December 07, 2015
Last month the Securities and Exchange Commission’s (“SEC” or “Commission”) Office of the Whistleblower (“OWB”) released its annual report for Fiscal Year 2015, announcing that the Commission received 3,923 whistleblower tips this fiscal year, more than any other year the program has been in operation and up more than 30% from Fiscal Year 2012. The OWB further noted that protecting whistleblowers from retaliation was a focus in 2015, and will continue to be a focus in 2016. Given this focus, the OWB was undoubtedly in good spirits when, in September of this year, a panel of the U.S. Court of Appeals for the Second Circuit became the first federal appellate court to hold that employees need not report alleged violations of federal securities law to the SEC to be protected against retaliation under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010), (“Dodd-Frank”). Under Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 155 (2d Cir. 2015), employees also may be protected when they report to someone within their organization.
The Berman decision directly conflicts with the only other federal appellate opinion on the issue from the Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013). In this article, we analyze both decisions on the scope of coverage under Dodd-Frank’s anti-retaliation provision. The Fifth Circuit found that the plain language of the statute unambiguously requires reporting to the SEC. By contrast, the Second Circuit concluded that the statute is sufficiently ambiguous as to require deference to the SEC’s contrary interpretation of the statute. After analyzing these opinions, we propose several steps companies can take to avoid litigation in this area.
Prior to the enactment of Dodd-Frank in response to the 2008 financial crisis, the Sarbanes-Oxley Act of 2002 (“SOX”), Pub. L. No. 107-204, 116 Stat. 745 (2002), provided a cause of action to an employee of a publicly traded company who suffers retaliation for reporting employer conduct that the employee reasonably believes (i) constitutes the federal crime of mail fraud, wire fraud, bank fraud, or securities fraud; (ii) violates any rule or regulation of the SEC; or (iii) violates any provision of federal law relating to fraud against shareholders. 18 U.S.C. § 1514A(a)(1). Dodd-Frank created a similar cause of action in 2010, prohibiting an employer, public or private, from retaliating against a whistleblower who has engaged in certain protected activity. 15 U.S.C. § 78u-6(h)(1)(A).
It is well-settled that employees who report wrongdoing internally (“internal whistleblowers”) are protected under SOX even if they do not report such conduct to the SEC. § 1514A(a)(1)(C) (protecting disclosure to “a person with supervisory authority over the employee or [someone] who has the authority to investigate, discover, or terminate misconduct”). But courts are divided on whether similar protection against retaliation is afforded under Dodd-Frank. The disagreement arises from the interaction between the definition of “whistleblower” found in section 21F, subsection (a), and the anti-retaliation provision found in subsection (h).
Subsection (a) defines a “whistleblower” as “any individual who provides … information relating to a violation of the securities laws to the Commission.” § 78u-6(a)(6) (emphasis added). Subsection (h) provides that an employer may not retaliate against “a whistleblower … because of any lawful act done by the whistleblower (i) in providing information to the [SEC] …; (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the [SEC] …; or (iii) in making disclosures that are required or protected under [SOX]…and any other law, rule, or regulation subject to the jurisdiction of the [SEC].” § 78u-6(h)(1)(A) (emphasis added). The first two subdivisions clearly require a report to the SEC. The third, however, incorporates protected activity under SOX, and, SOX protects internal whistleblowers from retaliation, regardless of whether they also report to the SEC. The issue, then, is whether the definition of “whistleblower” in subsection (a), which requires a report “to the Commission,” applies to the anti-retaliation provision in subsection (h)(1)(A)(iii).
The SEC broadly construes subsection (h) as extending anti-retaliation protection to internal whistleblowers. See 17 C.F.R. § 240.21F-2(b)(1)(ii). The majority of federal district courts to rule on the matter have deemed § 78u-6 ambiguous and have deferred to the SEC’s regulation under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). Berman, 801 F.3d at 153.
Some courts, such as the Fifth Circuit in Asadi, reject the SEC’s broad interpretation of subdivision (iii) and interpret section 21F as requiring employees to report alleged violations to the SEC in order to be protected against retaliation under Dodd-Frank. In Asadi, the plaintiff, an employee of GE Energy, reported an alleged violation of the Foreign Corrupt Practices Act to his supervisor. Id. at 621. After GE Energy terminated his employment he brought a Dodd-Frank retaliation claim against GE. Id. The Fifth Circuit affirmed the dismissal of this claim, finding that he was not a “whistleblower” under Dodd-Frank. Id. at 630.
The court noted that subsection (h)(1)(A) explicitly states that employers may not retaliate against “whistleblowers” under certain conditions. Id. at 626-27. “Whistleblower” is defined in subsection (a), and this definition requires providing information “to the Commission.” Id. at 623. According to the court, these provisions, taken together, unambiguously require employees to report to the SEC if they seek protection from retaliation under Dodd-Frank. Id. at 629. It, therefore, rejected the SEC’s “expansive interpretation of the term ‘whistleblower’ for purposes of the whistleblower-protection provision.” Id. at 630.
The Fifth Circuit found no conflict in its reading of subdivision (iii) and the definition of “whistleblower” in subsection (a). Under the court’s reading, these provisions would conflict “only if we read the three categories of protected activity as additional definitions of three types of whistleblowers.” Id. at 626. But there is only one definition of whistleblower in section 21F, that found in subsection (a), and subsection (h) merely provides three scenarios in which a whistleblower, as defined in subsection (a), is protected from retaliation. See id. at 627.
The court also rejected the argument that its reading of section 21F renders subdivision (iii) superfluous. Id. It provided an example of a manager discovering a securities law violation and reporting that violation to the CEO of the company and to the SEC on the same day. Id. Before the CEO learns of the report to the SEC, he fires the manager. Id. The manager meets the definition of “whistleblower” under subsection (a) because he reported a securities law violation to the SEC. Id. Because he could not prove he was retaliated against for reporting to the SEC, he could not seek protection under subdivisions (i) or (ii). Id. But he would be entitled to protection under subdivision (iii) because he was terminated for reporting a securities violation to the CEO, and this conduct is protected from retaliation under SOX. Id. at 627-28.
In contrast to Asadi, the majority of district courts, and now the Second Circuit, find section 21F to be ambiguous and defer to the SEC’s broad interpretation of subdivision (iii). In Berman, 801 F.3d at 148-49, a finance director alleged that he was terminated as a result of reporting possible accounting fraud to his employer. Id. at 149. Although he did not report to the SEC until six months after his termination, he brought a claim for whistleblower retaliation under Dodd-Frank. Id. The U.S. District Court for the Southern District of New York dismissed the claim and the Second Circuit reversed. Id. at 146.
Consistent with Asadi, the Second Circuit found “no absolute conflict between the Commission notification requirement in the definition of ‘whistleblower’ and the absence of such a requirement in both subdivision (iii) of subsection [h] of Dodd-Frank and the [SOX] provisions incorporated by subdivision (iii).” Id. at 150. Referencing the Fifth Circuit’s example, the court found subdivision (iii) applicable when an employee “suffers retaliation after reporting wrongdoing simultaneously to his employer and to the SEC.” Id. at 150-51.
Despite the lack of an “absolute conflict” between the two provisions, the court saw “significant tension” in section 21F. Id. at 151. According to the court, “apart from the rare example of simultaneous (or nearly simultaneous) reporting of wrongdoing to an employer and to the Commission, there would be virtually no situation where an SEC reporting requirement would leave subdivision (iii) with any scope.” Id. at 152. This is because, in the Second Circuit’s view, few employees simultaneously report internally and to the SEC because they assume there is a decreased risk of retaliation when they file only an internal report. Id. at 151. Moreover, due to constraints placed on auditors and attorneys by SOX and the SEC’s Standards of Professional Conduct, these whistleblowers must first report wrongdoing to their employers. Id. at 151-52. Because “any retaliation would almost always precede Commission reporting,” such individuals would likely not be protected against retaliation under the Fifth Circuit’s interpretation of section 21F. Id. at 152.
The Circuit then considered “whether Congress intended to add subdivision (iii) … only to achieve such a limited result.” Id. at 152. It framed the issue not as whether the phrase “to the Commission” in the definition of “whistleblower” “means something other than what it literally says.” Id. at 150. Instead, the court considered whether that definition in subsection (a) applies to the anti-retaliation provisions in subdivision (iii), or “whether the answer to that question is sufficiently unclear to warrant Chevron deference to the Commission’s regulation.” Id.
Subdivision (iii) was initially added in a House conference to follow subdivisions (i) and (ii) that were in the Senate version. Id. at 152-53. Its addition was not mentioned in any legislative materials, leading the Berman court to characterize it as “a king of legal Lohengrin; … no one seems to know whence it came.” Id. at 153 (citation omitted). After considering the “realities of the legislative process” in which “conferees are hastily trying to reconcile House and Senate bills,” the court found the issue of whether subdivision (iii) is limited by the definition of “whistleblower” in subsection (a) to be “as a whole sufficiently ambiguous to oblige [it] to give Chevron deference to the reasonable interpretation” of the SEC. Id. at 154-55. Accordingly, the court deferred to the SEC’s reading and held that internal whistleblowers may state a claim for whistleblower retaliation under Dodd-Frank. Id. at 155.
Because the Berman decision created a circuit split, id. at 153, this issue is ripe for Supreme Court review. In the meantime, this decision reminds employers of the risks of taking action that could be perceived as retaliation against an employee who has made an internal report of a potential federal securities law violation. Due to the significant differences in the remedial schemes of SOX and Dodd-Frank, Berman increases the risk of whistleblower retaliation claims being brought several years after the alleged retaliation and for more damages than would otherwise be available. Whistleblowers under SOX must exhaust administrative remedies prior to filing suit in federal court and abide by a 180-day statute of limitations. Asadi, 720 F.3d at 629. By contrast, Dodd-Frank has no administrative exhaustion requirement, has a much longer statute of limitations (between six and ten years), and if successful, whistleblowers are entitled to two times back-pay, twice the amount available under SOX. Id.
To minimize the risk of liability under Dodd-Frank, companies should review their human resources and investigation policies and practices and consider:
- Ensuring that the investigation team maintains the anonymity of whistleblowers;
- Structuring the review process so that no one on the investigation team has authority to make employment decisions;
- Conducting annual training on maintaining whistleblower anonymity and avoiding even the appearance of a retaliatory act;
- Consulting with counsel before taking any action against a whistleblower that could be considered retaliatory;
- Ensuring that policies and procedures encourage managers to document performance-related issues during periodic performance evaluations or, even better, as such issues arise, in order to create a written record that any disciplinary action independently resulted from such performance issues rather than any potential whistleblowing; and
- Maintaining personnel records for an extended period to account for Dodd-Frank’s longer statute of limitations.
 OWB Ann. Rep. 1, at 21 (2015), available at http://www.sec.gov/about/offices/owb/annual-report-2015.pdf.
 Id. at 19.
 Chevron requires courts to “defer to a reasonable agency interpretation of ambiguous statutory language when it appears that Congress has delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority.” Stryker v. SEC, 780 F.3d 163, 167 (2d Cir. 2015).
 “In the German legend, Lohengrin appears as if out of nowhere to rescue a maiden and break a curse, but after her inquiry into his cryptic origins, he vanishes again.” Flores v. S. Peru Copper Corp., 414 F.3d 233, 243 n.16 (2d Cir. 2003).
Reprinted with permission from the December 7, 2015 edition of the New York Law Journal © 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.