SCOTUS To Hear If Dodd-Frank Protections Require SEC Reporting

Certiorari granted by SCOTUS to resolve question of whether a “whistle-blower” must report wrongdoings both internally in his organization and externally to the SEC to have legal protections against retaliation.

Case: Digital Realty Trust Inc. v. Paul Somers, case number 16-1276, at SCOTUS

re-blogged from

Law360, New York (September 1, 2017, 7:00 PM EDT) — Several business and trade groups have submitted friend-of-the-court briefs telling the U.S. Supreme Court that whistleblowers must report to the U.S. Securities and Exchange Commission to be protected from retaliation under Dodd-Frank, saying Congress intentionally set narrow protections.

The U.S. Chamber of Commerce, the Cato Institute and several other groups filed amicus briefs in support of Digital Realty Trust Inc.’s appeal of a Ninth Circuit decision finding a former executive can bring claims under the Dodd-Frank Act’s whistleblower anti-retaliation provision even though he didn’t report suspected securities law violations to the SEC.

The briefs, submitted on Wednesday and Thursday, argued that because the act defines “whistleblower” as someone who reports to the SEC, a provision prohibiting employers from retaliating against employees who make disclosures that are required or protected by the Sarbanes-Oxley Act only applies to employees who have reported both internally and to the SEC.

“The interpretation of the Dodd-Frank Act espoused by the Ninth Circuit in this case would greatly expand the number of employees authorized to pursue the enhanced remedies of the act, and the period of time in which they may sue for alleged retaliation, without yielding the law-enforcement benefits Congress intended when it enacted a ‘bounty’ and heightened protections for persons who complain to the SEC,” the U.S. Chamber of Commerce said in its brief.

The Supreme Court accepted Digital Realty’s petition for writ of certiorari in June, agreeing to review a Ninth Circuit opinion that revived former Digital Realty executive Paul Somers’ claims he was terminated based on false allegations of misconduct after he complained to senior management that a senior vice president had eliminated some internal corporate controls in violation of Sarbanes-Oxley.

A split panel of the appellate court ruled that Dodd-Frank’s whistleblower anti-retaliation provision “unambiguously and expressly protects” both those who report to the SEC and internal whistleblowers.

The provision in question, subdivision (iii) of Section 21F of Dodd-Frank, prohibits employers from discharging or discriminating against a whistleblower who makes disclosures that are required or protected by Sarbanes-Oxley.

Digital Realty filed its opening brief in mid-August, arguing that the Ninth Circuit and the SEC had adopted a definition of whistleblower more expansive than what Congress intended and diminished the role of the Sarbanes-Oxley Act’s parallel whistleblower regime.

The amicus briefs expanded on those points, as several groups argued that Congress meant to limit the anti-retaliation protections to SEC whistleblowers in order to encourage would-be tipsters to report suspected fraud to the agency.

Several of the briefs, including one submitted by the New England Legal Foundation and Associated Industries of Massachusetts, noted that Congress explicitly extended anti-retaliation protections to “employees” in both Sarbanes-Oxley and in the Dodd-Frank section creating the Consumer Financial Protection Bureau, but intentionally used “whistleblower” in the provision at issue.

“Dodd-Frank’s incentives and remedies are not severable from each other. Instead, they go hand in hand,” the New England Legal Foundation said. “And they are only available to the employee who has earned them both, by reporting information to the SEC.”

Applying Dodd-Frank’s protections to internal whistleblowers would also burden employers, the Center for Workplace Compliance argued, by making it more likely companies will have to simultaneously defend allegations in multiple forums.

A representative for the CWC, Jamie Novikoff of NT Lakis LLP, told Law360 on Friday that the issue of who is considered a whistleblower under Dodd-Frank has “significant legal and practical implications for our members.”

“Permitting an employee who only complained internally (but not to the SEC) of suspected corporate misconduct to access the enhanced remedies available under Dodd-Frank, could (among other things) embroil his employer in simultaneous SEC and OSHA investigations,” Novikoff said.

A brief submitted by Lime Energy Services Co. and Prestige Cruises International, both of which are battling Dodd-Frank retaliation claims from former employees who had not reported to the SEC, said the Ninth Circuit’s decision leaves companies vulnerable under Dodd-Frank’s long statute of limitations, which extends up to 10 years.

Lime pointed to a suit brought by a former employee two years after she was terminated, now stayed by a New Jersey federal judge, saying the claims serve “as an object lesson in how dilatory, opportunistic plaintiffs are incentivized by the decision below and decisions like it.”

The Cato Institute argued that the SEC’s own rule, which holds that the Dodd-Frank protections do apply to internal whistleblowers, is not entitled to Chevron deference because the agency did not give any notice in its rule proposal that it might include internal whistleblowers. By expanding its interpretation in the final rule without indicating it would do so, the brief said, the agency violated the Administrative Procedure Act.

The Cato Institute also nodded to some court members’ distrust of the “modern administrative state,” citing concurring opinions written by Justices Clarence Thomas and Neil Gorsuch, and suggested that the high court enforce the notice-and-comment protections of the APA as “one of the most fundamental protections the people have against an overreaching executive.”

A representative for Digital Realty declined to comment. Representatives for the remaining parties did not immediately respond to requests for comment.

Digital Realty is represented by Kannon K. Shanmugam, Amy Mason Saharia, A. Joshua Podoll and Meng Jia Yang of Williams & Connolly LLP and by Brian T. Ashe, Kiran A. Seldon, Shireen Y. Wetmore and Kyle A. Petersen of Seyfarth Shaw LLP.

Somers is represented by Peter K. Stris, Brendan S. Maher, Daniel L. Geyser and Douglas D. Geyser of Stris & Maher LLP and Stephen F. Henry of Stephen F. Henry Esq.

The Cato Institute is represented in-house by Ilya Shapiro and Frank Garrison. The U.S. Chamber of Commerce is represented by Steven J. Pearlman and Edward C. Young of Proskauer Rose LLP and in-house by Kate Comerford Todd, Steve P. Lehotsky and Janet Galeria. The NELF and AIM are represented by Benjamin G. Robbins and Martin J. Newhouse of NELF. The Center for Workforce Compliance is represented by Rae T. Vann and Jamie L. Novikoff of NT Lakis LLP. Lime Energy Services Co. is represented by Collin O’Connor Udell, Richard J. Cino and Joseph C. Toris of Jackson Lewis PC. Prestige Cruises International is represented by Kristen M. Fiore and Arlene K. Kline of Akerman LLP.

The case is Digital Realty Trust Inc. v. Paul Somers, case number 16-1276, at the Supreme Court of the United States.

–Editing by Rebecca Flanagan.

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