Alerts

Supreme Court to Determine Whether Internal Whistleblowers Are Protected From Retaliation

Alerts / July 5, 2017

On June 26, 2017, the Supreme Court granted certiorari on an issue that has long divided the federal courts: whether a whistleblower is entitled to protection from retaliation for blowing the whistle internally even if he or she doesn’t report to the Securities and Exchange Commission (SEC).[1]

The Supreme Court granted certiorari of the Ninth Circuit Court of Appeals’ decision in Somers v. Digital Realty Trust Inc. et al.,[2] which upheld the ability to bring anti-retaliation claims by a whistleblower who did not make a report to the SEC. The Ninth Circuit’s decision held that the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (Dodd-Frank) “anti-retaliation provision unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally” (emphasis added).[3]

However, many courts have found that these provisions are anything but “unambiguous.” In his dissent in the Somers case, the Ninth Circuit’s Judge John B. Owens recognized (and came out on the opposite side of) the ongoing circuit split regarding this interpretation of Dodd-Frank.[4]

The circuit split stems from interpretation of Section 21F(h)(1)(A)(iii) of the Securities Exchange Act of 1934 (Exchange Act), as promulgated under Dodd-Frank. This provision prohibits employers from retaliating against “whistleblowers” for, inter alia, “making disclosures that are required or protected under” the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), the Exchange Act, 18 U.S.C. § 1513(e), “and any other law, rule, or regulation subject to the jurisdiction of the Commission.”[5] Among other laws, rules and regulations, several provisions of Sarbanes-Oxley require or protect reporting of alleged securities violations internally, without regard to further reporting to the SEC.[6]

At the same time, Section 21F(a)(6) of the Exchange Act limits the definition of “whistleblower” to “any individual who provides . . . information relating to a violation of the securities laws to the Commission.”[7] In reading this definition of “whistleblower” together with Dodd-Frank’s anti-retaliation provision, both of which were specifically enacted by the same legislation, some courts have held that so-called internal whistleblowers (who never report to the SEC) are out of luck.

In 2013, the Fifth Circuit Court of Appeals in Asadi v. GE Energy USA LLC[8] held that the “plain language and structure of the whistleblower-protection provision . . . unambiguously requires individuals to provide information relating to a violation of the securities laws to the SEC to qualify for protection from retaliation.” Two years later, a divided panel of the Second Circuit Court of Appeals in Berman v. Neo@Ogilvy[9] held the opposite. Acknowledging the “tension between” Dodd-Frank’s definition of “whistleblower” and its anti-retaliation provision, which “renders section 21F as a whole sufficiently ambiguous,” the Second Circuit held that the court would defer to the SEC’s reasonable interpretation of the applicable statutes.[10]

Less than two months ago, the SEC filed an Amicus Brief in the Seventh Circuit Court of Appeals addressing this very issue. It is the SEC’s position, in keeping with its own Rule 21F-2(b)(1), that whistleblower anti-retaliation protections “extend to any individual who engages in the whistleblowing activities described in Section 21F(h)(1)(A) [of the Exchange Act], irrespective of whether the individual makes a separate report to the Commission.”[11] It has urged deference to its interpretation of the relevant statutes, arguing that protecting internal reporters from retaliation is important to its enforcement efforts.
The SEC therefore submitted a brief in support of the appellant in Verfuerth v. Orion Energy Sys., Inc., whose whistleblower retaliation claim under Sarbanes-Oxley had been summarily dismissed by the Eastern District of Wisconsin because he blew the whistle internally rather than to the SEC.[12] The District Court had concluded that “[s]imply telling a person he might be committing fraud is not whistleblowing.”

With the Supreme Court set to rule on this issue, whistleblowers and companies will soon have much-needed clarity on the scope of the applicable anti-retaliation protections should employees choose to make an internal report before reaching out to the authorities.[13]

If you have any questions about this alert, please contact Tracy Cole at tcole@bakerlaw.com or +1.212.589.4228 or Marc D. Powers at mpowers@bakerlaw.com or +1.212.589.4216 or any member of BakerHostetler’s Whistleblower and Compliance or Securities Litigation and Regulatory Enforcement team.

Authorship credit: Tracy Cole and M. Elizabeth Howe


[1] See Order List, June 26, 2017, available at https://www.supremecourt.gov/orders/courtorders/062617zor_8759.pdf.
[2] Somers v. Digital Realty Trust Inc. et al., No. 15-17352 (9th Cir. Mar. 8, 2017), available at http://cdn.ca9.uscourts.gov/datastore/opinions/2017/03/08/15-17352.pdf.
[3] Id. at 9.
[4] Id. at 13.
[5] 15 U.S.C. § 78u-6(h)(1)(A)(iii).
[6] See, e.g., Sarbanes-Oxley §§ 307 (requiring disclosures by attorneys to general counsel), 806 (protecting disclosures to a supervisor or compliance officer at a public company).
[7] 15 U.S.C. § 78u-6(a)(6) (emphasis added).
[8] Asadi v. GE Energy USA LLC, No. 12-20522 (5th Cir. Jul. 17, 2013), at 15 (emphasis in original), available at http://www.ca5.uscourts.gov/opinions%5Cpub%5C12/12-20522-CV0.wpd.pdf.
[9] Berman v. Neo@Ogilvy LLC, No. 14-4626 (2d Cir. Sep. 10, 2015), at 4, available at https://www.sec.gov/about/offices/owb/berman-v-neo-ogilvy-llc.pdf.
[10] Id. at 28.
[11] See Brief of the Securities and Exchange Commission, Amicus Curiae in Support of the Appellant and Reversal of the District Court, Verfuerth v. Orion Energy Sys., Inc., No. 16-3502 (7th Cir. May 5, 2017) (Amicus Brief), at 1, available at https://www.sec.gov/litigation/briefs/2017/verfuerth-vs-orion-energy-050517.pdf.
[12] Id.
[13] See Decision and Order, Verfuerth v. Orion Energy Sys., Inc., No. 14-C-352 (E.D. Wisc. Aug. 25, 2016) (ECF No. 116), at 11.

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