance violation to his supervisors.Id.at *1. The court found that the statute was ambiguous, and it was therefore appropriate to defer to the SEC’s interpretive guidance.Id. at *6.See alsoYang v. Navigators Grp., Inc., 2014 WL 1870802, at *13 (S.D.N.Y. May 8, 2014);Ahmad v. Morgan Stanley & Co., 2014 WL 700339, at *4 n.5 (S.D.N.Y. Feb. 21, 2014);Rosenblum v. Thomson Reuters (Markets) LLC, 984 F. Supp. 2d 141, 147-48 (S.D.N.Y. 2013);Ellington v. Giacoumakis, 977 F. Supp. 2d 42, 45-46 (D. Mass. 2013);Murray v. UBS Sec., LLC, 2013 WL 2190084, at *7 (S.D.N.Y. May 21, 2013);Genberg v. Porter, 935 F. Supp. 2d 1094, 1106-07 (D. Colo. 2013);Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 994 n.9 (M.D. Tenn. 2012);Kramer v. Trans-Lux Corp., 2012 WL 4444820, at *5-7 (D. Conn. Sept. 25, 2012). Most of the district court decisions have found an ambiguity in the statutory language and deferred to the SEC’s interpretive guidance.See, e.g.,Khazin, 2014 WL 940703, at *6;Yang, 2014 WL 1870802, at *13;Rosenblum, 984 F. Supp. 2d at 147-48.

Other district courts have declined to follow the Fifth Circuit’s decision inAsadi, including the U.S. District Court for the Southern District of New York (Yang v. Navigators Group, Inc., 2014 WL 1870802 (S.D.N.Y. May 8, 2014)), the U.S. District Court for the District of Massachusetts (Ellington v. Giacoumakis, 977 F. Supp. 2d 42 (D. Mass. 2013)), the U.S. District Court for the District of Kansas (Azim v. Tortoise Capital Advisors, LLC, 2014 WL 707235 (D. Kan. Feb. 24, 2014)), and the U.S. District Court for the District of Nebraska (Bussing v. COR Clearing, LLC, 2014 WL 2111207 (D. Neb. May 21, 2014)).

However, while a majority of district courts have embraced a broader definition of “whistleblower,” several courts have expressly followed the Fifth Circuit’s precedent inAsadi. For example, inEnglehart v. Career Educ. Corp., 2014 WL 2619501, at *9 (M.D. Fla. May 12, 2014), the court held that an employee of an education services company who disclosed material misrepresentations in budget forecasts to her supervisor was not a whistleblower within Dodd-Frank’s statutory definition. The court found that the restrictive statutory definition of whistleblower was unambiguous, and therefore gave no weight to the SEC’s guidance, agreeing withAsadithat only an employee who complains to the SEC can be a whistleblower under the law.Id.

The U.S. District Court for the Northern District of California also followed the Fifth Circuit’s lead inBanko v. Apple Inc., 2013 WL 7394596 (N.D. Cal. Sept. 27, 2013). Banko, an Apple engineer, reported to his supervisors that a fellow engineer was embezzling money, an allegation that was allegedly later confirmed by an internal investigation.Id. at *1. Apple then terminated Banko, who responded by bringing a claim for whistleblower retaliation under Dodd-Frank.Id. The district court granted Apple’s motion for summary judgment on the Dodd-Frank claim, citingAsadiand dismissing Banko’s claim on the grounds that he never reported his concerns to the SEC.Id. at *4-6.

Recently, Judge Chen issued an opinion thoroughly analyzing the scope of Dodd-Frank protected conduct and concluding thatAsadiis fatally flawed and that the SEC’s implementing regulations should be affordedChevrondeference.

InSomers v. Digital Realty Trust, Inc., (N.D. Cal. May 15, 2015), Somers, a Vice President at Digital Realty, was terminated after reporting to senior management that his supervisor had engaged in corporate actions in violation of SOX. Somers then brought suit under Dodd-Frank, alleging that he was terminated in retaliation for internally reporting securities law violations. Digital Realty filed a motion to dismiss arguing that since Somers only reported his concerns internally and not also to the SEC, he does not qualify as a “whistleblower” under Dodd-Frank.Id. at *3. Judge Chen denied Digital Realty’s motion, finding that SEC Rule 21F-2(b)(1) is entitled to Chevronv. NRDC deference and thus individuals like Somers who only report their suspicions internally are protected under Dodd-Frank.

Applying the surplus-usage and harmonious-reading canons of statutory interpretation, in conjunction with the legislative intent behind Dodd-Frank,Somersrejected theAsadicourt’s reasoning and concluded that the statutory language is ambiguous.Id. at *6-12. InAsadi, the court determined that an expansive reading of Dodd-Frank would make the anti-retaliation provision of SOX moot. In contrast,Somersreasons that individuals might file claims under SOX in addition to or instead of Dodd-Frank because they might prefer an administrative forum and a prevailing plaintiff can recover monetary damages other than back pay, such as damages for non-economic harms.Id. at *11-12.

After finding sufficient ambiguity to invokeChevrondeference, theSomerscourt decided that SEC Rule 21F-2(b)(1) eliminates the tension between the narrow definition of whistleblower and the broad language of (iii) and thus is a reasonable construction of the statute. In addition, the SEC’s rule is consistent with purpose of Dodd-Frank to improve accountability and transparency, encourages the internal reporting of potential illegal activities, and enhances the SEC’s ability to bring actions against employers who engage in retaliatory action.Id. at *12-13.

It is possible that this split of authority will eventually reach the Supreme Court. Until it does, whistleblowers who have suffered retaliation for internal disclosures should consider bringing SOX claims within the 180-day statute of limitations.