Opinion analysis: Whistling while you work is whistling in the wind – Dodd-Frank whistleblowers do need to inform the SEC
on Feb 22, 2018 at 10:30 am
Setting the stage
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created a bounty system designed to reward those who provide information to the Securities and Exchange Commission when that information leads to monetary penalties. The term “whistleblower” appeared multiple times throughout the several pages of new Section 21F of the Securities Exchange Act of 1934 and was specifically defined 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.”
The whistleblower award structure created by Section 21F was paired early on with protection against employer retaliation. Two proposed subsections protected whistleblowers from retaliation for providing information to the commission (“Clause (i)”) and for participating in any judicial or administrative actions based on or related to the information provided (“Clause (ii)”). These subsections eventually were joined by a third anti-retaliation subsection (“Clause (iii)”). Clause (iii) prohibits retaliation against “whistleblowers” for acts protected under several cross-referenced laws. These acts include, under the Sarbanes-Oxley Act of 2002, internal reporting and/or reporting to or cooperating with arms of government other than the commission – notably including members and committees of Congress.
The sticky wicket for an employee claiming retaliation either for internal reporting or for reporting to some arm of government other than the commission is that “whistleblower,” as noted above, is a defined term, literally demanding reporting to the SEC. That is something Paul Somers did not do. He evidently did report to senior management of his employer, Digital Realty Trust, Inc., that his supervisor had eliminated internal controls in violation of the Sarbanes-Oxley Act of 2002; he allegedly was fired in retaliation. Although Sarbanes-Oxley has its own remedial scheme (with a brief, 180-day statute of limitations) for retaliation against whistleblowers, including those filing only internal reports, Somers did not employ it. 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 provision described above. Digital Realty predictably moved to dismiss.
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 previously 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. The district court therefore turned for guidance to an SEC rule bifurcating 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. 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 further, however, concluding that “whistleblower” should be read two different ways in the statute itself, even without resort to the commission’s rule; it employed deference to the commission’s interpretation of the statute under Chevron, U.S.A., Inc. v. Natural Resource Defense Council, Inc. only as a back-up. Digital Realty appealed to the Supreme Court, filing a brief that, among other things, attacked the procedures followed by the commission in adopting its bifurcated rule. The case was argued on November 28, 2017, and the court issued its decision yesterday.
A play in four parts
In a 9-0 opinion with two short concurrences, Justice Ruth Bader Ginsburg and her colleagues handed the Tony award to Digital Realty.
Act 1. I say what I mean and I mean what I say
The justices were unanimously wowed by the plain-meaning argument that the language of the statute says what it says: Whistleblowers must, for 21F purposes, provide information to the SEC. This part of the reasoning was buttressed by the familiar “Congress knows how” argument: A different part of Dodd-Frank (relating to reporting to the Consumer Financial Protection Bureau) covers a much broader group than does 21F, as does the Sarbanes-Oxley Act, thus indicating that if Congress had intended a more expansive meaning, it would have been capable of expressing it.
Act 2. You either hate it or you love it
Three of the justices bowed out of Act 2. In a concurrence, Justice Clarence Thomas, joined by Justices Samuel Alito and Neil Gorsuch, approved the court’s outcome, but refused to endorse Ginsburg’s argument that the purpose manifest in the statute and its legislative history supported the court’s conclusion. That purpose, according to Ginsburg, was to “motivate individuals with knowledge of illegal activity to ‘tell the SEC.’” Thomas maintained that even if “a majority of Congress read the Senate Report, agreed with it, and voted for Dodd-Frank with the same intent, ‘we are a government of laws, not of men, and are governed by what Congress enacted rather than by what it intended’” (quoting Justice Antonin Scalia’s concurring opinion in Lawson v. FMR LLC). Justice Sonia Sotomayor, joined by Justice Stephen Breyer, filed a concurrence that took issue with Thomas and supported the majority’s use of legislative history, noting that “[j]ust as courts are capable of assessing the reliability and utility of evidence generally, they are capable of assessing the reliability and utility of legislative-history materials.”
For style points, it perhaps is worth noting that Thomas’ concurrence features a seriously funny footnote that is longer than the concurrence itself. Among other highlights, it quotes a former Senate staffer (now a federal judge) who referred to his own drafting of legislative history as “like being a teenager at home while your parents are away for the weekend: there was no supervision.”
Act 3. Raining on somebody’s parade
Somers and the U.S. solicitor general’s office had marched a parade of horribles on stage, and the justices were spectacularly unimpressed. Among the arguments rejected were the following:
- Applying the literal definition of “whistleblower” would gut much of the protection of Clause (iii). (It wouldn’t, it would just reduce it.)
- Protection for auditors, attorneys and other employees subject to internal reporting requirements would be jettisoned. (It wouldn’t, provided they do report to the commission before retaliation occurs.)
- Applying the whistleblower definition literally would create an “incredibly unusual statutory scheme,” pursuant to which identical conduct (retaliating for internal reporting) is only punished based on the “happenstance” of also reporting to the SEC. (It’s not unusual if it comports with the purpose of encouraging reporting to the commission.)
- A literal approach could lead to topical and temporal anomalies in which someone who reported information to the SEC and subsequently was fired for internally reporting other information would be covered. (This is not a situation presented by the facts.)
- Applying “whistleblower” literally would undermine not only Clause (iii) but also the prohibition against retaliating for initiating, testifying or assisting in an investigation (Clause (ii)), because it is not clear those activities “provide information … to the Commission in a manner … established by the Commission.” (Although the SEC has not yet specified that Clause (ii) activities are methods of providing information to the commission, and thus literally within the definition of “whistleblower,” it easily could do so.)
Act 4. After me, Alphonse
In one spare paragraph, Ginsburg refused to give Chevron deference to the SEC’s position that “whistleblower” should have different meanings in the bounty and anti-retaliation contexts. Because “Congress has directly spoken” to the matter, she wrote, the commission simply is precluded from a more expansive interpretation.
Most folks who followed the oral argument in this case concluded that Somers’ position was DOA, so the outcome was hardly a surprise. The most interesting aspect of the decision was the court’s handling of Chevron, which does seem to signal that the majority believes deference to an agency determination still could be appropriate in a case in which the statute is ambiguous. Although Thomas, Alito and Gorsuch did not take this on directly, they specifically stated in their concurrence that they did not join “the portions of the Court’s opinion that venture beyond the statutory text.” They objected explicitly only to the majority’s use of legislative history, but arguably took a quiet swipe at Chevron as well.