Tag Archives: whistleblower protection

February 21, 2018

Dodd-Frank Whistleblower Protection Extends Only to Employees Who Report to SEC

By Brian Neil Hoffman and Jeremy Ben Merkelson

Brian Neil Hoffman

The United States Supreme Court today narrowed the universe of plaintiffs who can claim protection under the whistleblower anti-retaliation provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). In a unanimous decision, the Court held that employees are not protected under Dodd-Frank unless they report information relating to a violation of the securities laws to the Securities and Exchange Commission (SEC). Employees who only report violations internally within their company, therefore, are not protected by Dodd-Frank’s anti-retaliation provisions.

Statutory Whistleblower Definition Applies 

Dodd-Frank defines a “whistleblower” as someone who provides pertinent information “to the Commission” (SEC). Yet this clear language becomes less certain because Dodd-Frank protects “whistleblowers” for engaging in certain specified conduct, including making reports to non-SEC individuals, such as a company supervisor.

In today’s decision in Digital Realty Trust, Inc. v. Somers, the Court concluded that Dodd-Frank’s anti-retaliation provision applies only to employees who fall within the definition of a whistleblower and have engaged in one of the specified types of conduct. As a result, individuals who have not reported to the SEC are, by definition, not Dodd-Frank whistleblowers protected under the act’s anti-retaliation provision. Stated differently, an employee who makes an internal report of securities violations, or an external report to any entity other than the SEC, is not a whistleblower under Dodd-Frank.

Internal Reports of Securities Violations Not Protected

In the case before the Supreme Court, employee Paul Somers reported to senior management at his employer, Digital Realty Trust, Inc., that he suspected violations of securities laws being made by the company. He did not report his suspicions to the SEC. Shortly thereafter, Digital Realty terminated his employment. Somers sued Digital Realty alleging that he was protected from retaliation under the whistleblower protections of Dodd-Frank.

Digital Realty argued that Somers was not a whistleblower under Dodd-Frank because he failed to report to the SEC prior to his termination. A federal district court judge in San Francisco and a divided panel in the Ninth Circuit disagreed with Digital Realty and denied dismissal of Somers’ claim. Judge Ginsburg’s opinion for the Supreme Court, siding with Digital Realty, settles this issue after courts addressing this same issue in other cases reached differing results from Texas to New York to California. It is now clear that a plaintiff cannot claim whistleblower retaliation under Dodd-Frank without having reported to the SEC before suffering adverse conduct by an employer.

Employer Takeaways

This decision presents a mixed bag for employers. On the one hand, the decision is good news for employers because the ruling narrows the scope of protections available under Dodd-Frank’s anti-retaliation provisions. Dodd-Frank contains multiple plaintiff-friendly provisions – including immediate access to federal court, a generous statute of limitations (at least six years), and the opportunity to recover double back pay. Yet these benefits are now only available to a, presumably, smaller number of potential plaintiffs who actually report to the SEC.

On other hand, there are many reasons for employers to be wary of the ruling. Rather than incentivize employees to report their suspected concerns internally, today’s decision heavily encourages potential whistleblowers to report their concerns directly to the SEC – before any adverse action occurs, but also before employers have had the chance to hear, investigate, and address their potential concerns. Indeed, when an internal report does arrive, it may be safest for employers to assume that the SEC already has that same report. Notably, individuals who report their concerns internally may still assert retaliation claims under Sarbanes-Oxley Act (SOX), which itself provides significant monetary recovery in the form of back pay with interest, reinstatement, and other costs.

As a result, employers should remain vigilant about avoiding retaliation when reports about potential concerns arise. Employers should also consider engaging in a timely and proactive response to potential concerns, often in consultation with outside counsel and which may include an appropriate and comprehensive investigation and remediation of the matter.

March 6, 2014

SOX Whistleblower Protection Extends to Employees of Private Contractors, According to Supreme Court

WhistleblowerBy Jude Biggs and Jeff Johnson 

On March 4, 2014, the U.S. Supreme Court ruled that employees of private contractors and subcontractors who contract with public companies are protected under the whistleblower provisions of the Sarbanes-Oxley Act of 2002 (SOX).  Lawson v. FMR LLC, 571 U.S. ___ (2014).  The ruling means that private employers who have a contract with a public company may not retaliate against their employees who report a potential fraud.  As pointed out in the dissenting opinion, the holding by the six-justice majority creates the potential for increased litigation as it offers private sector employees another avenue to bring retaliation claims.  In addition, it implies private sector employers with such contracts may need to strengthen their corporate compliance and complaint procedures to discover and fix problems early. 

Whistleblowers Reported Potential Fraud In Mutual Fund Operations 

Two former employees of private companies that contracted to advise and manage mutual funds filed separate administrative complaints alleging retaliation under 18 U.S.C. §1514A, the whistleblower provision of SOX.  The mutual funds themselves were public companies, but they did not have any employees.  Instead, the funds contracted with private companies to handle the day-to-day operation of the funds, including making investment decisions, preparing reports for shareholders and filing reports with the Securities and Exchange Commission (SEC).  

Jackie Hosang Lawson was the Senior Director of Finance for a private advisory firm that contracted to provide services to the Fidelity family of mutual funds.  Lawson alleged that she suffered a series of adverse employment actions that resulted in her constructive discharge after she raised concerns about certain cost accounting methods being used with the funds.  She alleged that she believed that expenses associated with operating the funds were being overstated. 

The second petitioner, Jonathan M. Zang, was a portfolio manager for a different division of the company that advised Fidelity mutual funds.  Zang alleged that he was fired after he expressed concerns about inaccuracies contained in a draft SEC registration statement concerning some of the mutual funds.  

After pursuing their administrative complaints, both whistleblowers filed retaliation lawsuits under §1514A in federal court in Massachusetts.  Their employers, collectively referred to as FMR, moved to dismiss the suits, arguing that §1514A only protects employees of public companies, and because FMR is a private company, neither plaintiff had a viable claim under §1514A.  The District Court denied FMR’s motion to dismiss.  FMR sought an interlocutory appeal to the First Circuit, which reversed, ruling that §1514A only refers to employees of public companies, not a contractor’s own employees.  The Supreme Court agreed to hear the case to resolve a division of opinion on the issue.   The question before the Supreme Court was whether the SOX whistleblower provision shields only those employed by a public company itself, or also shields employees of privately held contractors and subcontractors who perform work for the public company. 

“Employee” Presumes an Employer-Employee Relationship Between the Retaliator and the Whistleblower 

Section 1514A provides: “No [public] company . . ., or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].”  FMR argued that the prohibition against retaliating against “an employee” meant an employee of the public company.  The Court (in an opinion by Justice Ginsburg) disagreed.  It looked at the provision as stating that “no . . . contractor . . . may discharge . . . an employee” and found that the ordinary meaning of “an employee” in that context was the contractor’s own employee.  The Court stated that contractors are not ordinarily in a position to take adverse actions against employees of the public company for which they contract so to interpret the provision as FMR did would “shrink to insignificance the provision’s ban on retaliation by contractors.”  The Court rejected FMR’s argument that Congress included contractors in §1514A’s list of governed parties only to prevent companies from hiring contractors to carry out retaliatory terminations, such as the “ax-wielding specialist” portrayed by George Clooney in the movie “Up in the Air.” The majority believed that Congress presumed that there must be an employer/employee relationship between the retaliating company and the whistleblower. 

Purpose of SOX Supports Extending Whistleblower Protections to Employees of Private Contractors 

The Court emphasized that SOX was enacted to safeguard investors in public companies and to restore trust in the financial markets after the collapse of Enron Corporation.  The Court found that because outside professionals, such as accountants, lawyers and consultants, have great responsibility for reporting fraud by the public companies with which they contract, such employees of contractors and subcontractors must be afforded protection from retaliation by their employers when they comply with SOX’s reporting requirements.   The fear of retaliation was a major deterrent to the employees of Enron’s contractors in reporting fraud.  Consequently, the Court’s reading of §1514A extending whistleblower protection to the employees of private contractors is consistent with the purpose for which SOX was enacted. 

Mutual Fund Industry Should Not Escape Ban on Retaliation 

Because virtually all mutual funds are structured as public companies without any employees of their own, the Court expressed the need to protect the employees of the investment advisors who are often the only firsthand witnesses to shareholder fraud in the mutual fund industry.  To rule otherwise, said the Court, would insulate the entire mutual fund industry from §1514A. 

Dissent Worries About Opening the Floodgates to More Retaliation Claims 

Justice Sotomayor, joined by Justices Kennedy and Alito, dissented from the majority, believing that the Court’s holding creates an “absurd result” that subjects “private companies to a costly new front of employment litigation.”  According to Sotomayor, the Court’s ruling means that any employee of an officer, employee, contractor or subcontractor of a public company, including housekeepers, nannies and gardeners, can sue in federal court under §1514A if they suffer adverse consequences after reporting potential fraud, such as mail fraud by their employer’s teenage kids.  The majority dispels this concern, stating that there is “scant evidence that [this] decision will open any floodgates for whistlelowing suits outside §1514A’s purposes” given that FMR did not identify a single case in the past decade in which an employee of a private contractor had asserted a §1514A claim based on anything other than shareholder fraud.  Still, the dissent believes that only employees of a public company should be protected from retaliation for whistleblowing activities under §1514A. 

Private Employer Take-Aways 

Despite the majority’s reassurances that employers will not see a substantial increase in new whistleblower retaliation cases, only time will tell if they are right.  Private employers who contract with public companies should review their employment policies to ensure that employees are protected from retaliation as a result of reporting concerns or unlawful activities involving the public companies with whom they do business.  Employers also should train their managers, supervisors and human resources professionals on this new development so that decision-makers do not inadvertently expose their company to the risk of a whistleblower retaliation claim under §1514A.

Click here to print/email/pdf this article.