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US Supreme Court Ruling Tightens the Reins on Dodd-Frank Whistleblower Retaliation Claims

Securities and Derivative Litigation   |   Qui Tam/Whistleblower Defense   |   Labor & Employment   |   White Collar Crime & Government Investigations   |   Securities Transactions and Compliance   |   February 22, 2018
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The U.S. Supreme Court dealt a blow to prospective whistleblowers in Digital Realty Trust Inc. v. Somers (February 21, 2018), making it more difficult to bring a retaliation claim under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Dodd-Frank was enacted in 2010 as an amendment to the Sarbanes-Oxley Act of 2002. In an effort to incentivize employee reports of suspected securities violations, Dodd-Frank expanded the scope and protections afforded to whistleblowers by providing an award to eligible employees who voluntarily provide the Securities and Exchange Commission (SEC) with original information that leads to a successful enforcement action that results in monetary sanctions in excess of $1 million. Dodd-Frank also includes robust anti-retaliation provisions which confer a private right of action in the event an employee is discharged or discriminated against by the employer in violation of the Act, and includes longer limitations periods than Sarbanes-Oxley provides.

Dodd-Frank defines a “whistleblower” as any individual who provides. . . information relating to a violation of the securities laws to the [SEC]…” making it clear that only individuals reporting externally to the SEC could be considered whistleblowers under Dodd-Frank. The language of the anti-retaliation clause, under which Somers sought relief, suffered from lack of specificity and left open to interpretation whether “disclosures that are required under the Sarbanes-Oxley Act of 2002” (i.e., internal complaints) were sufficient to trigger the anti-retaliation protections under Dodd-Frank. Because Sarbanes-Oxley protects whistleblowers who report internally to an employee with “supervisory authority” in their own company, Somers argued that the anti-retaliation clause can be read to protect both external and internal whistleblowers. The textual inconsistency resulted in a circuit split between the Ninth and Fifth Circuits.

The U.S. Supreme Court agreed with Digital Realty Trust that the Dodd-Frank Act defines a whistleblower as an individual who reports alleged securities violations to the SEC. The law was not intended to protect workers who report alleged securities violations only within their companies, the justices ruled, rejecting the SEC’s broader definition of a whistleblower. The Court held that Somers was ineligible to seek relief under Dodd-Frank because the Act’s anti-retaliation provision does not extend to an individual, like Somers, who “did not provide information to the [SEC] before his termination. . . so he did not qualify as a ‘whistleblower’ at the time of the alleged retaliation.”

The ruling that Dodd-Frank applies only to those who report suspected violations to the SEC, will likely result in fewer Dodd-Frank retaliation claims. Employees can still raise retaliation claims for internal complaints under Sarbanes-Oxley or state whistleblower laws, but to avail themselves of longer limitations periods and greater damages (two times back pay with interest under Dodd-Frank versus simple back pay with interest under Sarbanes-Oxley), employees must report to the SEC.

Because of the extraordinarily long limitations period afforded by Dodd-Frank (up to 10 years), the opinion affords employers definitive protection. Unlike Sarbanes-Oxley which requires an employee claiming retaliation to file an administrative complaint with the Department of Labor within 180 days from the adverse employment action before an employee can file suit for retaliation, Dodd-Frank does not impose an administrative exhaustion requirement. An employee can sue an employer directly in federal court within six years from the date the alleged retaliation occurs, or three years after the date “facts material to the right of action are known or reasonably should have been known by the employee, but in no event more than 10 years after the violation occurred." Without the narrow definition of “whistleblower,” employers would continue to be liable for retaliation based on internal complaints allegedly lodged years before, where records have long been purged and memories have faded. In this respect, the decision creates greater certainty for employers.

Some commentators have cautioned that the ruling may cause greater potential exposure for employers that might prefer to resolve whistleblower retaliation complaints internally, but it is unlikely that companies will see a wave of complaints filed with the SEC.


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