By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.
The Supreme Court last week in a unanimous 9-0 decision narrowly interpreted the scope of Dodd-Frank anti-retaliatory whistleblower protections to apply only to those who reported their concerns to the Securities and Exchange Commission (SEC).
In Digital Realty Trust v. Somers, the Court weighed in to resolve a split between the circuits as to whether the Dodd-Frank protections applied to whistleblowers who used their internal company complaint procedures, but failed to raise the problem with the SEC. Or, more precisely, as Justice Ruth Bader Ginsburg wrote in her majority opinion:
The question presented: Does the anti-retaliation provision of Dodd-Frank extend to an individual who has not reported a violation of the securities laws to the SEC and therefore falls outside the Act’s definition of “whistleblower”? We answer that question “No”: To sue under Dodd-Frank’s anti-retaliation provision, a person must first “provid[e] . . . information relating to a violation of the securities laws to the Commission.” (citations omitted; opinion).
Writing for the Scotusblog in an article headed,
Opinion analysis: Whistling while you work is whistling in the wind – Dodd-Frank whistleblowers do need to inform the SEC Theresa Gabaldon summarized the alternative arguments for a broader interpretation of who would qualify for whistleblower protection. In the interest of keeping this post short and accessible to non-lawyers, I’ll not repeat those arguments here, but refer interested readers to that analysis. Instead, I wish to focus on the consequences of the opinion rather than parsing the arguments the Court considered in reaching its decision..
I’ve previously written about the history of US financial incentives to encourage whistleblowers to spill the beans about fraudulent and corrupt practices. Such bounty systems date back to the US Civil War (as I discussed most recently New Dept of Justice Guidelines Will Stymie Whistleblowers). I’ve also written about the deficiencies in the SEC’s new highly-touted whistleblower program in SEC Takes Victory Lap for Pathetic Performance of Whistleblower Program— as with much of Dodd-Frank, these provisions represent a missed opportunity to create a whistleblower system that could have ferreted out more corporate corruption.
The Recent Decision: Not Good for Whistleblowers, Nor Companies Either
A potential whistleblower who opts to go the internal complaint route may still be protected from retaliation by choosing to bring a claim under the statutory provisions authorized by the 2002 Sarbanes-Oxley Act. But, as laid out by The Washington Post, there are significant differences between the Sarbanes-Oxley provisions and those allowed under Dodd-Frank:
People who report issues to their company’s management, to another federal agency or to Congress are still protected against retaliation but under an older law, the 2002 Sarbanes-Oxley Act. But the two laws differ in a number of ways, including how long people have to bring a lawsuit and how much money they can get in compensation. A person who wins a lawsuit under the Dodd-Frank Act’s whistleblower protection provision can get more money than someone who wins under the Sarbanes-Oxley Act’s provision.
While the ruling interprets the statute in a narrow way that reduces the potential whistleblowers who qualify to be protected by anti-retaliatory provisions, companies themselves may be the ones most harmed by it, as The Wall Street Journal reports:
Corporate America could find trouble in a recent Supreme Court ruling that limits protections for whistleblowers, lawyers say.
The unanimous decision was handed down Wednesday in the case Digital Realty Trust Inc. v. Somers. The ruling makes it clear antiretaliation protections for whistleblowers under the 2010 Dodd-Frank Act only cover people who report allegations of wrongdoing to the Securities and Exchange Commission. SEC rules enforcing Dodd-Frank protected in-house whistleblowers as well.
The ruling could reduce a company’s ability to handle allegations of wrongdoing internally, lawyers told Risk & Compliance Journal.
“I think for businesses, for companies, it’s a matter of ‘be careful what you wish for,’” said Thomas A. Zaccaro, vice chairman of the white-collar and investigations group at law firm Paul Hastings LLP and a former chief trial attorney at the SEC’s Los Angeles office.
“I think the consequence of the decision is whistleblowers are now made more likely to report to the SEC, and I think most companies would prefer that employees would report internally,” he said.
Oops! Cry me a river.
Writing for the Harvard Law School Forum on Corporate Governance and Financial Regulation, Cydney Posner reaches the same conclusion:
The result may have an ironic impact: while the win by Digital will limit the liability of companies under Dodd-Frank for retaliation against whistleblowers who do not report to the SEC, the holding that whistleblowers are not protected unless they report to the SEC may well drive all securities-law whistleblowers to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor.
The Bottom Line
All joking aside, this decision pleases no one: it hurts potential whistleblowers, and would make it less likely that corporations can deal with a whistleblower complaint in house rather than in response to a full bore SEC investigation. The obvious retort to that is that Congress could amend the statute to extend broader protections to whistleblowers. Yet given the current composition of Congress– not to mention who occupies the White House– that is not likely to happen. Instead, Dodd-Frank is clearly in Trump’s crosshairs. Notwithstanding that more general opposition, the Justice Department had promoted a broader interpretation of the statute, advancing the arguments mentioned in the Scotusblog post cited above.
Quoting again from the Washington Post:
The court’s ruling comes at a time when the Trump administration has already laid out changes it wants to make to the 2010 Dodd-Frank Act, which the administration believes went too far and has hurt economic growth. President Donald Trump has repeatedly attacked the law as a “disaster” and has promised to do “a big number” on it. The Trump administration had nonetheless argued that the law did provide broad protection. Businesses had opposed that reading of the law.