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February 22, 2018

Landmark Supreme Court Decision Substantially Narrows the Applicability of the Dodd-Frank Whistleblower Provision

By Callan Stein

Landmark Supreme Court Decision Substantially Narrows the Applicability of the Dodd-Frank Whistleblower Provision

On February 21, 2018, the United States Supreme Court issued a landmark opinion substantially limiting the applicability of the whistleblower provision of the Dodd-Frank Act. In Digital Realty Trust, Inc. v. Somers, the Court was charged with interpreting the meaning of the term "whistleblower" in Dodd-Frank's anti-retaliation provision to decide whether an individual who only reports suspected securities violations internally qualifies as a Dodd-Frank "whistleblower," or if the statute requires the report to be made externally to the SEC. Relying largely on the plain language of the statute, the Supreme Court concluded that only those who report suspected violations externally to the SEC are "whistleblowers" under Dodd-Frank.

In reaching this conclusion, the Supreme Court greatly narrowed the class of individuals who qualify for Dodd-Frank whistleblower protection by excluding those who only report suspected violations internally (e.g., to supervisors, to internal compliance departments, etc.). Nonetheless, the Court found this to be the only interpretation supported by the text and history of Dodd-Frank for at least three reasons:

  1. Text of the Whistleblower Provision. The Court was most convinced by what it found to be the statute's "clear and conclusive" definition of "whistleblower." That definition, found in Section 78u-6(h)(6) of Dodd-Frank, explicitly references reports to the SEC as a requirement for protection: "The term 'whistleblower' means any individual who provides…information relating to a violation of the securities laws to the Commission." (emphasis added) Although Section 78u-6 also includes three clauses that clarify the scope of protected whistleblowing conduct, none of which contain an external reporting requirement, the Court found the definition still clearly applied given the statute's unambiguous instruction that the definitions "shall apply" throughout the entirety of Section 78u-6.

  2. Comparison to Another Whistleblower Provision. The Court was also persuaded by another whistleblower provision within Dodd-Frank that explicitly grants protection based on internal reporting. The anti-retaliation provision in Title 10 of Dodd-Frank, which created the Consumer Financial Protection Bureau (CFPB), prohibits discrimination against a "covered employee" who reports-internally or externally-a violation of a law subject to the CFPB's jurisdiction. This protection covers reports to the employer and to "State, local, or Federal, government authority or law enforcement agency," not just the CFPB. As the Court found, "[w]hen Congress includes particular language in one section of a statute but omits it in another[,]…this Court presumes that Congress intended a difference in meaning."

  3. Purpose Underlying Dodd-Frank. The Court also found its narrow interpretation of the whistleblower provision to match Congress's purpose in enacting Dodd-Frank. According to the legislative history, "[t]he 'core objective' of Dodd-Frank's robust whistleblower program…is 'to motivate people who know of securities violations to tell the SEC." (emphasis added) This very specific purpose attached to Dodd-Frank differed, the Court noted, from the more general purpose of the Sarbanes-Oxley Act to disturb the "corporate code of silence." The Court therefore concluded that because Dodd-Frank was specifically aimed at increasing reports to the SEC, the legislative history supported the narrower definition of whistleblower.

The Supreme Court's decision in this case will surely diminish the number of Dodd-Frank whistleblower cases. But its impact may not be all good news for employers. The decision could also lead to an uptick in employees reporting instances of suspected fraud directly to the SEC (rather than internally) to ensure they achieve whistleblower status. Given this possibility of increased SEC scrutiny, employers would be wise to review their compliance programs, and they should also consider additional policies or guidance encouraging employees (and making it easy and safe for them) to raise concerns internally.

It also remains to be seen whether the Supreme Court's decision will have a significant impact on any of the other myriad state and federal whistleblower laws. If nothing else, this decision provides the defense bar with powerful precedent to argue for narrower definitions of whistleblowing conduct where the statute in question either requires the report to be made externally-i.e., to a specific regulatory body or even to a particular category of government agencies (e.g., law enforcement)-or does not explicitly state that internal reporting affords whistleblower protection.

About the Author

Callan Stein

Callan Stein was formerly a litigation associate at Barrett & Singal, P.C. His practice focused on the areas of white-collar criminal defense, including securities and banking fraud, corporate and commercial civil litigation, and professional licensing.

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