- Internal Whistleblower Reports May Trigger Dodd-Frank Act Anti-Retaliation Protection
- October 9, 2012 | Author: John R. Snyder
- Law Firm: Bingham McCutchen LLP - Boston Office
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) extends anti-retaliation protection to whistleblowers, in the form of SEC enforcement authority and a private right of action for remedies including reinstatement, double back pay and special damages. Three federal district court judges have, in the past year and a half, considered how the scope of this protection, including whether an employee’s report to his/her employer qualifies is affectedly a conflict between the “whistleblower” definition in the statute and another subsection of the Dodd-Frank Act’s whistleblower provisions. These three courts have each adopted the more expansive alternative extending the anti-retaliation protection to activity beyond what the statute’s definition of “whistleblower” contemplates, including internal reports of alleged wrongdoing.
The DFA’s definition of “whistleblower” is “any 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.”1 Straightforward enough, right?
However, the statute also says that an employer may not retaliate against a “whistleblower” for providing information to or assisting the SEC, or for making disclosures “required or protected” by the Sarbanes-Oxley Act (“SOX”), the Securities Exchange Act or “any other law, rule, or regulation subject to the jurisdiction of” the SEC.2 The SEC’s May 25, 2011, Adopting Release for its DFA whistleblower regulations states that this provision provides protection, in certain circumstances, for those who have only reported wrongdoing internally: “The retaliation protections for internal reporting afforded by Section 21F(h)(1)(A) do not broadly apply to employees of entities other than public companies. . . . In a few limited situations - reporting by employees of subsidiaries and NRSRO’s [nationally recognized statistical rating organizations] covered by SOX Section 806, and by employees whose reports were required or protected under SOX or the Exchange Act, see DFA Section 21F(h)(1)(A)(iii) - internal reporting is expressly protected.”3 In other words, outside the public company context, internal reporting will give rise to anti-retaliation protection only if that reporting was “required or protected” by a law, rule or regulation within the SEC’s purview.
The three federal district courts, in New York, Tennessee and Connecticut, have adopted the approach set forth in the SEC’s Release, giving precedence to § 21F(h)(1)(A)(iii) - the provision that offers anti-retaliation protection for some internal reporting. So, despite what the statute’s whistleblower definition explicitly says, in certain circumstances a whistleblower who has not provided information “to the Commission” may still be eligible for whistleblower anti-retaliation protection. What appears to be an emerging consensus is evident in these three decisions:
The first reported decision to tackle this issue was Egan v. TradingScreen, Inc. (S.D.N.Y. May 4, 2011).4 That court, finding that “[t]he legislative history of the Act provides little evidence of Congress’s purpose,” held that “a literal reading of the definition of the term ‘whistleblower’ . . . , requiring reporting to the SEC, would effectively invalidate § 78u-6(h)(1)(A)(iii)’s protection of whistleblower disclosures that do not require reporting to the SEC. . . . The contradictory provisions . . . are best harmonized by reading 15 U.S.C. § 78u-6(h)(1)(A)(iii)’s protection of certain whistleblower disclosures not requiring disclosure to the SEC as a narrow exception to [the statute’s] definition of a whistleblower as one who reports to the SEC.”5 In other words, the enumerated “required or protected” disclosures trump the statutory definition, but only as a narrow exception.
About a year later, Nollner v. Southern Baptist Convention, Inc. (M.D. Tenn. April 3, 2012)6 held that the DFA anti-retaliation protections will in certain circumstances apply to Foreign Corrupt Practices Act (“FCPA”) whistleblowers who only report internally. That decision essentially follows the analysis set forth in the SEC whistleblower regulations Adopting Release. However, the decision concludes, based on the facts in that case, that, because the employer was not a publicly traded company--and thus not subject to the SEC’s FCPA jurisdiction--the court “will not interpret the DFA as extending its whistleblower protections to [those who make disclosures about] companies that otherwise have no relationship to the SEC and that have not committed securities violations.”7 The court noted that it was "constrained to reach this result because of the limited scope of the DFA and the apparent lack of remedies available to individual FCPA whistleblowers."8
Most recently, on September 25, Judge Underhill of the District of Connecticut weighed in on another inconsistency between the “whistleblower” definition and anti-retaliation § 21F(h)(1)(A)(iii), in Kramer v. Trans-Lux Corp.9 That court lined up with Egan and Nollner in holding that the “required or protected” disclosures provision overrules the statutory definition. As noted above, the statute’s “whistleblower” definition requires that the information be provided “in a manner established, by rule or regulation, by the Commission.” The SEC’s DFA whistleblower regulations do establish the manner in which prospective whistleblowers are to provide information. 17 C.F.R. § 240.21F-9. Kramer essentially rendered the words “in a manner established, by rule or regulation, by the Commission” in the “whistleblower” definition nugatory for purposes of the anti-retaliation provisions. The court found that, “[i]n order to have provided information in the manner provided by the SEC, an individual would have either had to submit the information online, through the Commission’s website, or by mailing or faxing a Form TCR (Tip, Complaint or Referral). Mailing a regular letter is insufficient.”10 The court found the requirements established by the Commission’s regulations to be “inconsistent with the goal of the Dodd-Frank Act” and, therefore, refused to enforce them. Indeed, the court went so far as to hold that “[s]ection 78u-6(a)(6)’s requirement that the information at hand have been provided ‘in a manner established, by rule or regulation, to [sic] the Commission’ does not apply to section 78u-6(h)(1)(A).”11 In other words, mailing a regular letter would be just fine for purposes of garnering anti-retaliation protection (a result that also would have the effect of overruling the SEC’s requirement (in 17 C.F.R. § 240.21F-9(b)) that the information be provided under penalty of perjury).12
Also of interest is Asadi v. G.E. Energy (USA), LLC (S.D. Tex. June 28, 2012),13 in which the court determined that it “need not reach the issue of whether Plaintiff qualifies as a whistleblower under the [DFA] Anti-Retaliation Provision.” The court held that the anti-retaliation provision did not protect the plaintiff with respect to his disclosure of alleged bribery because the court was not convinced the FCPA “protect[ed] or require[d]” his internal report.14 The court’s primary holding was that the DFA anti-retaliation provision does not apply extraterritorially, basing its analysis on Morrison v. National Australia Bank, Ltd., 130 S. Ct. 2869 (2010).15
It is not news that the Dodd-Frank Act is not a model of precision or internal consistency. Nevertheless, in this particular instance, conflicting provisions seem to be precipitating interpretations of the statute that sanction broader application than the statute’s definition of “whistleblower” on its face permits. These cases seem to be the vanguard of a growing consensus that although an employee’s internal report of alleged wrongdoing under the securities laws will not always trigger Dodd-Frank whistleblower anti-retaliation protection - with its panoply of remedies and the possibility of an SEC enforcement action - there are a variety of circumstances in which it will. More generally, these decisions may be a disturbing indication that anti-retaliation protection will not be limited to those who are in fact whistleblowers, as defined by the statute.
1 § 21F(a)(6), 15 U.S.C. § 78u-6(a)(6).
2 § 21F(h)(1)(A)(i), (ii) and (iii), 15 U.S.C. § 78u-6(h)(1)(A)(i), (ii) and (iii).
3 Release No. 34-64545, 2011 WL 2293084 at *34304 & n.38.
4 No. 10 Civ. 8202 (LBS), 2011 WL 1672066.
5 2011 WL 1672066 at *4-5.
6 852 F.Supp.2d 986.
7 852 F.Supp.2d at 997. The Nollner decision states that the FCPA violations reported by the plaintiff in that action “do not ‘relate to violations of the securities laws,’” as required by the statute’s “whistleblower” definition. But that conclusion is incorrect because the FCPA is part of the Securities Exchange Act of 1934, codified in Sections 13 and 30A of that act. Id.
8 Id. at 998.
9 No. 3:11cv1424 (SRU), 2012 WL 4444820 (D. Conn. Sept. 25, 2012).
10 2012 WL 4444820 at *4, citing the SEC’s whistleblower regulations, 17 C.F.R. § 240.21F-9(a).
11 Id. at *5.
12 The court in Kramer also provided some guidance on the “protected” part of the statute’s requirement that the disclosure be “required or protected” under “any other law, rule, or regulation subject to the jurisdiction of” the SEC.” § 21F(h)(1)(A)(iii). The court held that, if the plaintiff’s actions fell within the SOX whistleblower anti-retaliation provisions (18 U.S.C. § 1514A), they were “protected” for purposes of the DFA’s whistleblower anti-retaliation provisions. 2012 WL 4444820 at *6.
13 No. 4:12-345, 2012 WL 2522599. The Nollner decision noted but did not decide this issue. 852 F.Supp. at 97 & n.13.
14 2012 WL 2522599 at *6.
15 Id. at 4-5.