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SCOTUS denies Dodd-Frank retaliation protections to internal whistleblowers

By Anne Sherry, J.D.

Only whistleblowers who report to the SEC are protected against employment retaliation under Dodd-Frank, the U.S. Supreme Court unanimously ruled. The majority opinion authored by Justice Ginsburg explains that the statute’s definition of a whistleblower as an individual providing “information relating to a violation of the securities laws to the Commission” unequivocally affirms that SEC reporting is a prerequisite to Dodd-Frank protection. Because the statute is clear, the Court did not accord deference to the SEC’s contrary rulemaking (Digital Realty Trust, Inc. v. Somers, February 21, 2018, Ginsburg, R.).

Tell it to the SEC. The majority opinion, in which Justices Roberts, Kennedy, Breyer, Sotomayor, and Kagan joined, also reasons that this textual reading comports with the whistleblower program’s “core objective” of motivating people who know of securities law violations to tell the SEC. Justice Thomas, joined by Justices Alito and Gorsuch, concurred in this opinion only to the extent it relied on the text of Dodd-Frank and not the Act’s purpose as derived from a committee report.

Statutory definition. Exchange Act Section 21F, added by Dodd-Frank, bars employers from discriminating against “a whistleblower” for providing information to the SEC; being involved in an investigation or action based on the information; or (in clause (iii)) making disclosures required or protected under the securities laws. That third category of protected disclosures includes certain categories of internal reporting and other reports that are not necessarily made to the SEC. In light of the apparent tension between these categories and the definition of “whistleblower,” the respondent employee argued that the statute is ambiguous, warranting Chevron deference to the SEC’s rule, which does not require reporting to the agency. The government also filed a brief and presented oral argument as amicus curiae in support of protections for internal whistleblowers.

In reversing and remanding the Ninth Circuit’s holding, however, the majority rested on the principle that the Court must follow a statute’s explicit definition. Another principle of statutory construction bolstered this conclusion: The use of particular language in one section of a statute but not in another raises the presumption that Congress intended a difference in meaning. A whistleblower provision in Title 10 of Dodd-Frank prohibits discrimination against a “covered employee,” the definition of which does not require reporting to the relevant agency (there, the CFPB).

Statutory purpose. The majority’s view was further corroborated by the purpose of Dodd-Frank’s whistleblower program, as laid out in a Senate committee report, “to motivate people who know of securities law violations to tell the SEC.” Sarbanes-Oxley, on the other hand, has a broader objective of disturbing the “corporate code of silence” that discouraged not just external reporting, but internal whistleblowing as well. Sarbanes-Oxley contains an administrative layer and a shorter statute of limitations, but covers a wider range of reporting.

Definition applies throughout. The majority dispensed with the employee’s and government’s arguments that the whistleblower definition applies only to Dodd-Frank’s award provision, not the anti-retaliation provision. First, the Court’s function is to give effect to the statute, however modest that effect may be, and applying the definition to clause (iii) still leaves the clause with “substantial meaning.” The clause protects whistleblowers who report misconduct both to the SEC and another entity, but suffer retaliation because of the non-SEC disclosure. For example, the retaliating employer may be unaware that the employee has alerted the SEC (the agency is required to keep whistleblowers’ identities confidential). Even if the employer knows of the SEC reporting, the third clause dispels the problem of proving which report motivated the retaliation.

The Court said its reading also shields employees, such as auditors and attorneys, who are required to report internally before they may do so externally: As soon as they make an external report, Dodd-Frank kicks in. Although the respondent argued that these professionals may face retaliation before they have a chance to report to the SEC, he made no showing that Congress had this concern in mind. Congress may have determined that Sarbanes-Oxley’s regime was adequate for these employees, the Court reasoned.

The respondent and government also argued that if SEC reporting were required, retaliation for internal reporting would go unpunished “based on the happenstance of a separate report” to the SEC. But it is understandable, given Dodd-Frank’s “precise aim” of encouraging SEC reporting, that the whistleblower regime is restricted to SEC reporters. The majority also declined to “dwell” on a situation hypothesized by the government in which an employee fired for internal reporting claims protection based on an earlier report to the SEC under a previous employer. On the contrary, the government’s view “could afford Dodd-Frank protection to an employee who reports information bearing no relationship whatever to the securities laws,” such as an employee who reports a coworker’s drug dealing to the FBI.

Finally, the Court rejected the government’s argument that requiring SEC reporting would undermine clause (ii) of the anti-retaliation provision. This clause prohibits retaliation against a whistleblower for assisting in an SEC investigation based on information the whistleblower provided. The government argued that if internal reports are not protected, an employer could fire an employee for testifying to the SEC without first reporting to the Commission using the methods currently prescribed by the agency’s rule. This did not convince the Court, which noted that the statute expressly grants the SEC the authority to establish the manner of reporting. Its opinion does not prevent the agency from enumerating additional means of reporting, including through protected testimony.