Source: https://www.vedderprice.com/bumpy-road-to-protection-for-internal-whistleblowers
Timestamp: 2019-04-25 23:38:49+00:00

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As published on March 27, 2017 in Law360.
Two recent court decisions are just the latest developments in the bumpy road to protection for internal corporate whistleblowers, a prominent issue that has sparked outspoken advocacy from the U.S. Securities and Exchange Commission, and may be increasingly likely to draw the U.S. Supreme Court’s attention. On March 8, 2017, a split Ninth Circuit panel ruled in favor of extending Dodd-Frank’s anti-retaliation protections to whistleblowers who choose to report suspected securities law violations internally to their employers, but who do not report directly to the SEC. On March 20, 2017, the Supreme Court declined to review a case out of the Sixth Circuit in which the district court had dismissed the case and ruled that Dodd-Frank’s whistleblower protections applied only to those who report to the SEC. In that case, the Sixth Circuit had affirmed on other grounds, so the Dodd-Frank issue was not squarely in play on certiorari. But, in light of the widening circuit split on the issue, it seems likely that the Supreme Court’s recent denial of certiorari will not be its final say on the topic.
The crux of the legal debate centers on whether the whistleblower protection provision in Section 922 of Dodd-Frank protects whistleblower reports that are made internally within a company but not to the SEC. Section 21F(a)(6) of Dodd-Frank defines a “whistleblower” as “any individual who provides ... information relating to a violation of the securities laws to the Commission.” However, Dodd-Frank’s anti-retaliation provisions, specifically Section 21F(h)(1)(A)(iii), prohibit retaliation against “whistleblowers” who make disclosures that are required or protected under the Sarbanes-Oxley Act, the Securities Exchange Act and “any other law, rule or regulation subject to the jurisdiction of the [SEC],” which, under certain circumstances, would include only internal reports. It is no surprise that the arguably confusing statutory provisions have caused the SEC to adopt rules clarifying its position and have resulted in opposing judicial opinions in multiple circuit courts.
The SEC’s position on the issue has been well-documented through agency rule-making, as well as in numerous amicus briefs filed in federal cases across the country since the implementation of Dodd-Frank. From a policy perspective, the SEC believes that internal company reporting by employees is essential in order to deter, detect and halt unlawful conduct that may harm investors. To that end, the SEC views the Dodd-Frank anti-retaliation provisions as a welcome supplement to the existing securities-law enforcement regime because the provisions encourage robust compliance programs and internal investigations of whistleblower reports.
On the other hand, many companies facing legal action for alleged retaliation have vehemently opposed the SEC’s position and argued against extending whistleblower protections to non-SEC reports, hoping to eliminate a potential cause of action that could be asserted by terminated employees. In response to the SEC’s concerns, companies have argued that Congress has taken clear and effective action to address potential abuse of whistleblowers through the plain language of Dodd-Frank and Sarbanes-Oxley. Thus, companies insist that whistleblower qualification under Dodd-Frank requires more than merely performing existing job duties, which for many employees includes assessing compliance with the law and reporting issues internally. Companies may also have a valid interest in protecting their right to make reasonable employment decisions based on false reports made in bad faith, or for legitimate alternative business reasons, without fear of a retaliation lawsuit.
The Second Circuit rejected this analysis in Berman v. Neo@Ogilvy LLC and found that non-SEC reporting whistleblowers are entitled to protection from employer retaliation.13 The court found Dodd-Frank’s definition of whistleblower inconsistent with its anti-retaliation provisions, and it therefore applied Chevron deference to the SEC’s regulations interpreting the statute.14 The Second Circuit noted that the Dodd-Frank anti-retaliation provisions would be narrowed to the point of absurdity if SEC reporting were a requirement for protection. In such a scenario, the only protected individuals would be those who reported possible securities violations both internally and to the SEC and were then fired solely on the basis of the internal report.15 Despite the circuit split caused by the Second Circuit’s opinion, the defendants in Berman did not seek Supreme Court review of the decision.
The dissent simply stated that the statute’s definition of whistleblower should be applied consistently throughout the statute, in accordance with the Fifth Circuit’s opinion in Asadi. The dissent also took issue with the majority’s reliance on a 2015 Supreme Court decision in King v. Burwell,20 which found that a defined statutory term could be interpreted differently depending on the context of different statutory sections.
Expanded Whistleblower Protection — Ripe for Repeal or Reversal?
Given the present uncertainty in the law, it is not readily apparent how the change in administration may affect the SEC’s well-defined position on whistleblower protection, if at all. The SEC may prefer the status quo, since encouraging and protecting internal reporters from retaliation may allow companies to investigate issues internally and potentially minimize SEC inquiries resulting from whistleblower reports. On the other hand, the anti-retaliation provisions may be subject to scrutiny given that President Donald J. Trump and congressional Republicans have pledged to roll back many Dodd-Frank regulations, although President Trump’s nominee for SEC chair, Walter “Jay” Clayton, revealed at his confirmation hearing that he would have no immediate plans to broadly attack Dodd-Frank’s mandates if he is confirmed. In addition, the new administration may prefer that anti-retaliation provisions not be extended to employees who do not report to the SEC if that is viewed as imposing a greater burden on employers.
On the enforcement front, many commentators have noted that SEC chair nominee Clayton, a partner at a New York law firm who has not held any government position, may not be as aggressive as recent former federal prosecutors who served as chair, which could result in fewer enforcement actions to protect whistleblowers. Others have been outspoken in their criticism of the SEC’s current stance — and of Dodd-Frank itself — including Paul Atkins, a former SEC commissioner and adviser to President Trump, who has argued in favor of requiring whistleblowers to report internally before going to the SEC. Exactly how the new administration and SEC leadership will view Dodd-Frank’s whistleblower protections and the SEC’s well-documented position on the issue remains to be seen.
Irrespective of the possible legislative and executive developments, it is likely that anti-retaliation provisions will continue to face significant scrutiny in the courts. If the issue is squarely presented and the Supreme Court weighs in on the circuit split, President Trump’s selected Supreme Court nominee, Judge Neil Gorsuch, could take part in deciding the issue if he is confirmed. Given his well-documented history as an originalist and textualist, and as a skeptic of deference to agencies, Judge Gorsuch, if confirmed, may be inclined to follow the Fifth Circuit’s approach in Asadi, strictly applying Dodd-Frank’s whistleblower definition rather than looking to the SEC’s interpretation of the provisions and its asserted entitlement to deference to its own rule-making. Thus, should the SEC choose to maintain the status quo on the regulatory front, the Supreme Court’s resolution of the circuit split may result in a rollback of protections for non-SEC reporting whistleblowers nonetheless.
Even if the Supreme Court chooses to limit Dodd-Frank’s anti-retaliation provisions to SEC reports, it is unclear how much employers stand to gain. If an employee is required to report to the SEC prior to termination in order to later bring a retaliation claim against an employer, companies may face increased regulatory scrutiny as a result. Additional SEC investigations of whistleblower reports may occur before companies are able to fully investigate the reported misconduct themselves. Moreover, even if the whistleblowers do not report to the SEC, employees who report internally could continue to seek recourse from retaliation under Sarbanes-Oxley. Employers will continue to be obligated to investigate whistleblower allegations and to provide an independent basis for terminating any whistleblowers, lest it appear to regulators that steps were taken to conceal misconduct. Under the circumstances, a potential lawsuit by a former employee may not be the most distressing of the risks facing companies that receive a whistleblower complaint.
No matter what happens, whistleblower protection is not an issue employers can afford to take lightly. Companies should not discount the importance of effective whistleblower reporting infrastructure and anti-retaliation training. This is particularly important in the Second Circuit and Ninth Circuit, where employers are more likely to be sued by terminated employees who report internally without going to the SEC. Companies should continue to retain experienced outside counsel to investigate whistleblower claims as soon as a report is received. Companies contemplating the termination of an employee who may be considered a whistleblower should involve outside counsel in that process and should work to ensure that any termination is well-documented. If a company discovers that a whistleblower claim has merit, it should consult with outside counsel regarding how best to remediate the misconduct and to consider whether a self-report to the SEC is warranted. In any event, however a whistleblower chooses to report potential misconduct, a company’s response may be subject to scrutiny by the government or the courts.
1 The SEC has repeatedly touted its “consistent” view that the anti-retaliation protections “apply not just to individuals who report to the SEC but also to individuals when they, among other things, report potential securities law violations internally at public companies.” See U.S. Sec. Exch. Comm’n, 2014 ANNUAL REPORT TO CONGRESS ON THE DODD-FRANK WHISTLEBLOWER PROGRAM, at 19, available at http://www.sec.gov/about/offices/owb/annual-report-2014.pdf.
2 Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34300, 34323 (June 13, 2011).
3 17 C.F.R. pt. 241.
4 See, e.g., Brief of the Securities and Exchange Commission as Amicus Curiae in Support of the Appellant, Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015); Brief of the Securities and Exchange Commission as Amicus Curiae in Support of the Appellee, Somers v. Digital Realty Tr. Inc., No. 15-17352 (9th Cir. 2017); Brief of the Securities and Exchange Commission as Amicus Curiae in Support of the Appellant, David Danon v. The Vanguard Grp. Inc., No. 16-2881 (3d Cir. 2016).
5 Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34300, 34323 (June 13, 2011); Brief of the Securities and Exchange Commission as Amicus Curiae in Support of the Appellee, Somers v. Digital Realty Tr. Inc., No. 15-17352, at 15–16 (9th Cir. 2017).
6 In the Matter of Int’l Game Tech., No. 3-17596 (Sept. 29, 2016).
7 See In the Matter of BlueLinx Holdings Inc., No. 3-17371 (Aug. 10, 2016); see also In the Matter of Health Net Inc., No. 3-17396 (Aug. 16, 2016).
8 For example, the rules provide for payment of whistleblower awards in instances in which an individual’s internal report results in a successful SEC action resulting in monetary sanctions exceeding $1 million. Also, when an individual first reports internally and then reports to the SEC within 120 days, the internal report date will be treated as the SEC report date for purposes of a whistleblower award. In addition, when determining the amount of a whistleblower award, the SEC will consider as a plus factor the whistleblower’s participation in a company’s internal compliance procedures.
9 At the Practising Law Institute’s "The SEC Speaks in 2017" conference in February, the agency touted the program’s success, noting that the SEC has received over 4,200 tips from all 50 states and 103 countries. As of February 2017, the SEC has awarded over $150 million in awards paid out since the program’s inception approximately five years ago. See Highlights from SEC Speaks 2017: Litigation and Enforcement Trends, Feb. 28, 2017, Vedder Price, http://www.vedderprice.com/vedder-thinking/publications/2017/02/highlights-from-sec-speaks-2017.
10 Asadi v. G.E. Energy (USA) LLC, 720 F.3d 620 (5th Cir. 2013).
12 Id. at 628–29. The Fifth Circuit noted that Dodd-Frank’s whistleblower protection provisions allow for greater monetary damages, a speedier route to filing a district court proceeding and a longer statute of limitations than Sarbanes-Oxley’s anti-retaliation provisions, thereby practically eliminating the need for Sarbanes-Oxley’s protections.
13 Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).
14 Id. The court looked to the SEC as “clearly the agency to resolve the ambiguity we face.” See also Chevron USA Inc. v. Nat. Res. Def. Council Inc., 467 U.S. 837 (1984), holding that federal agencies are entitled to deference by the courts when considering an agency’s reasonable interpretation of a statute it administers, so long as the statute is silent or ambiguous on the matter at issue.
15 Berman, 801 F.3d at 152; Somers v. Digital Realty Tr. Inc., No. 15-17352, at 10 (9th Cir. Mar. 8, 2017).
16 Somers, No. 15-17352 (9th Cir. Mar. 8, 2017).
19 Id. at 4–5, 12.
20 King v. Burwell, 135 S. Ct. 2480 (2015).
21 Verble v. Morgan Stanley Smith Barney LLC,No. 15-6397 (6th Cir. 2017).
22 David Danon v. The Vanguard Grp Inc., No. 16-2881 (3d Cir.).

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