Decision Creates Dodd-Frank Whistleblower Circuit Split

By Max Scharf

The Dodd-Frank Act protects whistleblowers from retaliation by their employer. However, to get that protection as a whistleblower, to whom must a concerned citizen disclose their information? That is a complicated question. Subdivision (iii) of subsection 21F(h)(1)(A) of the Dodd-Frank Act provides protection against retaliatory discharges, discrimination, and demotions for whistleblowing employees who make disclosures protected by the Sarbanes-Oxley Act, which includes disclosures made internally, without any notification to the SEC.

Subsection 21F(a)(6) of the Dodd-Frank Act provides that “‘whistleblower’ means any individual who provides…information relating to a violation of the securities laws to the [SEC].”

Here is the problem: 21F(a)(6) unambiguously requires disclosure of the wrongdoing to the SEC, and subdivision (iii) unambiguously protects whistleblowers who only disclose the wrongdoing internally to their employer (without any disclosure to the SEC). It appears that these two provisions directly contradict each other. Given a literal reading, 21F(a)(6) would exclude internal whistleblowers from the Act’s protections despite subdivision (iii)’s protections. Surely, this cannot be the way the Act was intended to be construed; why would Congress include subdivision (iii), only to have it partially negated by a different subsection. Judge Newman of the Second Circuit Court of Appeals opines that these provisions are “in tension.”

In order to resolve this tension, federal district courts have struggled to interpret what Congress meant by 21F(a)(6)’s phrase “provides…to the [SEC].” Did they intend to provide protection for employees who (1) disclose the violation first to their employer, before providing the information to the SEC or did they intend to only protect employees who (2) do not speak to their employer prior to disclosing the violation to the SEC? US circuit courts have split over the answer to this question.

As the first circuit court to address this issue, the Fifth Circuit interpreted the Act’s protections to only protect whistleblowers that initially report the wrongdoing to the SEC. In Asadi v. G.E. Energy United States, Asadi sued GE Energy claiming he was unlawfully fired after he reported internally, to his supervisor, his concerns that his co-worker may be illegally attempting to curry favor with an Iraqi official. The Asadi court reasoned that the Act does not cover employees like Asadi because the plain language of 21F(a)(6) requires the whistleblower to disclose the wrongdoing to the SEC. The court contended that any other construction of the statute would render the phrase “to the [SEC]” superfluous.

A few weeks ago, the Second Circuit provided a conflicting interpretation. In Berman v. Neo@Ogilvy LLC, Berman sued Neo@Ogilvy, alleging they unlawfully fired him because he reported accounting violations, internally, to senior company officials. Berman did not report the accounting violations to the SEC before he was fired. The court reasoned that whether Dodd-Frank protects a whistleblower who reports only to his employer, and not to the SEC, is a “sufficiently ambiguous” question. To resolve the ambiguity, the court deferred to the SEC’s interpretation.

What did the SEC say? Shortly after Dodd-Frank was enacted, the SEC issued a release which defined whistleblowers as including “individuals who report to persons… other than the [SEC].” On those grounds, the Second Circuit held that the Dodd-Frank Act protects employees from retaliation because of an internal disclosure of a violation, even though the employee never made a disclosure to the SEC.

The differing approaches presented by the Fifth and Second Circuits, while nuanced and complex, actually represent yet another chapter of the never-ending debate: do we apply (A) the plain language of the law or (B) the underlying intent of the law? I will not pretend to end this long-running series with 905 words in a JLPP blog post, but – at least with respect to the whistleblower provision of the Dodd-Frank Act – the stronger policy arguments belong to the Act’s underlying intent for three main reasons.

First, applying the plain language of the statute would be bad for employers. Employers are certainly better positioned when the Act, by protecting internal disclosures, provides an incentive for employees to report the violation internally; this way, the employer has an opportunity to investigate and fix the problem before the SEC regulators ever have the chance to get involved.

Second, a literal reading of the Act ignores the “realities of the legislatives process.” The Berman court points out that subdivision (iii) was inserted into the Act at the last minute, in an attempt to reconcile House and Senate bills, each of which was hundreds of pages long. The Second Circuit called the subdivision “a kind of legal Lohengrin; . . . no one seems to know whence it came.” It feels unwise to construe literally the words of legislators who most likely failed to notice “that the new subdivision and the definition of “whistleblower” do not fit together neatly.”

Third, courts should rely on the underlying intent of the Act and provide protection for internal whistleblowers because there are many employees who are required to make disclosures internally before reporting to the SEC. There is no clear reason for excluding these employees from the Act’s protections. For example, auditors of a public company often are required to inform the company’s board or management before they are able to report to the SEC. Attorneys are subject to similar restrictions. Since the Act’s purpose is to expose and deter corporate wrongdoing through protection of whistleblowing employees, it seems unlikely that Congress intended to exclude attorneys and auditors from the Act’s protections.