Ninth Circuit Joins Second Circuit in Adopting Broad Definition of “Whistleblower” Under The Dodd-Frank Act

March 16, 2017

A divided panel of the U.S. Court of Appeals for the Ninth Circuit recently ruled in Somers v. Digital Realty Trust Inc.1 that the Dodd-Frank Act’s definition of “whistleblower” includes not only those who disclose information to the Securities and Exchange Commission (SEC), but also employees who report alleged unlawful activity internally within their companies. 

The Ninth Circuit is the latest court of appeals to weigh in on this issue, siding with the Second Circuit’s broader definition of “whistleblower” over the narrower interpretation the Fifth Circuit adopted. The Ninth Circuit’s Somers decision is significant in that it (1) reflects the increasingly important role whistleblowers play in white collar enforcement; (2) highlights the importance to companies of developing robust internal procedures regarding whistleblowers; and (3) may increase the likelihood of Supreme Court review of what constitutes a “whistleblower” under the Dodd-Frank Act. 

Somers involved Digital Realty’s former vice president alleging that he was fired after making several internal reports to senior management regarding possible securities law violations at the company.2 Somers sued Digital Realty in the U.S. District Court for the Northern District of California. Somers invoked the anti-retaliation protections of the Dodd-Frank Act, specifically “subdivision (iii)” of Section 21F of the Securities Exchange Act of 1934. Subdivision (iii) prohibits employers from discriminating against whistleblowers who disclose suspected unlawful activities to “a person with supervisory authority over the employee.”3 Digital Realty moved to dismiss, citing to a separate provision of Section 21F that formally defines “whistleblower” as any individual who provides information “to the Commission.”4 The district court denied Digital Realty’s motion to dismiss. Last week, a Ninth Circuit panel in a 2-1 published decision affirmed the district court on interlocutory appeal.

In reaching its decision, the Ninth Circuit panel reasoned that the Dodd-Frank Act’s formal whistleblower definition was not exclusive because subdivision (iii) “unambiguously and expressly protects from retaliation all those who report to the SEC and who report internally.”6 The Court looked to the SEC’s regulation endorsing the broader definition and found it consistent with subdivision (iii)’s statutory language and Congress’s overall purpose in enacting Dodd-Frank.7 The panel majority held that a narrow definition would both “make little practical sense8 and undercut congressional intent.”9 

The Ninth Circuit panel in Somers acknowledged the circuit split between the Second and Fifth Circuits on the definition of “whistleblower” under Dodd-Frank. The Fifth Circuit in 2013 first considered the question in Asadi v. G.E. Energy (USA), L.L.C., strictly applying the formal definition of “whistleblower” to require the plaintiff to have disclosed to the SEC.10 Two years later, the Second Circuit came to a different conclusion in Berman v. Neo@Ogilvy LLC.11 Given the conflict between the formal definition and subdivision (iii), the Second Circuit found Section 21F to be ambiguous and applied the Supreme Court’s decision in Chevron12 to defer to the SEC’s rule recognizing whistleblowers who report externally or internally.13 Notably, the Ninth Circuit in Somers used a different analytical approach to ultimately reach a similar conclusion as the Second Circuit in Berman. Instead of basing its decision on Chevron deference, the Ninth Circuit applied statutory interpretation principles to find that Dodd-Frank’s whistleblower protections were meant to include those who report internally as well as those who also report directly to the SEC.14 

Somers is instructive in several ways. First, the decision is consistent with the overall trend toward the increased importance of whistleblower activities to white collar enforcement. Since Dodd-Frank established its new anti-retaliation protections and whistleblower awards in 2011 (a whistleblower can potentially receive between 10-30% of a monetary judgment from a successful enforcement action), the number of tips, complaints and referrals the SEC receives per year has increased significantly.15 Since launching the new program, the SEC has awarded 41 whistleblowers a total of approximately US$149 million.16 By broadening the scope of who qualifies as a whistleblower, Somers reinforces these trends and may be an important catalyst for white collar enforcement in the Ninth Circuit and elsewhere. 

Second, Somers highlights the need for companies to develop best internal practices to successfully address whistleblower complaints, create an incentive structure to encourage employees to internally report suspected wrongdoing, and foster a culture of compliance. When designing their programs, companies should avoid establishing policies that encourage internal reporting to the exclusion of reporting to the SEC. Since 2015, the SEC has indicated it will focus attention on employment agreements (including non-disclosure, confidentiality and severance agreements) that could potentially discourage employees from reporting problems directly to the SEC in violation of Rule 21F.17 Several six-figure settlements have been announced with corporations who had such agreements in place—e.g., agreements that prohibited employees from disclosing externally information they had already reported internally or required that outgoing employees waive their ability to obtain SEC whistleblower rewards.18 In the wake of Somers, companies must perform a careful balancing act of establishing comprehensive programs that encourage internal reporting while not running afoul of the SEC’s stated concerns about stifling whistleblower contacts with the government. 

Furthermore, companies should keep in mind that the Ninth Circuit’s decision in Somers likely increases the possibility that the Supreme Court may step in and issue the definitive word on who qualifies as a whistleblower under the Dodd-Frank Act. The decision in Somers both highlights an existing circuit split on the definition of whistleblower while also creating a further split between the Ninth and Second Circuits over the application of Chevron deference. The Regulatory Accountability Act of 2017, which passed the U.S. House of Representatives in January, seeks to repeal the Chevron standard where courts defer to agency interpretations of their own regulations. Should that bill become law, it would arguably undermine the Second Circuit’s holding in Berman. Somers may provide the Supreme Court an opportunity to resolve a definitional issue under the Dodd-Frank Act while simultaneously addressing the broader issue of Chevron’s utility to the modern administrative state. Finally, the Trump Administration has publicly stated its intention to roll back many provisions of the Dodd-Frank Act.19 It remains to be seen whether these efforts will be successful, and if so what impact (if any) they will have on the whistleblower provisions of the Dodd-Frank Act at issue in Somers.20 

Footnotes

1) Somers v. Digital Realty Trust Inc., No. 15-17352, --- F.3d ----, 2017 WL 908245, at *1 (9th Cir. Mar. 8, 2017).
2) Id. at *2.
3) The Dodd-Frank Act added its anti-retaliation provisions as Section 21F to the Securities Exchange Act of 1934. See 15 U.S.C. § 78u-6(h)(1)(A). Subdivision (iii) of § 78u-6(h)(1)(A) protects whistleblowers who make “disclosures that are required or protected under the Sarbanes-Oxley Act” which in turn protects disclosures made to “a person with supervisory authority over the employee.” See 18 U.S.C. § 1514A(a).
4) 15 U.S.C. § 78u-6(a)(6). 
5) In dissent, Judge Owens stated that he instead agreed with the Fifth Circuit’s narrower interpretation of “whistleblower.” See Somers, 2017 WL 908245, at *5.
6) Id. at *3.
7) Id. at *1.
8) The Court explained that a strict interpretation of the whistleblower definition would narrow subdivision (iii) “to the point of absurdity; the only class of employees protected would be those who had reported possible securities violations both internally and to the SEC, when the employer—unaware of the report to the SEC—fires the employee solely on the basis of the employee’s internal report. This reading is illogical.” Id. at *4 (citation omitted).
9) Id.
10) 720 F.3d 620 (5th Cir. 2013).
11) 801 F.3d 145 (2d Cir. 2015).
12) Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).
13) Berman, 801 F.3d at 155.
14) Somers, 2017 WL 908245, at *3-4.
15) In the first year of the Dodd-Frank Act’s new regime, the SEC received over 3,000 tips, complaints and referrals, amounting to an increase of approximately 17% over 2011. See SEC Annual Report on Dodd-Frank Whistleblower Program Fiscal Year 2012 at p.4 (Nov. 2012).
16) SEC Press Release 2017-27: SEC Announces $7 Million Whistleblower Award (Jan. 23, 2017).
17) SEC Annual Report on Dodd-Frank Whistleblower Program Fiscal Year 2015 at p.2 (Nov. 2015) (“Assessing confidentiality agreements for compliance with Rule 21F-17(a) will continue to be a top priority for OWB into Fiscal Year 2016.”).
18) See, e.g., SEC Press Release 2015-54: SEC: Companies Cannot Stifle Whistleblowers in Confidentiality Agreements (Apr. 1, 2015); Order Instituting Cease-And-Desist Proceedings, In the Matter of BlueLinx Holdings, Inc., No. 3-17371 at 1 (SEC Aug. 10, 2016); Order Instituting Cease-And-Desist Proceedings, In the Matter of Health Net Inc., No. 3-17396 (SEC Aug. 16, 2016).
19) See Ben Protess and Julie Hirschfeld Davis, Trump Moves to Roll Back Obama-Era Financial Regulations, N.Y. Times, Feb. 3, 2017; Gillian B. White, Trump Begins to Chip Away at Banking Regulations, The Atlantic, Feb, 3, 2017.
20) On February 3, 2017, President Trump signed an executive order directing the Secretary of the Treasury to meet with the various agencies that oversee and implement Dodd-Frank, including the SEC, and then report back to the President within 120 days regarding which existing laws should be changed. See Exec. Order No. 13772, 82 Fed. Reg. 9965 (Feb. 3, 2017).