Appeals Court Restricts Dodd-Frank Whistleblower Protections

19 July 2013 Publication
Author(s): Bryan B. House Lisa M. Noller Pamela L. Johnston Michael P. Matthews

Legal News Alert: Securities Enforcement & Litigation

In the first opinion on the subject by an appellate court, the U.S. Court of Appeals for the Fifth Circuit ruled in Asadi v. G.E. Energy (USA), LLC, No. 12-20522 (5th Cir. July 17, 2013), that Dodd-Frank’s protections against whistleblower retaliation (and the right to file a lawsuit claiming a violation) apply only to individuals who have provided information to the SEC. The plaintiff, who was working in the Middle East, was fired after he complained internally that GE Energy’s actions in Iraq may have violated the Foreign Corrupt Practices Act. The district court recognized that there could be a debate regarding whether the plaintiff was a “whistleblower” with a private right of action, but dismissed the case because the Dodd-Frank Act did not protect whistleblowing activity outside of the United States.

The Fifth Circuit affirmed based not on the district court’s extraterritorial analysis, but on the question of whether the plaintiff had a private right of action in the first instance. Two provisions of the Dodd-Frank Act were at issue. The first provision, § 78u-6(a)(6), defines a “whistleblower” as someone who provides information “to the Commission.” The second provision, § 78u-6(h), allows whistleblowers to sue employers who take retaliatory actions against a whistleblower for taking certain protected actions. The issue, as phrased by the Fifth Circuit, was “whether an individual who is not a ‘whistleblower’ under the statutory definition of that term in § 78u-6(a)(6) may, in some circumstances, nevertheless seek relief under the whistleblower-protection provision.” As described in our Legal News Alert last fall, federal courts in Egan v. Tradescreen, Inc., 2011 U.S. Dist. LEXIS 47713 (S.D.N.Y. May 4, 2011), Nollner v. Southern Baptist Convention, Inc., 852 F. Supp. 2d 986 (M.D.Tenn. 2012), and Kramer v. Trans-Lux Corp., 2012 U.S. Dist. LEXIS 136939 (D. Ct. Sept. 25, 2012), had concluded that the whistleblower-protection provisions were ambiguous and, in reconciling the relevant provisions of Dodd-Frank, those courts concluded that the whistleblower-protection provisions extended a right of private action to certain individuals who had not made disclosures to the SEC.

The Fifth Circuit disagreed that the Dodd-Frank whistleblower provisions were ambiguous or were in conflict. The court’s analysis began and ended with an examination of § 78u-6. The court said that, to be a “whistleblower,” the statute “expressly and unambiguously” requires that an individual provide information to the SEC. The Fifth Circuit rejected the plaintiff’s assertion that he could bring a claim under the anti-retaliation provisions, namely § 78u-6(h)(1)(A)(iii), which precludes retaliation for protected activity other than providing information to the SEC, such as making disclosures required or protected under the Sarbanes-Oxley Act of 2002 (SOX). The court relied on the following introductory language in the anti-retaliation provision “No employer may discharge . . . or in any other manner discriminate against, a whistleblower . . . because of any lawful act done by the whistleblower. ” § 78u-6(h)(1)(A) (emphasis in original). The court said it was clear from this language that the anti-retaliation provisions applied only to actions taken against a whistleblower, i.e., someone who had provided information to the SEC.

The Fifth Circuit rejected the plaintiff’s argument that this interpretation of the anti-retaliation provisions conflicted with the definition of “whistleblower” because one could engage in protected activity yet not have a private right of action. The court agreed that its interpretation would leave certain individuals without a Dodd-Frank claim, but found no conflict in this result. Rather, the court said the plaintiff’s reading would have expanded the definition of “whistleblower” in a manner that conflicted with the unambiguous statutory definition of the term.

The court also rejected the plaintiff’s argument that the court’s reading of the statutes rendered § 78u-6(h)(1)(A)(iii) superfluous. The Court imagined a scenario in which an employee reported a securities law violation to his employer’s CEO and to the SEC, only to be fired by the CEO, who was unaware of the report to the SEC. In that case, the employee would have a cause of action under Dodd-Frank because: (1) he reported to the SEC and, thus, was a “whistleblower,” and (2) he was terminated for engaging in a protected activity, i.e., reporting the violation to the CEO, which is protected under SOX.

The Fifth Circuit was influenced by its belief that the plaintiff’s effort to broaden the definition of “whistleblower” would render the SOX anti-retaliation provisions moot. The court noted that, under the plaintiff’s interpretation, any person who could bring a SOX anti-retaliation claim could necessarily bring a Dodd-Frank anti-retaliation claim. The court noted three reasons why an individual was not likely to bring a SOX claim in these circumstances: (1) Dodd-Frank allows for greater monetary damages; (2) under SOX, a claim must first be filed with the Department of Labor, rather than in federal court; and (3) the statute of limitations is longer under Dodd-Frank. The court could not accept a construction of the Dodd-Frank provisions that would render the SOX provisions moot.

The Fifth Circuit also rejected the plaintiff’s reliance on the SEC’s regulations implementing the Dodd-Frank whistleblower provisions. While noting that the whistleblower regulations were inconsistent, the court conceded that the SEC’s anti-retaliation regulations purported to expand the definition of “whistleblower” to one who engages in the activity protected by § 78u-6(h)(1)(A). Nevertheless, the court held it could not accept the SEC’s interpretation of the statute because Congress had unambiguously defined “whistleblower.”

The Fifth Circuit’s ruling in Asadi is a significant development. It is a blow to the whistleblower plaintiffs’ bar and no doubt a relief for employers worried that Dodd-Frank’s whistleblower provisions were being interpreted very broadly in favor of employees. The decision also provides needed clarity regarding the interplay between the existing SOX whistleblower provisions and the Dodd-Frank provisions. Of course, whether other circuits will follow the Fifth Circuit’s lead is yet to be seen.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Lisa M. Noller
Chicago, Illinois

Bryan B. House
Milwaukee, Wisconsin

Michael P. Matthews
Tampa, Florida

Kenneth B. Winer
Washington, D.C.

Pamela L. Johnston
Los Angeles, California