Argument analysis: Don’t just whistle while you work – Dodd-Frank whistleblowers may need to pucker up for the SEC
on Nov 29, 2017 at 11:42 am
Digital Realty Trust hired Paul Somers in 2010 and fired him in 2014, allegedly in retaliation for reporting to senior management that his supervisor had eliminated internal controls in violation of the Sarbanes-Oxley Act of 2002. Although Sarbanes-Oxley has its own remedial scheme for retaliation against whistleblowers (including those filing only internal reports), Somers did not utilize it, perhaps because of its brief, 180-day statute of limitations. Instead, seven months after the alleged retaliation, he filed a lawsuit in the U.S. District Court for the Northern District of California claiming protection under the Dodd-Frank Act of 2010. The Dodd-Frank provision he invoked grants a remedy for retaliation against whistleblowers for, among other things, internal reporting of Sarbanes-Oxley violations. As compelling a fit for a Dodd-Frank retaliation claim as Somers’ alleged facts and requested remedy first might seem, Digital Realty moved to dismiss on the grounds that “whistleblower” is defined for Dodd-Frank purposes as “any individual who provides … information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” A person reporting only within the employing organization, like Somers, literally is not covered.
Rather than follow Asadi v. G.E. Energy (USA), L.L.C., a decision of the U.S. Court of Appeals for the 5th Circuit applying what it considered the plain language of the statute, the California district court (in line with the majority of courts considering the matter) found the statute ambiguous in light of the fact that Dodd-Frank uses the term “whistleblower” both in describing who can claim an award under a new bounty scheme created by that act and to refer to the group entitled to protection from retaliation. It therefore turned to the Security and Exchange Commission’s own interpretation of the definition of “whistleblower,” which bifurcated whistleblowers seeking awards and whistleblowers seeking the act’s protection against retaliation. The former are required to provide information to the commission; the latter are not. The district court denied Digital Realty’s motion to dismiss. Before the appeal of the California district court’s order was heard by the U.S. Court of Appeals for the 9th Circuit, the majority approach was endorsed by the U.S. Court of Appeals for the 2nd Circuit, in Berman v. Neo@Ogilvy LLC, WPP Group USA, Inc.
The 9th Circuit went a bit further, concluding that “whistleblower” should be read two different ways in the statute itself, even without resort to the commission’s rule; it employed deference under Chevron, U.S.A., Inc. v. Natural Resource Defense Council, Inc. only as a back-up. According to the 9th Circuit, employing a unitary statutory definition would achieve an absurd outcome. This is because the group benefiting from the anti-retaliation provisions would not include those whose employers fired them (for internal reporting) before they reported to the SEC. Thus, well-informed whistleblowers would eschew the step of internal reporting and go directly to the commission. This would fly in the face of legislative history evidencing concern with encouraging internal reporting and dissatisfaction with the protection of whistleblowers under Sarbanes-Oxley.
The curtain rises
Opening the oral argument yesterday, Kannon Shanmugam, arguing on behalf of the petitioner, Digital Realty Trust, emphasized – and stuck to – three main points: the plain language of the statute, the need to maintain the viability of the Sarbanes-Oxley remedy for retaliation, and why the Supreme Court should not defer to the SEC in construing the statute. The argument for not deferring to the agency, which was raised for the first time in Digital Realty Trust’s briefs in the Supreme Court, was based not on a broad attack on Chevron deference, but on the commission’s alleged procedural defects in adopting its own definitions of “whistleblower.”
Justice Ruth Bader Ginsburg weighed in quickly, expressing concern for those internal reporters fired before they made it to the SEC – a group likely to include auditors and attorneys required to engage in internal reporting before turning outside their employing organizations (if they are allowed to turn outside at all). Justice Sonia Sotomayor noted that employees who are subpoenaed by the SEC before they file a report and then fired for cooperating also would be excluded from Dodd-Frank protection. Justice Elena Kagan suggested that it seemed odd that those fired for reporting only internally would, under the plain-language approach, still have a remedy if they had reported a completely unrelated matter to the commission at some time in the distant past.
The Janus effect (sounds better than “the worm turns”)
Justice Stephen Breyer picked up on an interesting point made in the amicus brief filed by the National Whistleblowers Center, engaging in a spirited exchange with Shanmugam as to whether the SEC could, by rule, classify internal reporting as one way of transmitting information to the commission. In the consequent back and forth, Breyer conjured one of the best images of the day, a whistleblower who, having engaged in internal reporting, struggles through a snowstorm to the steps of the SEC but doesn’t quite get there in time before being fired. He also appeared to take up the cudgel on behalf of the SEC’s administrative procedures, suggesting that the appropriate time for attacking the six-year-old rule had passed. When Shanmugam tried to turn to an earlier unanswered question from another justice about the ordinary meaning of whistleblower, Breyer retorted, “You don’t have to. I can look it up, you know.”
While Digital Realty Trust was in the spotlight, Breyer seemed to favor the employee, Somers – but there are reasons one doesn’t bet on Supreme Court votes. When Daniel Geyser took over the lectern on behalf of Somers, Breyer’s questioning was just as challenging. Queries from Ginsburg, Sotomayor and Kagan also confirmed open minds.
In my preview of this case, I observed that Justice Neil Gorsuch is no fan of Chevron, which he once called “the elephant in the room.” He did not take advantage of the oral argument to suggest it was time to take on the elephant. Gorsuch did, however, argue strongly with Geyser about just how seriously flawed the commission’s administrative procedures were. He also expressed the view that although it might be too late for an effective challenge of the validity of the commission’s definition of “whistleblower” on procedural grounds, the soundness of those procedures could be taken into account in determining whether Chevron deference should be accorded. Gorsuch’s questioning of Christopher Michel, assistant to the solicitor general, arguing for the United States as an amicus in support of Somers, led Michel to concede that if the procedural-defects argument had been properly raised at an earlier point, and procedural defects had been established, “you wouldn’t be able to defer to that.” Breyer leaped in to encourage Michel not to make “a lifetime concession on the part of the government” with respect to that point.
“Absurd” is the word
Michel took on the task of convincing the court that in some circumstances it is permissible to ignore a literally applicable statutory definition. He raised the case of Lawson v. Suwanee Fruit & SS Steamship Co., in which a sailor half-blinded in a pre-employment accident sued his employer for total disability when he lost the sight in his second eye. The relevant statute premised liability on disability from an “injury,” defined as something that occurred on the job. The statute, however, relieved the employer from liability for disabilities from pre-existing “injuries.” The Supreme Court reasoned in that case that to give employers relief for injuries incurred while employees worked for them, but not for injuries incurred previously, would be mechanically correct, but would “create obvious incongruities in the language, and … destroy one of the major purposes of the second injury provision: the prevention of employer discrimination against handicapped workers.”
What would seem to be a fairly good argument for the employee immediately became complicated by the justices’ ensuing fascination with articulating exactly what standard should be applied before a court should be willing to deviate from a statutory definition. Michel had argued that Lawson is an applicable precedent when a statutory definition produces “an anomaly” – a test that Justice Samuel Alito immediately criticized. Ginsburg offered her understanding that “the stock phrase was absurd,” rather than “anomaly.” When Gorsuch asked Michel to agree that a literal reading of the Dodd-Frank provisions was not absurd, Michel did. At that point, Chief Justice John Roberts opined that not only was a literal reading in this case not absurd, but “[t]he cases where you’re allowed to move beyond the defined term are when if you stick to it, it really makes a mess of the whole thing.”
There may be good reasons one doesn’t bet on Supreme Court cases. There also are good reasons to suspect that Digital Realty Trust walked away from yesterday’s argument whistling the more cheerful tune.