Circuit Conflict Over Application Dodd-Frank Whistleblower to Internal Whistleblowers Heads to Supreme Court
July 29, 2017
In its upcoming term starting this October, the United States Supreme Court will determine whether employees who raise potential securities laws violation only inside the company (“internal whistleblowers”) as opposed to submitting their concerns to the SEC are protected under the under the 2010 Dodd-Frank Act whistleblower protections. The High Court accepted petitioner Digital Reality Trust’s petition to review a Ninth Circuit decision which found that a former company Vice President was protected by the Dodd-Frank whistleblower protections despite having only reported securities law violations internally and not also to the Securities and Exchange Commission. In the case, the former executive claimed Digital Realty discriminated against him due to his sexual orientation and eventually terminated him for “vague, trivial and false allegations of misconduct” after he reported a senior vice president to senior management for having committed securities laws violations by eliminating necessary internal control procedures. Upon his firing, the executive claimed the company violated the Dodd-Frank Whistleblower rules and the case eventually reached the Ninth Circuit. The key issue considered by the court was whether the Dodd-Frank whistleblower protections applied because the executive had not reported the securities law violations to the SEC and had only done so internally. The Ninth Circuit chose to follow the Second Circuit’s opinion that the whistleblower protections apply. The ruling further expanded a circuit split as the Fifth Circuit had also previously deliberated the issue and reached the opposite conclusion.
The consequences of the Supreme Court’s ruling will impact employers and how whistleblower situations are handled. If the Supreme Court upholds the Ninth Circuits ruling, even internal whistleblowers will be covered under Dodd-Frank’s protections. However, if the ruling goes the other way, whistleblowers will not have any incentive to report problems internally and will know they must go straight to the SEC thus exposing the employer to potential regulatory enforcement issues where internal reporting could have offered an opportunity for self-correction.