The Supreme Court heard argument in Digital Realty Trust, Inc. v. Paul Somers, No. 16-1276. The case centers on the question of who is a whistleblower and entitled to the protections of the Dodd-Frank anti-retaliation provisions.
The complaint, filed by former Digital Realty executive Paul Somers, followed his dismissal after lodging complaints about possible securities law violations. The firm’s motion to dismiss, arguing that Mr. Somers was not a whistleblower as defined under Section 922 of Dodd-Frank because he did not report to the Securities and Exchange Commission, was denied by the district court. The ninth circuit affirmed. Somers v. Digital Realty Trust Inc., No. 15-17352 (9th Cir. Filed March 8, 2017). That ruling furthered a split among the circuits on the question of whether a whistleblower must file with the SEC or if it is sufficient to lodge a complaint with the firm under the Dodd-Frank provisions. See Berman v. Neo@Ogilvy LLC, 801 F. 3d 145 (2nd Cir. 2015)(agreeing with SEC that need not report to the agency first; the SEC also harmonized the statutory provisions with rules); but see Asadi v. G.E. Energy (USA) LLC, 720 F. 3d 620 (5th Cir. 2013)(rejecting SEC view).
The case turns on the construction of two Dodd-Frank provisions. One is Section 922(a)(6) which defines a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the . . .” SEC. The second is Section 922(h)(1)(A), the anti-retaliation provision, which states in part that “No employer may discharge . . . threaten, harass . . . a whistleblower . . . (i) in providing information to the Commission . . . (ii) in initiating, testifying in, or assisting . . . the Commission . . . (iii) in making disclosures that are required or protected under . . . [SOX] and any other law, rule, or regulation subject to the jurisdiction of the Commission.”
The arguments centered on three points. First, the primary position of each party regarding whether the statutory definition of whistleblower applies to all three subsections of 922(a)(6). Second, test for whether the Court could rule in a manner which ignored the statutory definition. Third, if the Commission’s rules were entitled to Chevron deference.
Petitioner Digital Realty began by framing the question: “The question presented in this case is whether the statutory definition of whistleblower applies to the subsection of the statute [922(a)(6)(iii)] that protects whistleblowers from retaliation from engaging in certain types of conduct. The answer to that question is yes. By its plain terms, the statutory definition applies to the entirety of the section, including the anti-retaliation provision. Far from being absurd, that plain text interpretation is entirely consistent with the history and the structure of the whistleblower provisions and with Congress’ overarching objective of promoting reporting to the SEC.”
Here Respondent did not report to the SEC. Justice Ginsburg asked about protections for employees who report internally first. Petitioner noted that “where an employee reports internally and then suffers an adverse action in the immediate aftermath of doing so, the Sarbanes-Oxley Act will provide protection.” This lead to questions by Justice Sotomayor about one of the so-called anomalies each party claimed resulted from the other’s reading of the sections: “So can you please tell me under your reading what we make of subdivision . . . [(ii)]? It protects from discrimination an employee who’s been fired for initiating, testifying in, or assisting in any investigation . . . of the Commission. Under what law is the employee who’s called by the SEC after another employee reports the violation . . .” protected. Petitioner responded that “I think you point up the reason why we actually think that our interpretation must be correct, and that is because the first and the second clauses . . . were already in the statute at the time that Congress made the judgment . . .[to] replace the broader term ‘employees, contractors, or agents’ with the narrower term, ‘whistleblower’ . . . Now, it may very well be that an individual in your circumstance is covered by the Sarbanes-Oxley Act . . .”
Justice Breyer then explored the question of whether the report from the whistleblower actually must be furnished to the SEC under Petitioner’s reading of the sections: “A question I would have for both sides really is, what do you think, is there any – could the SEC here promulgate a rule that would define the manner of reporting to the SEC, which manner would include the class of cases where the report or the information goes to an Audit Committee under circumstances such that, were the Audit Committee and others to do nothing about it, it would likely end up at the SEC’s window?”
Petitioner told the Justice that the SEC did not have the authority to write such a rule. To the contrary, to be a whistleblower, the report must be to the Commission. Petitioner went on to note that when the SEC engaged in rule making under the provisions here the notice “tracked the statutory definition and the SEC provided no indication in the notice of proposed rule-making that it was contemplating the possibility of dispensing with that [reporting] requirement.” Accordingly, there was no notice until the agency issued the final rule and “converted the one statutory definition of whistleblower into two,” covering all three subsections. Thus an invalid notice of rule making was issued, according to Petitioner. And, in any event, the SEC is not entitled to Chevron deference here because the sections involved are clear on their face, a position Justice Gorsuch later agreed with.
Respondent began by arguing that “Petitioner’s reading does create a serious anomaly. If anyone reports to the SEC at any time, it could be half a decade or a decade earlier on a completely unrelated issue, they’re a whistleblower for life. So any report they make at a later time is protected even if the information doesn’t get to the SEC.”
A greater anomaly in Petitioner’s potion, according to Respondent, is that “someone who reports internally, as they’re often required to do under Sarbanes-Oxley, and they’re immediately terminated. And then the second they walk out of that meeting they report to the SEC . . . that person isn’t protected under this [Dodd-Frank] provision.” Yet the entire reason Congress added subsection (iii) was to strengthen the remedies in SOX, according to Respondent. This is consistent with the fact that Congress recognized that the SOX protections needed to be strengthened.
Justice Gorsuch then began to explore the application of Chevron and the SEC’s rule making here – a point that repeated throughout the balance of the argument: “I’d like to talk about the notice and comment period . . It seems to me you’ve got this plain language problem, so you’ve got to generate an ambiguity. That’s the first step of your – your move [under Chevron]. Then the second step is that the SEC has reasonably resolved that ambiguity and that we should defer to it . . . then the rule comes out and says reporting to the Commission is not required, in an ipsi dixit unreasoned opinion, one line, basically, and then we have two circuits that actually gave deference to that interpretation. Now, that seems to me to put the whole administrative process on its head . . . Help me out of that scheme.”
Respondent walked the Justice through the notice and rule making process, arguing that the SEC had given notice. Citing the notice pages in the Federal Register, Respondent stated that “the agency specifically asked for comments about whether to broaden or change the definition of whistleblower for purposes of the anti-retaliation.” And there were three comments on the question. Later the Justice disagreed with Respondent’s reading of the notice.
Respondent concluded by arguing that only its reading of the sections gave protection to all those involved in the whistleblowing process: “This is critical whistleblower protections, and we don’t see any basis for carving those groups out of the statute.”
The Solicitor General began by stating that the “statutory definition of whistleblower is tailor-made for the awards program, but it does not fit in the retaliation programs. Giving the term its ordinary meaning in the retaliation context would harmonize the statute and avoid the anomalies that would result from woodenly applying the statutory definition.” This lead to an exchange with Justice Kagan regarding the circumstances under which the Court might actually ignore the definition. By the end of the argument both sides agreed that this could only happen in extreme circumstances to avoid an absurd result.
The Solicitor went on to argue that Petitioner’s reading of the sections would “eviscerate the incentive for internal reporting.” That would be contrary to what Congress sought to accomplish here which was to “bolster the remedies that were available under Sarbanes-Oxley.”
Justice Gorsuch then returned to the question of Chevron inquiring “would you agree, though, that a notice-and-comment rule-making that didn’t provide fair notice shouldn’t be deferred to?” The Solicitor responded: “I think in a properly presented challenge, that – that you wouldn’t be able to defer to that. I’ll — I’ll agree with that, Justice Gorsuch.” Justice Breyer followed-up stating “Are you wary of the government conceding that point? I would be wary of that because I don’t know what implications it has for other cases where, in fact, you start chipping away in an unforeseen way . . . [it was not] a lifetime concession on the part of the government, is it?” The Solicitor agreed it was not.
While the Justices probed each side with questions about “anomalies” and possible inconsistencies, throughout the discussion there seemed to be something of a consensus around the idea that whistleblowers under each subsection were protected. The only question was whether that protection came from SOX or Dodd-Frank. Likewise, there seemed to be little support for the SEC’s position or its rules. That is particularly true of Justice Gorsuch who repeatedly returned to the question of Chevron and deference and at one point seemed to be trying to extract a concession from the government – but for the follow-up questions from Justice Breyer. That exchange may well be the harbinger of future battles on the Court.
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