No SEC report, no “whistleblower” problem

Second Circuit allows Dodd-Frank retaliation claim

Publication September 2015

On Thursday, September 10, the Second Circuit issued the second appellate decision interpreting the scope of the anti-retaliation provision protecting whistleblowers under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Berman v. Neo@Ogilvy LLC, No. 14-4626 (2d Cir. Sep. 10, 2015). The panel's decision adopts an expansive definition of who qualifies as a "whistleblower" entitled to bring an anti-retaliation claim under Dodd-Frank, creating a circuit split with the Fifth Circuit's decision in Asadi v. G.E. Energy (USA) LLC, 720 F.3d 620 (5th Cir. 2013).1

Enacted in response to the 2008 financial crisis, the Dodd-Frank Act provides for substantial whistleblower protections and incentives, including significant monetary awards for employees of public companies and their subsidiaries who report possible securities laws violations to the SEC. In addition to these bounty provisions, the act also contains protections for whistleblowers against retaliation. Employees who reported wrongdoing had preexisting protection against retaliation under the Sarbanes-Oxley law, but Dodd-Frank's anti-retaliation provision is significantly broader, allowing whistleblowers to file suit in federal court without first pursuing claims through the Department of Labor, providing increased potential damages, and offering a dramatically lengthened statute of limitations.

Since Dodd-Frank was enacted, there has been a simmering dispute over whether an employee must report his allegations of wrongdoing to the SEC in order to bring a claim under the anti-retaliation provision, or whether merely reporting internally is sufficient. The statute provides that "No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment" for three categories of protected conduct: (1) providing information to the SEC; (2) participating in an investigation or proceeding of the SEC based upon reported information; or (3) "making disclosures that are required or protected under the Sarbanes-Oxley Act," the Securities Exchange Act, 18 U.S.C. § 1513(e), or "any other law, rule, or regulation subject to the jurisdiction of the" SEC. 15 U.S.C. § 78u-6(h)(1)(A) (emphasis added). And "whistleblower" is defined in Dodd-Frank to mean "any individual who provides . . . information relating to a violation of the securities laws to the Commission. . . ." Id. § 78u-6(a)(6) (emphasis added). A number of courts have held, therefore, that only a person who reports to the SEC qualifies as a "whistleblower" who can bring an anti-retaliation claim under Dodd-Frank; an individual who makes only an internal report can pursue remedies available under Sarbanes-Oxley, but not Dodd-Frank. See, e.g., Asadi, 720 F.3d at 625.

When the SEC promulgated rules implementing Dodd-Frank in 2011, however, it stated that an employee could qualify as a "whistleblower" "[f]or purposes of the anti-retaliation protections" if the employee "provide[s] that information in a manner described in [§ 78u-6(h)(1)(A)]," which in turn includes the provision for internal reporting under Sarbanes-Oxley.2 See 17 C.F.R. § 240.21F-2(b). Some lower courts have rejected the plain language approach exemplified by Asadi and deferred to this SEC interpretation. The Second Circuit's decision in Berman is the first appellate court to adopt this view.

In Berman, relying on the SEC's administrative interpretation, the court concluded that Dodd-Frank's anti-retaliation provisions were ambiguous and that an individual does not have to make a report to the SEC to qualify as a "whistleblower" despite the statute's definition of a "whistleblower" as a person who reports possible securities laws violations "to the Commission." The lynchpin of the court's decision was the "arguable tension between the definitional subsection . . . which defines 'whistleblower' to mean an individual who reports violations to the Commission, and subdivision (iii) of subsection 21F(h)(1)(A) [§ 78u-6(h)(1)(A)], which, unlike subdivisions (i) and (ii), does not within its own terms limit its protection to those who report wrongdoing to the SEC" but instead "expands the protections of Dodd-Frank to include the whistleblower protection provisions of Sarbanes-Oxley." While recognizing there was no "absolute contradiction," to applying the statute as written, the panel majority nonetheless found that this reading "would leave that subdivision [related to reporting under Sarbanes-Oxley] with an extremely limited scope." The court concluded it was "doubtful that the conferees who accepted the last-minute insertion of subdivision (iii) would have expected it to have the extremely limited scope it would have if it were restricted by the Commission reporting requirement in the 'whistleblower' definition. . . ." As a result, the court concluded it was appropriate to defer to the SEC's interpretation.

Judge Jacobs issued a forceful dissent, concluding that the statute was not ambiguous, observing that "[t]he thing about a definition is that it is, well, definitional." Judge Jacobs wrote the "more natural reading of the statute" was that it only applied to individuals who reported possible securities violations to the SEC and rejected the majority's "deference to an SEC regulation that alters the unambiguous definition of 'whistleblower'" in Dodd-Frank. Judge Jacobs agreed with the Fifth Circuit, which concluded in Asadi that "[u]nder Dodd-Frank's plain language and structure, there is only one category of whistleblowers: individuals who provide information relating to a security law violation to the SEC." Moreover, he argued that "the majority has no support for the proposition that when a plain reading of a statutory provision gives it an 'extremely limited' effect, the statutory provision is impaired or ambiguous. The U.S. Code is full of statutory provisions with 'extremely limited' effect." The panel majority's decision, Judge Jacobs stated, "creates a circuit split, and places us firmly on the wrong side of it."

As a result of Berman, the scope of the Dodd-Frank anti-retaliation remedy depends on where a business is located. For now, at least, employers subject to suit in the Second Circuit confront a more expansive retaliation cause of action than do employers subject to suit in the Fifth Circuit. It would not be surprising if the Supreme Court stepped in to settle this question, either on further appeal in Berman or another appropriate case.


1 Norton Rose Fulbright represented the defendant in Asadi.

2 In response to the Asadi decision, the SEC recently issued a release to "clarify" its view that the applicability of the anti-retaliation provision "does not depend on adherence to the reporting procedures" specified in other portions of the SEC rule. SEC Release No. 34-75592, 2015 WL 4624264 (Aug. 4, 2015).

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