Ninth Circuit Widens Split on Dodd-Frank Whistleblower Provisions

The Ninth Circuit joined the Second Circuit in concluding that the Dodd-Frank whistleblower provisions protect from retaliation those who report internally at the company but not to the SEC, despite the literal language of the statute. In reaching this conclusion the Circuit Court adopted a position that is consistent with that of the SEC but which has previously been rejected by the Fifth Circuit, widening the split among the circuits. Ultimately the question will need to be resolved by the Supreme Court. Somers v. Digital Realty Trust Inc., No. 15-17352 (9th Cir. Filed March 8, 2017).

Plaintiff-Appellee Paul Somers was employed as a vice president at Defendant-Appellant Digital Realty Trust, Inc. During his four year tenure with the firm, which ended in 2014, he made several reports to senior management regarding possible securities law violations by the company. He was terminated. Prior to being terminated Mr. Somers did not report his concerns to the SEC.

Subsequently, Mr. Somers filed suit against Digital Realty alleging violations of Exchange Act Section 21F and other laws. That Section includes an anti-retaliation provision passed as part of Dodd-Frank. The Section provides in part that “No employer may discharge . . . a whistleblower . . . because of any lawful act done by the whistleblower – (i) in providing information to the Commission in accordance with this section; (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon. . . such information. . . (iii) in making disclosures that are required or protected under the Sarbanses-Oxley Act . . .”

Defendant moved to dismiss in the District Court, arguing that Mr. Somers was not a whistleblower under Dodd-Frank. Specifically, Section 21F defines a whistleblower as “any individual who provides . . . information relating to a violation of the securities laws to the Commission. . .” Since Mr. Somers did not provide information to the SEC, Digital Realty argued he was not protected by the Section. The District Court denied the motion after an extensive examination of the statutes and their legislative history. That determination is in accord with Berman v. Neo@Ogilvy LLC, 801 F. 3rd 145 (2nd Cir. 2015) but contrary to the decision in Asadi v. G.E. Energy (USA) LLC, 720 F. 3d 620 (5th Cir. 2013). The District Court certified the question to the Ninth Circuit for review.

The Ninth Circuit affirmed. The case “must be seen against the background of twenty-first century statutes to curb securities abuses” the Court began. In 2002 Sarbanes-Oxley was passed to safeguard investors following a financial scandal. A key part of the Act requires internal reporting by lawyers working for public companies, a provision which is similar to obligation imposed on auditors by the Exchange Act. SOX protects those professionals and others who lawfully provide information to federal agencies, Congress or “a person with supervisory authority over the employee.”

Dodd-Frank, like SOX, was passed in the wake of a financial scandal. Section 21F contained a provision protecting whistleblowers from retaliation. The term whistleblower was defined as anyone who reports to the SEC “in a manner established, by rule or regulation, by the Commission.” The anti-retaliation provision provides protections to those who (i) furnish information to the SEC, (ii) testify or assist the Commission or (iii) make disclosures that are required or protected under SOX. This broad prescription evidences an intent to cover more than just those who report to the SEC since under SOX auditors, lawyers and others who report to their supervisor but not the Commission are protected. It would thus be illogical to confine the protections to only those who report to the Commission. While there is a split on this question between the Second and Fifth Circuits, the Court found that when the SOX and Dodd-Frank provisions are read together it is clear that the anti-retaliation provisions were designed to cover those who report to the Commission and internally.

Circuit Judge Owens dissented, citing the decision of the Fifth Circuit in Asadi.

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