In a unanimous ruling in Digital Realty Trust v. Somers, the U.S. Supreme Court has narrowed whistleblower protections in the Dodd-Frank Act that shield employees who report potential securities law violations. As a result, employees who report suspected violations internally but do not report the suspected violations to the U.S. Securities and Exchange Commission are not entitled to rely on the anti-retaliation protections and associated penalties afforded by Dodd-Frank. The SEC had previously interpreted Dodd-Frank to protect individuals from retaliation where the individuals had reported suspected securities law violations internally, i.e., without notifying the SEC of the employee’s concerns. Although the Supreme Court’s February 21 ruling now insulates public companies from such whistleblower retaliation suits, the decision may increase the likelihood that employees will bypass internal corporate reporting mechanisms and raise their concerns directly with the SEC.
Plaintiff Paul Somers was a vice president of San Francisco investment firm Digital Realty Trust. Somers claimed he had been fired shortly after notifying his supervisor of possible securities law violations and therefore sued Digital Realty for whistleblower retaliation under Dodd-Frank. Denying Digital Realty’s motion to dismiss, the district court ruled that Dodd-Frank’s anti-retaliation protections extended to whistleblowers who report internally, without providing information about the suspected securities law violation to the SEC. The Ninth Circuit affirmed.
The Supreme Court’s ruling resolved an emerging circuit split between the Ninth Circuit’s decision (and a similar Second Circuit decision) and the Fifth Circuit, which had previously ruled that a whistleblower must report to the SEC to receive Dodd-Frank whistleblower protection.
The Supreme Court reversed the Ninth Circuit, holding that the plain language of Dodd-Frank limits whistleblower protections to employees who report suspected violations to the SEC. In reaching that decision, the Court rejected arguments by the Solicitor General that the purpose of Dodd-Frank’s whistleblower retaliation provisions would be gutted if internal reporters were not also protected.
Writing for the Court, Justice Ruth Bader Ginsburg concluded that the definition section of Dodd-Frank provided an “unequivocal answer” to the question of who the whistleblower retaliation provision was meant to protect: “[T]he anti-retaliation provision does not extend to an individual, like Somers, who has not reported a violation of the securities laws to the SEC.”
The Court’s decision provides certainty to companies and clarity to would-be whistleblowers about the scope of the anti-retaliation protections. Companies will not face retaliation suits and steep penalties from “internal-only” whistleblowers. But the narrowed protection for whistleblowers may come at a significant cost to public companies.
Whistleblower complaints to public company boards, general counsel or auditors have proliferated in recent years, occupying management teams and directors for months or longer as complaints are investigated and, if necessary, resolved or remediated. Most of those investigations proceed internally, outside the scrutiny and without the attendant cost and disruption of reporting findings to regulators or the public.
Although internal-only whistleblowers are still protected from retaliation under Sarbanes-Oxley, Digital Realty may prompt whistleblowers who would otherwise report their concerns internally to now report those concerns to the SEC. The result would be an increase in SEC whistleblower investigations, together with all of the attendant costs, reputational harm and diversion of resources. As a result, companies would be well served to: