Supreme Court Narrows Definition of Whistleblower Under Dodd-Frank

In an effort to eradicate corporate fraud, Congress passed the Sarbanes-Oxley Act of 2002 (SOX), and then the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). While both Acts protect whistleblowers from retaliation, they differ in several important respects. 

Among them, SOX whistleblowers cannot take their complaints straight to federal court. Instead, they must first file an administrative complaint with the Department of Labor, and they must do so within just 180 days of the alleged retaliation. Conversely, Dodd-Frank contains no such administrative exhaustion requirement. Instead, Dodd-Frank plaintiffs can bring their complaints of retaliation straight to federal court. In addition, Dodd-Frank plaintiffs enjoy a substantially longer statute of limitations—employees have six years from the date of the alleged retaliation or three years from the date of the discovery of the alleged retaliation (whichever is later) in which to bring a complaint. And unlike their SOX counterparts, successful Dodd-Frank plaintiffs are entitled to greater damages, including double back pay.

The Decision

Given these significant differences, it is not surprising that since its implementation, many have preferred to pursue their whistleblower retaliation claims under Dodd-Frank. But with its February 21, 2018 decision in Digital Realty Trust, Inc v. Somers, the Supreme Court has significantly curtailed their ability to do so. Specifically, SOX’s anti-retaliation provision extends to individuals who report fraud or SEC violations to: (1) an internal supervisor, (2) Congress, (3) the SEC, or (4) any other federal agency. In Digital Realty Trust, however, the Court made clear that Dodd-Frank’s anti-retaliation provision is limited to a much narrower group. Only individuals who have reported a violation of securities laws to the SEC may pursue a retaliation claim under Dodd-Frank. 

To reach its conclusion, the Court needed to look no further than Dodd-Frank’s narrow definition of a whistleblower: “any individual who provides…information relating to a violation of the securities laws to the Commission.” 15 U.S.C. §78u-6(a)(6). That this definition applied to the statute’s anti-retaliation provision was further evident from the statute’s stated purpose and design. “The ‘core objective’ of Dodd-Frank’s robust whistleblower program…is to ‘motivate people who know of securities law violations to tell the SEC.’”

The Impact

Prior to Digital Realty Trust, several federal courts—including the Second and Ninth Circuit Courts of Appeals—permitted plaintiffs to proceed on claims of whistleblower retaliation under the more generous Dodd-Frank Act although those plaintiffs had made only internal whistleblower reports to management. Under the Court’s decision, such claims are no longer viable. Employees who make only internal reports of suspected fraud or SEC violations must now satisfy the more stringent requirements of SOX to pursue a whistleblower retaliation claim.

What Should Employers Do

One possible drawback of the Court's ruling in Digital Realty Trust is that it may remove incentives for employees to first report suspected fraud or SEC violations internally. To combat this potential, employers should develop a corporate culture which fosters internal reporting, including by developing policies and practices which allow employees multiple avenues to report concerns of corporate wrongdoing and retaliation, and requiring prompt investigation and resolution of those concerns.

• Fred Gants: (608) 283-2618 / fred.gants@quarles.com
• Lindsey W. Davis: (414) 277-3073 / lindsey.davis@quarles.com