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Dodd-Frank Whistleblower Rules May Get a Supreme Court Showdown

The SEC has filed a series of friend-of-the-court briefs defending its rules that protect corporate whistleblowers from retaliation by their employers. The dispute, which revolves around competing interpretations of a Dodd-Frank Act provision, is likely headed for the Supreme Court, one attorney predicted.

The SEC in August 2015 filed four appeals court briefs defending its whistleblower protection rules.

The cluster of filings is another sign that the dispute, which revolves around competing interpretations of a Dodd-Frank Act provision, is coming to a head. At question is the scope of the protection that Dodd-Frank affords employees who report misconduct — specifically, whether the protections apply only to those who go directly to the SEC, or whether they extend to those who first report wrongdoing internally or to other authorities.

“I think certainly, as the number of cases on this question of who is a whistleblower expands in terms of district courts and a number of appellate courts now, I think the SEC wants to be at the table and be heard,” said Jill Rosenberg, a partner with Orrick, Herrington & Sutcliffe LLP, who defends employers in whistleblower cases. “It’s an important issue for them. It’s an important issue for the employer community.”

The question, she added, is “probably a long way from being resolved” and likely headed for the Supreme Court.

The commission, in its briefs, argues for its own more expansive definition of “whistleblower,” urging the courts to defer to its rules in Release No. 34-64545,Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934 .

The rules, finalized in 2011, confer anti-retaliation protections to employees who report a possible violation of securities laws, “irrespective of whether the individual makes a separate report to the commission,” the SEC wrote in its brief for Vincent Beacom v. Oracle America Inc.

The Beacom case, which is being heard before the U.S. Court of Appeals for the Eighth Circuit, revolves around a former vice president at the software giant who says he was fired in 2012 after confronting his superior over “fraudulent revenue forecasts.” Beacom claimed protections under the anti-retaliation provisions of both Dodd-Frank and the Sarbanes-Oxley Act of 2002 . In March, a U.S. District Court judge in Minnesota sided with Oracle and tossed out the case.

Oracle in a July 24 brief said Beacom failed to hit sales goals, was “disgruntled and disengaged” after he was passed up for a promotion, and publicly campaigned against the person selected for that promotion.

The SEC’s amicus brief does not comment on the merits of Beacom’s case. Instead, it asks the court to follow the commission’s interpretation in Release No. 34-64545 and contradict a 2013 ruling by the Fifth Circuit Court of Appeals in Asadi v. GE Energy that narrowed the definition of whistleblower only to those who report misconduct to the SEC.

The SEC warns of “severe” consequences should other appeals courts follow the Asadi ruling, which risks leaving workers “more exposed to the risks of employment retaliation.” With Release No. 34-64545, the commission sought to avoid a “two-tiered structure of anti-retaliation protections that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the benefits that can result from internal reporting.”

Dodd-Frank, alongside the anti-retaliation protections, set up an awards program that doles out bounties to employees whose reporting leads to sanctions against a company of more than $1 million. SEC Chair Mary Jo White, in an April 30 speech, said the SEC’s whistleblower rules were set up to “incentivize employees to report internally first” by increasing award sizes for employees who make use of their company’s internal compliance systems.

Supporters of the protections say they play a valuable role in uncovering frauds that would go undetected without shielding employees who come forward with information. In their view, the Sarbanes-Oxley protections were not strong enough to guard employees from retaliation, and they added a provision to Dodd-Frank that added to the financial incentives for exposing fraud. The financial rewards to whistleblowers are needed, given the career setbacks they commonly face, the supporters of the rules say.

The focus on internal reporting in the current round of cases is interesting in part because business lobbyists pushed for a requirement to use internal channels, such as the internal audit department or the corporate counsel, before filing a complaint with government prosecutors while the SEC wrote the rule published in Release No. 34-64545. SEC enforcement officials opted not to include the requirement because they felt it could add to the already high risk of intimidation. The final rule did add incentives for first going through internal channels because business groups said the use of internal channels would help them root out problems and revamp their ethics guidelines to prevent future abuses.

Now the courts are being asked to decide if some companies punished employees who used internal channels.

The SEC’s argument in the amicus briefs is rooted in what it frames as “statutory ambiguity” in Dodd-Frank that empowered it to craft a broader definition of whistleblower.

In Asadi, however, the Fifth Circuit deemed the law’s language unambiguous.

“It’s a statutory interpretation issue. I think that’s the way parties are briefing it on all sides,” said Rosenberg. “What does the language say? What did Congress mean? What is the legislative history, how do you read all these different parts of the statute to have meaning and relate to each other?”

The other cases in which the SEC filed recent amicus briefs are Liu Meng-Lin v. Siemens AG and Daniel Berman v. Neo@Ogilvy LLC and WPP Group USA Inc., both at the Second Circuit, and Mikael Safarian v. American DG Energy Inc. and Multiservice Power Inc., at the Third Circuit.

The Berman case, which was argued in June, centers on a marketing executive who was let go after reporting accounting problems internally.

The U.S. Chamber of Commerce filed a brief in support of Oracle, arguing that, because Berman did not make a complaint to the SEC before being terminated, he should not qualify for whistleblower protections under Dodd-Frank.

“There is no warrant for a judge-made ‘exception’ to the language written by Congress, as the SEC contends and some lower courts erroneously have concluded,” the Chamber wrote in the June filing. “Nor is there a statutory ‘ambiguity’ that justifies the SEC regulation which states that employees who complain internally at their companies—but not to the SEC—receive the benefit of Dodd-Frank’s enhanced whistleblower protections.”