Time for Supreme Court to Weigh in on Scope of Dodd-Frank Act’s Anti-Retaliation Protection?
By Kenneth W. Gage, Mark D. Pollack, Kelsey G. Van Wart
In a 2-1 decision last week, the Second Circuit Court of Appeals created a circuit split over the scope of protection offered by the anti-retaliation protections contained in the Dodd-Frank whistleblower provision, Section 21F of the Securities Exchange Act of 1934. Disagreeing with the Fifth Circuit, the only other federal court of appeals that has addressed the issue, the Second Circuit in Berman v. Neo@Ogilvy LLC, held that the anti-retaliation protections in Section 21F extend to individuals who only report a potential violation of the securities laws internally to their employers. This increases the likelihood that the U.S. Supreme Court will need to weigh in on another statutory construction question involving the Dodd-Frank Act.
As part of the Dodd-Frank Act of 2010, Congress added Section 21F to the Securities Exchange Act of 1934, establishing a whistleblower bounty program for certain individuals who provide information to the SEC, defined as “whistleblowers,” and creating a private cause of action for violations of a new anti-retaliation provision.
Three provisions of Section 21F are relevant to this question.
First, the statute defines a “whistleblower” as “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.”
Second, the statute defines the “protected activity” for purposes of the anti-retaliation provision; it provides that employers may not take adverse employment actions against “a whistleblower because of any lawful act done by the whistleblower”—(i) in providing information to the SEC in accordance with that section; (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action by the SEC based upon or related to such information; or (iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002, the Securities Exchange Act of 1934, or any other law, rule, or regulation subject to the SEC’s jurisdiction.Notably, the first two of these forms of protected activity involve providing information to the Commission, and the last may involve disclosures only made internally to the individual’s employer.
Third, Section 21F grants rulemaking authority to the SEC “to issue such rules and regulations as may be necessary or appropriate to implement the provisions of this section consistent with the purposes of this section.”
The SEC’s final rule interpreting Section 21F was issued in 2011. It contains two definitions of the term “whistleblower”: one, for purposes of the bounty program, which requires that the individual provide information to the Commission, and another, for purposes of the anti-retaliation protection, which does not require that the individual provide information to the Commission. The latter encompasses an individual who engages in protected activity defined in Section 21F, regardless of whether she or he provided information to the Commission.
Federal district courts across the country have been divided over the issue, with a majority of them to date concluding that the SEC’s interpretation of Section 21F in the regulation is entitled to deference.
The District Court’s Decision in Berman
The plaintiff in Berman, a former Finance Director of Neo@Ogilvy North America, alleged that he reported a number of transactions to his employer that he believed to be violations of various securities laws, and that he was fired in retaliation for making his report in violation of Section 21F. The plaintiff did not report any of his concerns to the SEC prior to his discharge. The defendants moved to dismiss the plaintiff’s claims, arguing, among other things, that the plaintiff was not a whistleblower as defined by the Dodd-Frank Act at the time of the alleged retaliation because he had not reported any violations to the SEC.
District Judge Gregory H. Woods agreed with the Fifth Circuit’s analysis in Asadi, which Judge Woods found “rest[ed] on fundamental principles of statutory construction,” and “identified a harmonious interpretation of the statute that eliminates the purported contradiction in the Act that forms the basis of other district courts’ determination that the statute is ambiguous, despite the plain language of the definition of the term ‘whistleblower.’”
The Second Circuit’s Decision
The Second Circuit began, as all other courts have, by considering whether the statute is ambiguous. “We do not doubt,” the majority conceded, “that ‘provide … to the Commission’ means ‘provide … to the Commission,’” referring to the whistleblower definition in Section 21F.
The court ultimately concluded that Section 21F is ambiguous but struggled to get there. The majority acknowledged that there was no direct conflict between the whistleblower definition, which expressly requires a report to the Commission, and the absence of such a requirement in the broad third category of protected activity, which covers internal reporting.
All of this led the court to question whether Congress intended to include the broader category of protected activity “only to achieve such a limited result.” So the court then turned to the legislative history behind Section 21F for guidance, only to find that sub-section (iii) of the anti-retaliation provision was added to the Dodd-Frank Act in conference, after earlier versions of the bill were passed by the House and the Senate and that there is no mention of the addition of sub-section (iii) in any legislative materials. Nonetheless, the majority explained, “we think it doubtful that the conferees who accepted the last-minute insertion of subdivision (iii) would have expected it to have the extremely limited scope” given to it by the lower court’s ruling.
Finding no answers in the legislative history, the majority returned to where it began, by asking “whether the definition should apply to a late-added subdivision of a subsection that uses the defined term.”
In his dissent, Judge Jacobs acknowledged that he and his colleagues in the judiciary “[n]o doubt … could improve many federal statutes by tightening them or loosening them, or recasting or rewriting them.”
The most practical result from Berman is this: potential plaintiffs in the Second Circuit who only have complained internally to their employer about potential securities violations will now have the benefit of Dodd-Frank’s longer statute of limitations to assert retaliation claims and will be able to seek the additional remedy of double back-pay. These are benefits they would not have under Sarbanes Oxley. This is likely to make retaliation claims, already enjoying great popularity among employees and former employees who sue their employers, even more attractive to plaintiff and counsel alike. The decision, however, does not change how employers should respond to internal whistleblowers. Employers should continue to vigilantly investigate complaints to determine whether the securities laws have been violated and take steps to prevent adverse actions from befalling any whistleblower who reports or complains of such violations. More broadly, however, this dispute over the interpretation of Section 21F presents an interesting question of how the Supreme Court’s decision in Burwell may have impacted the approach that the lower federal courts will take in addressing what may to some appear to be curious or even dubious policy choices reflected in the plain language of statutes. Given the patent circuit split over the interpretation of the statutory provision, and the important policy implications associated with the decision to expand or limit the statute’s reach, we suspect that the Supreme Court is likely to soon address the issue and opine on whether the statute is indeed sufficiently ambiguous so as to warrant Chevron deference to the Commission’s interpretation.