Does Dodd-Frank Protect Internal Whistleblowers?

Why it matters

The Supreme Court has agreed to answer the question of whether the Dodd-Frank Wall Street Reform and Consumer Protection Act provides protections to whistleblowers who file their reports internally and not with the Securities and Exchange Commission (SEC), a question that has split the circuits. In the case before the justices, Paul Somers, vice president of portfolio management at Digital Realty Trust, shared with senior management his concerns about a supervisor’s actions that he believed violated the Sarbanes-Oxley Act. When he was fired not long after, he sued. Digital Realty moved to dismiss, contending that Somers was not entitled to protection from the alleged retaliation because he did not report his concerns to the SEC. A district court denied the motion, and the U.S. Court of Appeals, Ninth Circuit affirmed. Digital Realty filed a writ of certiorari, noting that the Fifth Circuit has reached a contrary conclusion and asking the justices to resolve the problem. The Court agreed to hear the case, with oral argument to be held in the fall.

Detailed discussion

Enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) contains two provisions related to whistleblowers that have divided courts across the country. Section 78u-6(a)(6) defines a whistleblower as “any individual who provides or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”

Separately, Section 78u-6(h)(1)(A) provides whistleblowers with a private right of action against employers who take retaliatory actions against the whistleblower for engaging in certain protected actions, delineated in three subsections. Two subsections specifically reference working with the Securities and Exchange Commission (SEC), while the third provides protections more generally “in making 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 Commission.”

In the case before the Supreme Court, Paul Somers, who began working as a vice president at Digital Realty Trust in 2010, claimed that over the four years he worked for the company, he made several reports to senior management regarding possible securities law violations. He was subsequently fired.

Somers then sued Digital Realty, alleging violations of various state and federal laws, seeking the protections afforded to whistleblowers under Dodd-Frank. Digital Realty moved to dismiss, arguing that because Somers reported the alleged violations only internally and not to the SEC, he was not a “whistleblower” as defined by Dodd-Frank.

The district court denied the motion, and the U.S. Court of Appeals, Ninth Circuit affirmed.

“We agree with the district court that the regulation is consistent with Congress’s overall purpose to protect those who report violations internally as well as those who report to the government,” the federal appellate panel wrote. “This intent is reflected in the language of the specific statutory subdivision in question, which explicitly references internal reporting provisions of Sarbanes-Oxley and the Securities Exchange Act. In view of that language, and the overall operation of the statute, we conclude that the SEC regulation correctly reflects congressional intent to provide protection for those who make internal disclosures as well as to those who make disclosures to the SEC.”

The court noted the existing circuit split on the question, with the Fifth Circuit strictly applying Dodd-Frank’s definition of “whistleblower” to require dismissal of the plaintiff’s action because he did not make his disclosures to the SEC. The Second Circuit has taken the opposite position, viewing the statute itself as ambiguous and deferring to the SEC’s regulation, which interprets the provision to extend protections to all those who make disclosures of suspected violations, whether internally or to the SEC.

Emphasizing the broadening split, Digital Realty filed a writ of certiorari with the Supreme Court. The employer argued that the case presents “a clear and intractable conflict on an important and recurring question of statutory interpretation,” while Somers responded by characterizing the split as “shallow” and the Fifth Circuit as simply an outlier.

The justices granted the petition, agreeing to weigh in on the issue of “[w]hether the anti-retaliation provision for ‘whistleblowers’ in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 extends to individuals who have not reported alleged misconduct to the Securities and Exchange Commission and thus fall outside the Act’s definition of a ‘whistleblower.’”

Oral argument will be held in the fall after the new term begins in October.

To read Digital Realty Trust’s cert petition, click here.

To read Somers’ reply brief, click here.

To read the order list, click here.



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