Supreme Court Limits Financial Whistleblower Protections Only To Individuals Who Report Violations Directly To The SEC

March 9, 2018

On February 21, 2018, the U.S. Supreme Court issued a unanimous decision holding that the anti-retaliation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act do not extend to employees who report suspected securities law violations solely to their employer and not the U.S. Securities and Exchange Commission (“SEC”). The Court determined that, for Dodd-Frank’s anti-retaliation protections to apply, employees must report suspected securities law violations directly to the SEC prior to suffering any retaliatory conduct. The Court’s decision sends an unequivocal message to financial whistleblowers: Run, don’t walk, to the SEC.

In Digital Realty Trust, Inc. v. Somers, Paul Somers, a former vice-president of Digital Realty Trust, Inc., alleged that the company unfairly terminated him after he reported securities law violations to Digital Realty’s senior management. Somers had not alerted the SEC. After being fired, Somers sued Digital Realty alleging an anti-retaliation claim (among others) under the Dodd-Frank Act. Digital Realty moved to dismiss Somers’s anti-retaliation claim arguing that he did not qualify as a whistleblower under the Dodd-Frank Act because he failed to report any potential securities law violations to the SEC prior to his termination. When both the district court and Ninth Circuit sided with Somers, the Supreme Court took the Company’s appeal.

In order to resolve the issues raised in Digital Realty, the justices were required to determine whether the anti-retaliation provisions for “whistleblowers” in the Dodd-Frank Act extend to individuals who never reported the alleged misconduct to the SEC. Plaintiff Somers took the broad view. He argued that the general whistleblowing provisions expressly protect employees who raise concerns either internally at their companies or externally to the SEC. Thus, Somers argued, despite more limiting statutory language for the anti-retaliatory provisions, it would only make sense that those provisions should similarly apply broadly to both internal and external reporting. The SEC agreed with Somers’s argument. In response, Digital Realty argued for a narrow interpretation of the statutory language—that the plain language of Dodd-Frank was clear and only people who file with the SEC qualify as whistleblowers under the statute’s anti-retaliations protections.

The Court sided with Digital Realty, holding that the Dodd-Frank Act’s anti-retaliation provisions do not extend to an individual, such as Somers, who did not report a securities law violation to the SEC. The Court’s decision relied on the statute’s plain language, which defined a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities law to the Commission.” The Court determined that the statute’s language was sufficiently clear to preclude the more expansive interpretation of the term “whistleblower” argued for by Somers. The Court recognized that while the conduct protected is broad (covering internal and external reporting), who is covered is not. Rather, the Court recognized that the “core objective” of the whistleblower program is “to motivate people who know of securities law violations to tell the SEC.”

“By focusing on a limited reading of the term ‘whistleblower,’ the Court has undermined Dodd-Frank’s delicate balance of providing broad whistleblower protections while at the same time promoting the use of internal reporting mechanisms,” commented Berman Tabacco Partner Bryan A. Wood. “In effect, the decision puts the cart before the horse by forcing employees who seek to preserve the statute’s retaliation protections to bring their concerns straight to the SEC before they have even alerted their employer of potential wrongdoing.”

By properly reporting any potential misconduct to the SEC before reporting internally, a whistleblower can preserve any Dodd-Frank Act based anti-retaliation claims. This decision reinforces the need for potential securities-law whistleblowers to retain competent counsel to protect their rights.