Supreme Court to Clarify Definition of “Whistleblower” Under The Dodd-Frank Act
The U.S. Supreme Court yesterday granted certiorari in Somers v. Digital Realty Trust Inc., a case the Ninth Circuit Court of Appeals decided this past March.1 This is significant because the Supreme Court may clarify how broad the term “whistleblower” is defined under the Dodd-Frank Act.
The issue in Somers was whether Digital Realty’s former vice president could invoke the anti-retaliation protections of the Dodd-Frank Act when he alleged that he was fired after making several internal reports to senior management regarding possible securities law violations at the company, although he had never reported directly to the Securities and Exchange Commission (SEC).2 The Ninth Circuit held that he could because Dodd-Frank’s definition of whistleblower includes not only those who disclose information to the SEC, but also employees who report alleged unlawful activity internally within their companies.3 In deciding Somers, the Ninth Circuit agreed with the Second Circuit’s broader definition of whistleblower,4 splitting with the Fifth Circuit’s narrower interpretation that requires the whistleblower to have reported to the SEC.5
The Supreme Court’s decision to review Somers suggests that it will resolve the critical issue of who qualifies as a whistleblower under Dodd-Frank and therefore is entitled to that law’s anti-retaliation protections and monetary awards. Since Dodd-Frank established its new whistleblower awards in 2011 (providing that a whistleblower can receive between 10-30% of a monetary judgment from a successful enforcement action), the SEC has seen an uptick in the number of tips, complaints and referrals it receives per year.6 Over the same period, the SEC has awarded 44 whistleblowers a total of approximately US$154 million.7 The Supreme Court’s review of Somers is an important turning point. If the Court affirms the Ninth Circuit’s broader definition, whistleblowers will continue to catalyze white collar enforcement across the country. If, on the other hand, the Supreme Court moves toward a narrower definition like the Fifth Circuit’s, it could interrupt these trends and reduce the role whistleblowers play in future SEC actions. The Supreme Court’s decision to review Somers was not altogether unexpected given the split between circuit courts. Furthermore, although both the Second and Ninth Circuits ultimately agreed on the broader definition of whistleblower, they reached that conclusion in different ways. In Somers, the Ninth Circuit applied statutory interpretation principles to find that Dodd-Frank’s whistleblower protections were meant to include those who report internally as well as those who also report directly to the SEC.8 In contrast, in Berman v. Neo@Ogilvy LLC, the Second Circuit found the statutory language to be ambiguous and applied the Supreme Court’s decision in Chevron9 to defer to the SEC’s rule recognizing whistleblowers who report externally or internally.10 Notwithstanding the Berman decision, recently there has been increased judicial and congressional skepticism toward Chevron and the broad interpretive authority it provides to administrative agencies.11 Somers provides the Supreme Court an opportunity to resolve the definition of whistleblower while simultaneously addressing the broader issue of Chevron’s utility to the modern administrative state.
Regardless of which side prevails in Somers, the Supreme Court’s grant of certiorari provides the prospect that Dodd-Frank’s definition of whistleblower will be clarified. Companies should pay close attention to Somers’ outcome as it will be instructive for how to develop best internal practices to successfully address whistleblower complaints. Especially if the Supreme Court affirms the Ninth Circuit’s broader definition, companies will have to perform a careful balancing act of establishing comprehensive programs that encourage internal reporting while not simultaneously stifling whistleblower reports to the SEC.12
Footnotes
1) Somers v. Digital Realty Trust Inc., 850 F.3d 1045, 1047 (9th Cir. 2017), cert. granted, 2017 WL 1480349 (U.S. June 26, 2017) (No. 16-1276).
2) Id.
3) Id.
4) See Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).
5) See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013).
6) In the first year of the Dodd-Frank Act’s new regime, the SEC received over 3,000 tips, complaints and referrals, amounting to an increase of approximately 17% over 2011. See SEC Annual Report on Dodd-Frank Whistleblower Program Fiscal Year 2012 at p.4 (Nov. 2012).
7) SEC Press Release 2017-90: Whistleblower Award of More Than Half-Million Dollars for Company Insider (May 2, 2017).
8) Somers, 850 F.3d at 1048-50.
9) Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). In Chevron, the Supreme Court held that, where an agency regulation is ambiguous, a court construing such regulation should defer to the agency interpretation.
10) Berman, 801 F.3d at 155.
11) Several federal judges (including now Supreme Court Associate Justice Neil Gorsuch) have expressed marked skepticism as to the continued viability of Chevron deference. See, e.g., Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1149 (10th Cir. 2016) (Gorsuch, J., concurring); see also Egan v. Delaware River Port Authority, 851 F.3d 263, 278 (3d Cir. 2017) (Jordan, J., concurring). Additionally, the U.S. House of Representatives has passed two pieces of legislation in 2017 that seek to repeal Chevron deference, namely the Regulatory Accountability Act of 2017, H.R. 5, 115th Cong. (2017), and the Financial CHOICE Act of 2017. H.R. 10, 115th Cong. (2017). Both these bills have yet to pass the Senate.
12) Since 2015, the SEC has indicated it will focus attention on employment agreements (including non-disclosure, confidentiality and severance agreements) that could potentially discourage employees from reporting problems directly to the SEC in violation of Rule 21F. See SEC Annual Report on Dodd-Frank Whistleblower Program Fiscal Year 2016 at p.2-3 (Sept. 2016) (“Assessing confidentiality, severance, and other kinds of agreements that may stifle a would-be whistleblower from reporting his or her information to the agency and that strip away the very incentives Congress intended for the program will continue to be a top priority for the SEC’s Office for the Whistleblower (OWB or the Office).”); SEC Annual Report on Dodd-Frank Whistleblower Program Fiscal Year 2015 at p.2 (Nov. 2015) (“Assessing confidentiality agreements for compliance with Rule 21F-17(a) will continue to be a top priority for OWB into Fiscal Year 2016.”).
