Whistleblowers need to report to SEC under new SCOTUS ruling

By Elizabeth Alt | Mar 27, 2018

WASHINGTON (Legal Newsline) – Employers may find themselves in more federal court cases after the U.S. Supreme Court issued a decision in February ruling that whistleblowers are not protected under the anti-retaliation provision of the Dodd-Frank Act unless they file a complaint with the Securities and Exchange Commission.

WASHINGTON (Legal Newsline) – Employers may find themselves in more federal court cases after the U.S. Supreme Court issued a decision in February ruling that whistleblowers are not protected under the anti-retaliation provision of the Dodd-Frank Act unless they file a complaint with the Securities and Exchange Commission.

The case, Digital Realty Trust Inc. vs. Somers, was decided Feb. 21. In the long term, the case will be a "double-edged sword" for companies because employees reporting securities fraud now have a stronger incentive to file formal complaints with the SEC, says Cozen O'Connor attorney Joe Sirbak.

Justice Ruth Bader Ginsburg wrote the opinion for the Supreme Court. Justice Sonia Sotomayor filed a concurring opinion with Justice Stephen G. Breyer. Justice Clarence Thomas filed an opinion concurring in part and concurring in the judgment, in which Justice Samuel A. Alito and Justice Neil M. Gorsuch joined.

Sirbak noted that “the outcome was not terribly surprising,” as the Supreme Court justices concurred in their decision, finding that the language in the Dodd-Frank Act clearly indicated that employees need to file a complaint with the SEC, not just their employer, to be protected against retaliation.

Sirbak told Legal Newsline that, “employers generally welcomed the decision,” but “a number of cases already in litigation involve the same factual scenario presented in Digital Realty Trust – alleged retaliation against an employee who reported suspected securities fraud to her employer but not the SEC. Obviously, the litigants in those pending cases will be most affected by the ruling, since the claims now will be dismissed.”

The Supreme Court was tasked by the lower courts with deciding whether former employee of Digital Realty Inc. Paul Somers was protected as a whistleblower. Somers claims that his termination from Digital in 2014 was done in retaliation after he reported suspected securities law violations, the court's ruling stated.

Digital Realty said Somers couldn't be a whistleblower because he did not report the alleged conduct to the SEC prior to his termination. The U.S. Court of Appeals for the Ninth Circuit and a lower court denied the company's motion to dismiss.

The main issue that the lower districts struggled with was the difference in how the Dodd-Frank and Sarbanes-Oxley acts outline how a whistleblower is protected under each. The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010 to protect and reward whistleblowers for providing the SEC with information on fraud that led to monetary penalties. Sarbanes-Oxley was created largely in response to scandals like the Enron case, but does not require an individual to report to the SEC.

The lower courts originally found that Somers was protected under the Dodd-Frank, noting that Congress intended a broader interpretation of the Act. 

“While Dodd-Frank protects whistleblowers for engaging in conduct protected by Sarbanes-Oxley (which does not require reporting to the SEC), all nine members of the court found that an employee must meet the threshold statutory definition of a whistle-blower, which expressly encompasses only those who report suspected fraud to the SEC,” Sirbak said.

Sirbak noted that “the court conspicuously side-stepped considering the issue of Chevron deference, which may be in danger if squarely presented to the current court.” 

The California district court found that Somers was protected, and the appellate court affirmed its ruling based on the Chevron deference.

Justice Thomas agreed with the majority, but disagreed with Justice Ginsburg’s main point that Congress intended for an individual to file a claim with the SEC to be protected under the Dodd-Frank.

“Justice Thomas’ concurring opinion, with which Justices Alito and Gorsuch joined, staked out a split among the justices on the value of sifting through legislative history to construe Congress’ supposed purpose in enacting a statute,” Sirbak noted.

Supreme Court of the United States case number 16–1276

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