Only Persons Who Report Security Violations to the SEC are Whistleblowers Under Dodd-Frank: Supreme Court Decides Digital Realty Trust Case

22 February 2018 Legal News: Whistleblower Developments Publication
Author(s): Lisa M. Noller Pamela L. Johnston Bryan B. House

The Supreme Court in Digital Realty Trust narrowed the definition of a whistleblower under the Dodd-Frank Act only to those persons who have provided information of a securities laws violation to the U.S. Securities and Exchange Commission (SEC), resolving a split between the Fifth and Ninth Circuits. Digital Realty Trust, Inc. v. Somers, ___ U.S. ___, No. 16-1276 (Feb. 21, 2018). In so doing, the Supreme Court established a bright line rule for who may sue for relief under Dodd-Frank Act’s anti-retaliation provision. This scholarly decision by Justice Ginsburg, joined by Chief Justice Roberts and Justices Kennedy, Breyer, Sotomayor, and Kagan, rejected the SEC’s expansive definition of a whistleblower in favor of a narrower reading based solely on the statute.

By way of background, Paul Somers, Digital Realty Trust’s former Vice-President of Portfolio Management, sued the company alleging that he was terminated shortly after he reported suspected securities law violations to senior management – not the SEC. Somers failed to alert the SEC before he was terminated; further, he did not file an administrative complaint, which would have made him eligible for relief under the Sarbanes-Oxley Act. Digital Realty Trust sought dismissal of Somers’ whistleblower retaliation claim, asserting that his failure to report to the SEC meant that Somers did not qualify as a whistleblower under the Dodd-Frank Act. The District Court refused to dismiss Somers’ claim, and on appeal the Ninth Circuit held that the Dodd-Frank Act’s anti-retaliation protection extended to a whistleblower who had reported the issue to senior management regardless of whether the person had reported the same information to the SEC. The decision widened the circuit split with the Fifth Circuit, which had held that only those who report to the SEC qualified as whistleblowers under the Dodd-Frank Act, and resulted in the Supreme Court agreeing to resolve the split. [Asadi v. G.E. Energy (USA), L.L.C., 720 F. 3d 620, 630 (5th Cir. 2013)]

The Supreme Court’s opinion focused on the Dodd-Frank Act’s precise wording of who is a whistleblower. In this, the Court focused on the fact that the statutory definition only includes an “individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” (emphasis added). Somers, as well as the Solicitor General, contended that this definition was applicable only to the statute’s award program, not to its anti-retaliation provision and that with respect to the latter, the term “whistleblower” should be construed in its ordinary sense without any SEC-reporting requirement. The Court disagreed, noting that the statute plainly directs that the whistleblower definition applies throughout the statute, including to §78u-6(h), which prohibits an employer from discharging, harassing, or otherwise discriminating against a “whistleblower.” Thus, only an individual who reports potential securities violations to the SEC is protected by the Dodd-Frank Act’s anti-retaliation provision. The Court found this interpretation was consistent with the core purpose of the Dodd-Frank Act’s whistleblower program; namely “motivat[ing] people who know of securities law violations to tell the SEC.”

Justice Ginsburg opined that the “statute’s unambiguous whistleblower definition, in short, precludes the Commission from more expansively interpreting that term.” Justice Ginsburg acknowledged that the SEC was of the view that the anti-retaliation protection of the Dodd-Frank Act was not contingent on an individual reporting information to the SEC and had issued an interpretive rule to that effect. Indeed, the Ninth Circuit deferred to the SEC’s position, reflected in Rule 21F-2, when it affirmed the refusal to dismiss Somers’ retaliation claim. However, as Justice Ginsburg pithily explained, “Congress placed a government-reporting requirement in §78u-6(h)….Courts are not at liberty to dispense with the condition–tell the SEC—Congress imposed.”

The case is Digital Realty Trust, Inc. v. Somers, ___ U.S. ___, No. 16-1276 (Feb. 21, 2018).