- July 12, 2020
- Posted by: Andrew Easler
- Categories: Business Planning, Compliance, Securities & Fundraising
On February 21, 2018, the Supreme Court in Digital Realty Trust, Inc. v. Somers narrowly construed the definition of “whistleblower” in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or “Act”) and thus limited who qualifies for the anti-retaliation protections afforded by the Act. The Court narrowly interpreted the Dodd-Frank Act, holding that a whistleblower is entitled to the anti-retaliation protections of the Act only if the employee reports alleged securities law violations directly to the Security Exchange Commission (SEC) while still employed by the issuer.
The Supreme Court’s decision in Digital Realty arose after it granted certiorari to resolve a conflict in the courts highlighted in the Ninth Circuit Court of Appeal’s decision in Somers v. Digital Realty Trust (2017) . Paul Somers (Somers) worked as Vice President of Digital Realty Trust from 2010 to 2014. Somers’s complaint asserted that Digital Realty terminated him only after he reported potential violations of the securities laws internally to company management. Somers did not provide this information to the SEC while employed. Somers subsequently brought a whistleblower retaliation claim under the Dodd-Frank Act against Digital Realty for his termination. The company moved to dismiss the claim on the grounds that Somers did not qualify as a whistleblower under the Dodd-Frank Act because he had not reported the alleged securities law violations to the SEC before his termination. The district court denied the motion, reasoning that the whistleblower provisions under Dodd-Frank were ambiguous and, as a result, the SEC’s broader Rule 21F-2, which accorded protection to internal reports, was entitled to Chevron deference. The Ninth Circuit affirmed, concluding that adoption of the statutory definition of whistleblower, as the company urged, would narrow the anti-retaliation provisions to protect only active employees who report possible violations of securities laws both internally and to the SEC, which was unlikely to occur.
On review, the Supreme Court held that a plain reading of Dodd-Frank’s definition of “whistleblower” in conjunction with its anti-retaliation provision, as well as the intent of Congress in enacting the statute, cut against the Ninth Circuit’s expansive reasoning. The issue before the Supreme Court in Digital Realty was the language of the Dodd-Frank Act, which defines “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established . . . by the Commission.” The Supreme Court unanimously, with two concurrences, overturned the Ninth Circuit’s holding and concluded that Mr. Somers’s failure to make a report to the SEC while employed was fatal to his case.
First, the Court pointed to the explicit statutory language of Dodd-Frank, noting that the specific text of the statute defined a whistleblower as someone who reported to the SEC, and the statutory definition of whistleblower applied to govern the anti-retaliation provisions under the Act. The Court also reasoned that Congress must have intended to use a government-reporting requirement because it incorporated such a requirement into the whistleblower definition but not elsewhere in the statute. Second, the Court relied on the legislative intent, holding that the “core objective” of Dodd-Frank was “to prompt reporting to the SEC” and interpreting Dodd-Frank’s definition of whistleblower strictly furthered that goal, even if it narrowed the field of eligible employees. Since Congress had directly spoken to the precise question before it, the Court saw no need to accord deference to a contrary view adopted by the SEC in Rule 21F-2.
The Court therefore held that individuals not meeting the threshold requirement of providing pertinent information to the SEC cannot benefit themselves of Dodd-Frank’s anti-retaliation protections; the Court noted that such a requirement is by statutory design. The Court stressed that Congress enacted Dodd-Frank “to motivate people who know of securities law violations to tell the SEC,” and, in connection with this purpose, Congress granted such individuals “immediate access to federal court, a generous statute of limitations . . . and the opportunity to recover double backpay.” The Court, however, found that the reason for such incentives was to effectuate Dodd-Frank’s narrow objective of motivating individuals to “tell the SEC,” and not to “disturb the ‘corporate code of silence’” and embolden employees to report fraudulent behavior “not only to the proper authorities . . . but even internally.”
In sum, Digital Realty determines an employee is entitled to no anti-retaliation protections if the employee only reports such purported violations internally, utilizing the employer’s internal compliance processes. Time will tell whether the Supreme Court’s ruling will deter or increase the number of whistleblower actions. Employees may either fail to report altogether for fear of unprotected retaliation, or, to ensure protection against retaliation, simultaneously report to both the regulators and internal compliance departments before those teams have a chance to review, investigate, and remediate as necessary. The decision is limited to the Dodd-Frank whistleblower statute involving securities laws and does not appear to affect or mention the numerous other whistleblower protection statutes. In the wake of Digital Realty ruling, employers should review their whistleblower policies frequently, in conjunction with legal counsel, to ensure that employees have multiple avenues to report suspected illegal and/or unethical conduct. Likewise, whistleblower polices should assure employees that such reports will not be met with retaliation.
 Dig. Realty Tr., Inc. v. Somers, 138 S. Ct. 767 (2018).  “Issuer” is a term which refers to an organization offering one or more securities for investment.  Id. at 778.  The Supreme Court grants certiorari when a party challenges the decision of a lower court and the Court decides to review the case. It’s effectively like asking for a manager and having the manager decide to closely review the subordinate’s work.  See, Somers v. Digital Realty Tr., Inc., 850 F.3d 1045 (9th Cir. 2017).  Id.  Id. at 1047.  Id.  Id.  Somers, 850 F.3d at 1047.  The scope of the Chevron deference doctrine is that when a legislative delegation to an administrative agency on a particular issue or question is not explicit but rather implicit, a court may not substitute its own interpretation of the statute for a reasonable interpretation made by the administrative agency; see, generally, Thomas W. Merrill & Kristin E. Hickman, Chevron’s Domain, 89 Geo. L.J. 833 (2001); see also, Chevron U.S.A. Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837 (1984).  Somers v. Digital Realty Tr. Inc., 850 F.3d 1045 (9th Cir. 2017).  15 U.S.C. § 78u-6 (a)(6).  Dig. Realty Tr., 138 S. Ct. at 772. Id. at 775.  Id. at 777.  Id. at 780.  Id. at 781-82.  Dig. Realty Tr., 138 S. Ct. at 781-82.  Id. at 778.  Id.