Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, do the anti-retaliation protections for whistleblowers apply to an individual who reports a securities law violation internally but who has not reported it to the Securities and Exchange Commission?
This case asks the Supreme Court to clarify whether the anti-retaliation provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) provides protection for individuals who report fraud or corporate misconduct internally and not to the Securities and Exchange Commission (“SEC”). Although the statutory definition of “whistleblower,” as well as previous SEC interpretation of the statute, indicate that an individual must report misconduct to the SEC to reap the benefits of the anti-retaliation provision, the SEC has recently changed its interpretation. Under its new interpretation, the SEC has found that even those who only report to internal senior management have a right to these protections. Digital Realty Trust, Inc. (“DRT”) argues that the SEC’s interpretation is at odds with the clear meaning of the Dodd-Frank Act’s provisions and was not issued in a procedurally valid manner. Paul Somers, a former employee of DRT, counters that the term “whistleblower” in the Dodd-Frank Act is ambiguous and that the SEC’s interpretation is reasonable and valid. With this decision, the Supreme Court will determine the statutory rights of securities violation whistleblowers and what procedures whistleblowers must use when reporting in order to invoke the anti-retaliation protections prescribed by the Dodd-Frank Act.
Questions as Framed for the Court by the Parties
Whether the anti-retaliation provision for “whistle-blowers” in the Dodd-Frank Wall Street Reform and Consumer Protection Act extends to individuals who have not reported a violation of the securities laws to the Securities and Exchange Commission and thus fall out-side the Act’s definition of a “whistleblower.”
Petitioner Digital Realty Trust, Inc. (“DRT”) is a corporation that employed Respondent Paul Somers (“Somers”) as Vice President of Portfolio Management from 2010 until they fired him in April 2014. Shortly before DRT terminated Somers, Somers had made several reports to DRT’s senior management regarding possible securities law violations by the company. . Somers had not reported these concerns to the Securities and Exchange Commission (“SEC”) before his termination.
Somers then sued DRT, alleging multiple state and federal law violations, including a claim under 17 C.F.R. § 240.21F-2, a section of the Securities Exchange Act of 1934 (“Exchange Act”) titled “Securities Whistleblower Incentives and Protection.” This section includes anti-retaliation protections provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) in 15 U.S.C. 78u-6. In response, DRT filed a motion to dismiss Somers’s claim on grounds that he was not a whistleblower entitled to protection under Dodd-Frank section 78u-6 because he only reported violations internally and not to the SEC. The district court rejected DRT’s claim that Dodd-Frank section 78u-6(a)(6)’s definition of “whistleblower”—providing that to be considered a whistleblower, a party must have reported violations to the SEC—unambiguously forecloses the SEC’s interpretation that a party who reports violations internally, but not to the SEC, can still be a “whistleblower.” The district court noted that the statutory definition of “whistleblower” was ambiguous because reading it strictly would render other statutory provisions unnecessary, primarily focusing on subdivision (iii) of Dodd-Frank section 78u-6(h)(1)(A) which provides protection to individuals who report violations both externally and internally. Because of this ambiguity, the district court applied Chevron deference and adopted the SEC’s more inclusive interpretation of “whistleblower.” The court found this interpretation to be reasonable as it would encourage internal reporting and promulgate the statute’s intended effects. Yet due to this split of authority, the district court certified its order for interlocutory review, which the Ninth Circuit granted.
Upon interlocutory review, the Ninth Circuit affirmed the lower court’s decision. The court acknowledged that the statutory definition of section 78u-6(a)(6) defines a “whistleblower” as someone who reports securities laws violations to the SEC, but explained that this definition is not “dispositive” of the scope of the anti-retaliation provision because a term can have different operative meaning in various contexts. Hence, the Ninth Circuit held that the anti-retaliation provision unambiguously and expressly protects those who report violations externally or internally. The court explained that DRT’s proposed interpretation would challenge Congress’s intent to provide “broad whistleblower protections" and would make much of the language of subdivision (iii) of Dodd-Frank section 78u-6(h)(1)(A) absurdly excessive. DRT appealed, and the Supreme Court granted certiorari on June 26, 2017.
WHAT IS THE SCOPE OF “WHISTLEBLOWER” UNDER A TEXTUAL INTERPRETATION OF THE DODD-FRANK ACT?
DRT claims that the definition of a protected whistleblower is unambiguous when looking at the text of the anti-retaliation provision of the Dodd-Frank Act. DRT claims that the statute—which defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the [Securities and Exchange] Commission” —“unambiguously” protects only individuals who have reported a violation to the SEC. DRT argues that precedent requires the Court to follow any definition contained within a statute, even if it varies from a word’s regular usage. DRT relies on Lamie v. United States Trustee in asserting that even “awkward” or “ungrammatical” definitions must be followed when unambiguous.
Somers contends that DRT’s reliance on the statute is misplaced, as Congress directed the Securities and Exchange Commission (“SEC”) to interpret the statute. Somers argues that the statute itself does not foreclose a broad definition of “whistleblower.” Additionally, Somers claims that the statutory definition relied on by DRT does not necessarily apply to the separate anti-retaliation provision. To support his assertion, Somers relies on the lack of capitalization of the term “whistleblower” in the anti-retaliation provision, as well as the lack of reference to the general definitional provision of the statute. Somers argues that the anti-retaliation provision’s reference to the Sarbanes-Oxley Act—which does not require reporting to the SEC as part of its whistleblower definition—indicates Congress intended a plain-meaning definition. Somers also points to Congress’s repeated use of “whistleblower,” “individual,” and “employee” interchangeably within the Dodd-Frank Act in arguing that the anti-retaliation provision was not using DRT’s claimed definition because Congress used the plain language meaning of “individual” and “employee” in the statute.
WHAT IS THE SCOPE OF “WHISTLEBLOWER” ACCORDING TO THE LEGISLATIVE HISTORY OF THE DODD-FRANK ACT?
DRT asserts that the legislative history of the Dodd-Frank Act requires a narrow definition of “whistleblower” under the anti-retaliation provision. DRT argues that Congress intended the Dodd-Frank Act to help direct information about securities laws violations specifically to the SEC. DRT rejects the argument that Congress intended to protect a broad class of people by relying on Congress’s change in the language from an early draft of the statute which protected “an employee, contractor, or agent” to the final statute which protects “whistleblower[(s)].” DRT contends that a broad interpretation of whistleblower would be the restoration of already rejected statutory language.
Somers argues that the legislative history of the Dodd-Frank Act supports a common-definition reading of “whistleblower.” Somers contends that the provision at issue is intended to protect “a vulnerable class,” while preventing unlawful conduct. Somers maintains that the late insertion of the anti-retaliation provision was not meant to limit this protection. Somers suggests that the change in language from “employers, contractors, and agents” to “whistleblower” is not dispositive because the statute would cover the same class of persons under either language. Somers claims that DRT’s reliance on the legislative record is misplaced because the comments of which DRT relies were made prior to the addition of the anti-retaliation provision.
WHAT IS THE SCOPE OF “WHISTLEBLOWER” ACCORDING TO THE UNDERLYING STATUTORY SCHEME?
DRT argues that the statutory scheme surrounding the anti-retaliatory provision supports a narrow definition of “whistleblower.” DRT contends that the award and protection components of the Dodd-Frank Act work in conjunction, and that the award provision’s focus on information provided to the SEC should extend to the anti-retaliation provision of the Act. DRT asserts that providing protection for reports other than to the SEC would unnecessarily separate the award and protection schemes. DRT also argues that the use of broader language in other provisions of the Act supports a narrowed interpretation of “whistleblower” in the anti-retaliation provision. In support, DRT cites to Loughrin v. United States, which held that the Court is to presume a difference in meaning when the particular language between provisions of the same statute differ. DRT also maintains that the narrow definition of “whistleblower” better compliments another whistleblowing statute, the Sarbanes-Oxley Act. DRT argues that the Sarbanes-Oxley Act applies to non-SEC-directed whistleblowing, and that Congress intentionally limited the remedy for such whistleblowing in the Dodd-Frank Act. DRT contends that should the Court read the Dodd-Frank Act—which lacks many of the limits found in the Sarbanes-Oxley Act—as applying to whistleblowing beyond SEC reporting, it would render the Sarbanes-Oxley limitations toothless, thereby destroying the complimentary nature of the two Acts.
Somers argues that a narrow definition of whistleblower within the anti-retaliation statute is irreconcilable with the statutory scheme. Somers contends that providing protection under Dodd-Frank solely to SEC whistleblowing would frustrate the internal whistleblowing objective of the Sarbanes-Oxley Act. Somers also asserts that the lack of protection for internal whistleblowing is inconsistent with federal laws requiring internal disclosure prior to external disclosure; to hold otherwise, Somers suggests, would force an employee to risk retaliation as a precondition to receiving protection as an external whistleblower. Additionally, Somers contends that a broad reading of “whistleblower” would not render Sarbanes-Oxley obsolete, as claimed by DRT. In support, Somers points to several reasons why a whistleblower might prefer the protections of the Sarbanes-Oxley Act, including the reduced stress and costs of having the SEC pursue the claim (rather than the whistleblower under Dodd-Frank) and the availability of special damages (not permitted under Dodd-Frank).
DOES THE SEC’S INTERPRETATION OF “WHISTLEBLOWER” DESERVE DEFERENCE?
DRT claims that the Ninth Circuit erred in deferring to the SEC’s interpretation of the anti-retaliation provision. DRT argues that deference was not proper because, in addition to the provision’s unambiguity, there were procedural defects in the adoption of the SEC’s interpretation. DRT maintains that under Chevron v. Natural Resources Defense Council, an agency is only allowed to choose between competing, reasonable interpretations of ambiguous statutes and is not permitted to rewrite unambiguous statutes. Here, DRT asserts that the statute unambiguously defines whistleblowers as those who have reported potential violations to the SEC. Even if the statute was ambiguous, DRT contends that the SEC failed to give the required fair notice when it changed its interpretation of the word “whistleblower.” DRT argues that by not giving notice that the definition of “whistleblower” was up for consideration, the change from a narrow to broad definition did not meet the requirements of the Administrative Procedure Act (“APA”). DRT argues that because the two interpretations are incompatible, the logical-outgrowth exception to the notice requirement does not apply. DRT also claims that explanations for decisions made during rulemaking are required under the APA and that the SEC failed to provide any explanation for choosing the broader the definition when they promulgated the regulation at issue. In support, DRT points to the SEC’s later clarification of their rationale and notes the Court may only consider what the SEC relied upon at the time of the rulemaking. DRT contends that given these procedural defects, the SEC regulation is entitled to deference as much as it has the “power to persuade.” DRT argues that given the lack of explanation for the initial regulation, the SEC rule has no “power to persuade” and is therefore not entitled to deference.
Somers counters that the Court should give deference to the SEC’s interpretation. The Court should not review DRT’s procedural defect claims, Somers argues, because DRT did not raise the issue in a lower court. Somers asserts that because DRT’s APA claims are not being used defensively and are not related to arguments raised in the lower courts, they are not reviewable per Chaidez v. United States. Somers contends that even should the Court consider DRT’s APA claims, they are time-barred and also fail on the merits. Somers argues that there was sufficient notice during the SEC’s rulemaking because the final regulation was a logical outgrowth of the proposed regulation. Somers, relying on precedent upholding similar changes from initial to final rules in other cases, argues that such a change in direction does not violate the requirement of fair notice, especially as the SEC received comments pertaining the definition of “whistleblower.” Somers also believes that reading the SEC’s rule in its entirety makes the agency’s rationale discernible, satisfying the explanation requirement. According to Somers, even should the Court find a procedural defect, the interpretation is still entitled to Chevron deference, which favors the SEC definition.
RISKS POSED BY STATUTORY AMBIGUITY REGARDING THE CLASSIFICATION OF INTERNAL REPORTERS
In support of DRT, the United States Chamber of Commerce (“USCC”) asserts that the Supreme Court would have to read the Dodd-Frank Act in a manner that conflicts with the U.S. precedent of statutory interpretation. USCC contends that section 78u-6(a)(6) of Dodd-Frank defines who is protected, while Section 78u-(6)(h)(1)(A) defines what actions taken by these individuals are protected. According to USCC, a ruling that Somers is a “whistleblower” requires an erroneous reading of the protected actions to create a new protected class of individuals. In further support of DRT, the Center for Workplace Compliance (“CWC”) argues that classifying internal reporters as whistleblowers would create a precedent of expressly ignoring legislative intent. CWC explains that Congress has used broader language in other acts depicting whistleblower protections and even in Section 1057 of Dodd-Frank itself, and the fact that they did not do so in the section in dispute shows intent to restrict whistleblower classification in the present case. The Cato Institute (“Cato”) asserts that even if ambiguity exists as to whether individuals in Somers’ position fall under the Dodd-Frank’s whistleblower protection, the SEC violated administrative due process. Cato asserts that, by the SEC’s failure to give the public fair notice of their new interpretation of the act, and therefore applying Chevron deference, this could create a precedent of allowing administrative bodies to circumvent long-standing notice-and-comment procedures.
In support of Somers, the Taxpayers Against Fraud Education Fund (“TAFE”) assert that restricting the meaning of the term “whistleblower” in the entire statute solely to the exact definition provided in one provision of the Dodd-Frank would upset historical precedent that U.S. courts have established by reading context into statutory terms with ambiguous meaning. TAFE argues that if the court applies the direct statutory definition of “whistleblower” throughout the statute, doing so would deny confidentiality benefits to internal whistleblowers who also report to the Commission. TAFE asserts that this could, as a consequence, directly cut against the intention of Dodd-Frank and create uncertainty for potential whistleblowers, employers, and fact-finders.Additionally, the National Whistleblower Center (“NWC”) rejects the idea that the SEC gave no notice prior to its updated interpretation of the term “whistleblower” as including individuals who have only made internal reports, and therefore applying Chevron deference poses no risk of upsetting administrative notice-and-comment procedures. NWC contends that the Commission both held open meetings and published a proposal in which the SEC explicitly raised the question of the scope of the term “whistleblower” and asked for comments on this specific matter, which is more than enough to satisfy public notice requirements.
WOULD A HOLDING THAT INTERNAL REPORTING ALONE WARRANTS WHISTLEBLOWER PROTECTION UNDERMINE THE SEC WHISTLEBLOWER PROGRAM?
The New England Legal Foundation and Associated Industries of Massachusetts (“NEMA”) argue that the lower courts’ approach directly conflicts with Congress’s clear goal of linking Dodd-Frank’s financial incentives with its remedial protection. In NEMA’s view, one of the key goals of the statute is to provide incentives to the public to report securities violations. However, NEMA argues that giving these same incentives to those who only reported violations internally would provide individuals who did not utilize the process prescribed by Congress with the same “bounty” as those who did, undermining the entire whistleblower program. Lime Energy Services and Prestige Cruises International (“L&P”) also argues that considering Somers as a whistleblower under Dodd-Frank overextends the statute to employees who are specifically covered by the Sarbanes-Oxley Act, or to whom state statutes and common law already provide remedies.
In contrast, Ethical Systems, Inc. (“Ethical Systems”) contends that including those who only reported violations internally would actually assist in achieving the goals of the SEC’s whistleblower program. Ethical Systems argues that it benefits whistleblower program as more than half of tips regarding corporate fraud and misconduct come through employee internal reporting, and internal reporting statistically reduces costs and losses arising from misconduct more effectively than external reporting. Ethical Systems adds that much of corporate misconduct still goes unreported and instilling a fear in employees of retaliation for internal reporting will only worsen the problem to the detriment of employers, employees, and taxpayers. Further, NWC contends that because subdivision (iii) of 15 U.S.C. 78u-6(h)(1)(A) applies to internal reporting, along with reporting to the U.S. Department of Justice (“DOJ”) and Congress, individuals reporting pursuant to this subdivision must be considered whistleblowers. NWC argues that it is preposterous to suggest that Congress would deny Dodd-Frank protection to those who reported to the DOJ or to Congress itself, but only allow it for individuals that reported to the SEC.
- Vedder Price, The Bumpy Road to Protection for Internal Whistleblowers, Vedder Thinking Articles (Mar. 27, 2017).
- Victoria M. Vitarelli, Is Internal Reporting Sufficient for Retaliation Protection Under Dodd-Frank?—Ambiguity Requires Deference Be Given to the SEC, Which Says Yes, Law School Student Scholarship. Paper 892 (2017).