Lisa Banks and Matthew LaGarde Publish Article on Dodd-Frank Act

Katz, Marshall & Banks partner Lisa J. Banks and law clerk Matthew LaGarde published an article on on June 23, 2016, entitled, “Scope of Whistleblower Protection Under Dodd-Frank Remains to Be Seen.” The article analyzes how an ambiguity that exists within the Dodd-Frank Act may impact who falls within the scope of the law’s anti-retaliation protections. In one section, Dodd-Frank defines whistleblowers as individuals who report violations externally to the SEC; however, by extending its protections to whistleblowers who make reports protected by the Sarbanes-Oxley Act, it also appears to extend retaliation protections to those who report SEC violations internally. Courts have disagreed about whether the Act’s protections extend to internal whistleblower, and in their article featured below, Ms. Banks and Mr. LaGarde give an overview of the status of this critical conflict.

Scope of Whistleblower Protection Under Dodd-Frank Remains to Be Seen

The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) was passed in the wake of the 2008 financial crisis and sought to rein in some of the excesses of Wall Street by increasing transparency and lowering risk. Among the methods through which Congress sought to increase transparency in the financial sector was by creating protections against retaliation for whistleblowers that reported certain types of wrongdoing relating to violations of securities laws. Two apparently conflicting provisions of the law, however, have created a split among courts regarding the scope of those whistleblower protections.

Dodd-Frank’s anti-retaliation provision is codified at 15 U.S.C. § 78u-6(h)(1).  Subsection A of that provision prohibits an employer from retaliating against a whistleblower because the whistleblower provided information to the U.S. Securities and Exchange Commission (SEC) through a whistleblower “tip,” assisted in an SEC investigation related to such a tip, or made “disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.”

The Sarbanes-Oxley Act of 2002 (SOX), in turn, protects employees of publicly traded companies or their contractors or subcontractors who provide information regarding mail fraud, wire fraud, bank fraud, securities fraud, or violations of an SEC rule or regulation or other provision of federal law relating to fraud on shareholders. Importantly, SOX protects whistleblowers whether they make such a report externally to an appropriate government agency or internally to a person with supervisory authority over the employee or a person with the authority to investigate or stop the violation. Thus, if the Dodd-Frank anti-retaliation provision applies to disclosures that are protected under SOX, then it would seemingly apply to internal reports of violations of SEC rules or regulations.

Meanwhile, however, a separate provision of Dodd-Frank defines the term whistleblower as “any individual who provides . . . information relating to a violation of the securities laws to  . . . the Commission.” Because the anti-retaliation provision described in the preceding paragraph applies only to whistleblowers that make disclosures protected by SOX, a tension exists regarding whether Dodd-Frank protections should extend to employees who make only internal reports of violations of securities laws.

The resolution of this conflict is critical because of the difference in protections provided by the two statutes. For instance, SOX provides for “make-whole relief,” which courts have interpreted to include damages for emotional distress and other non-pecuniary compensatory damages (see Jones v. Southpeak Interactive Corp. of Delaware).  Dodd-Frank does not provide for compensatory damages. In addition, while Dodd-Frank amended SOX to prohibit the use of pre-dispute arbitration agreements, Congress did not expand that prohibition against pre-dispute arbitration agreements to include retaliation claims brought under Dodd-Frank itself.

In certain ways, however, Dodd-Frank affords significant additional rights and protections to whistleblowers that suffer retaliation. Importantly, the statute of limitations on a Dodd-Frank retaliation claim is three years, whereas SOX retaliation claims must be filed within 180 days of the violation (or the date on which the employee became aware of the violation). Moreover, Dodd-Frank claims may be brought directly in federal court, whereas SOX claims must first be filed with the Department of Labor, which represents a potentially significant administrative hurdle that must be overcome by a victim of retaliation. In addition, Dodd-Frank provides successful litigants with double back pay, which allows for a potentially significant increase in damages.

Recognizing what it perceived to be an ambiguity in the law, in August 2011, the SEC issued a Final Rule interpreting the anti-retaliation provision, which provided that internal reporting of information relating to a possible securities law violation is entitled to protection under Dodd-Frank. Following the Final Rule, several federal district courts faced with the question deferred to the SEC’s interpretation of the statute and ruled that Dodd-Frank protections and remedies were available to internal whistleblowers.  That deference was called into question in July 2013, when the U.S. Court of Appeals for the Fifth Circuit—the first appellate court to hear a case involving the Dodd-Frank anti-retaliation provision— ruled that, per the explicit definition of whistleblower provided in the statute, protection against retaliation under Dodd Frank only extended to whistleblowers who reported securities violations to the SEC (see Asadi v. G.E. Energy). The court reasoned that the provision extending protections to persons who made disclosures protected by SOX meant only that whistleblowers (i.e., people who made disclosures to the SEC) were also protected for making SOX-protected disclosures, but that the prerequisite that an individual be a statutorily defined whistleblower was a necessary element of any claim of retaliation under Dodd Frank.

Following the Fifth Circuit’s decision in Asadi, federal district courts interpreting Dodd-Frank went back and forth on the issue for over two years. A majority of courts in the years following Asadi have continued to defer to the SEC’s interpretation of protections afforded to internal whistleblowers, but a substantial number of courts found the Fifth Circuit decision compelling and have limited Dodd-Frank whistleblower protections to those who reported securities violations to the SEC.

In September 2015, the Second Circuit Court of Appeals became the second appellate court to address the question of whether Dodd-Frank protections applied to internal whistleblowers, and chose to defer to the SEC’s interpretation of the rule (see Berman v. Neo@Ogilvy LLC). Berman thus created a circuit split on this critical issue, setting the stage for an eventual Supreme Court showdown.

In the months since the Second Circuit’s decision in Berman, lower courts have continued to be split on the question of whether internal reporting of securities violations is protected by Dodd-Frank. A November 2015 decision by a federal district court in Missouri deferred to the SEC’s interpretation protecting internal reports, while a December 2015 decision by a federal district court in Virginia adopted the Fifth Circuit’s reasoning in Asadi. For whistleblowers and advocates, this remains a hotly contested and critical issue, and it may be that the justice filling Justice Antonin Scalia’s Supreme Court vacancy will cast the deciding vote in determining the scope of Dodd-Frank’s anti-retaliation provision.

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