The decisions from these three circuits turned primarily on their determinations of whether the statutory definition of “whistleblower” in Dodd-Frank’s anti-retaliation provision was ambiguous. The Second and Ninth Circuits found the term ambiguous, thereafter relying on the Supreme Court’s decision in Chevron USA Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) to afford deference to the SEC’s interpretative regulations that extended anti-retaliation protection to whistleblowers who reported violations only internally as well as to whistleblowers who reported violations to the SEC. In contrast, the Fifth Circuit found the statutory term unambiguous and, as a result, concluded that Chevron deference to the SEC’s interpretative regulations should not be afforded because the statutory definition was clear.
The Supreme Court agreed with the Fifth Circuit’s reasoning. In a unanimous opinion, the Court held that a person is protected by Dodd-Frank’s anti-retaliation provision only if the person has reported a suspected securities violation to the SEC. Put another way, if a person has made only an internal report, they are not shielded under Dodd-Frank’s anti-retaliation provision. In reaching its holding, the Court rejected the Solicitor General’s arguments for a broader reading of the term and found the definition of “whistleblower” unambiguous because it is defined “clear[ly] and conclusive[ly]” in the statute. As a consequence, the Court declined to apply Chevron deference to the SEC’s contrasting interpretative regulations.
While the Supreme Court’s holding removes the uncertainty of who is a whistleblower for purposes of coverage under Dodd-Frank’s anti-retaliation provision, application of the holding could lead to forum shopping, disregard of internal reporting protocol, difficulty proving causation in retaliation cases and increased criticism of the Chevron doctrine.
Key takeaways
Anti-retaliation coverage is limited under Dodd-Frank, but other laws still provide broad protections and may encourage more forum shopping
Digital Realty can be viewed as friendly to employers because it reduces the categories of employees who are covered by Dodd-Frank’s anti-retaliation provision. However, the practical impact of the decision may be limited because other federal, state and local statutes, as well as case law, routinely define whistleblowers expansively to include both employees who have made only internal complaints and employees who provide information to government agencies following an alleged violation. Arguing on behalf of the government, the Solicitor General made the point that restricting anti-retaliation coverage to employees who report suspected violations to the SEC would lead to an incongruous result because it would effectively allow retaliation against employees who assist the SEC with its investigation or testify at a proceeding involving an alleged SEC violation. In response to this argument, the Court stated that the decision does not prevent the SEC from expanding the methods of SEC reporting. Arguably, the Court was likely aware that its decision would not have a chilling effect on the commencement of complaints alleging securities violations given the breadth of other anti-retaliation statutes as evidenced by, among other things, the Court’s frequent references to the anti-retaliation provisions contained in Sarbanes-Oxley.
From a litigation point of view, the decision may encourage employees who feel retaliated against, but who failed to make a complaint to the SEC, to bring a claim under different federal, state and local laws rather than under Dodd-Frank.
Internal reporting may be impacted
Since employees are only covered by Dodd-Frank’s anti-retaliation provisions if they have reported a suspected securities violation to the SEC, the decision may encourage employees to bypass an employer’s internal reporting process in favor of reporting first to the SEC. This may impact an employer’s ability to frame the issues to the SEC, self-report to the SEC or resolve the issue prior to the matter being brought to the SEC’s attention. Nevertheless, prudent employers should still maintain a strong compliance policy that includes internal reporting protocols and take other measures – such as the prompt investigation of reported concerns and internal anti-retaliation restrictions – to help assure that employees view the employer’s programs as effective and fair. Doing so may incentivize the employees to first use an employer’s internal reporting protocols.
Maintaining accurate records is critical because causation may be a dispositive issue
The decision may make it harder to show causation in instances where an employee has reported a securities violation to multiple parties. For example, if an employee makes an internal complaint and alleges retaliation as a result of the internal complaint, the employee would not be covered under Dodd-Frank. However, if the employee makes a subsequent complaint to the SEC and alleges retaliation under Dodd-Frank, then there may be an argument that it was the internal complaint and not the reporting to the SEC that triggered the alleged retaliation.
Arguments challenging the Chevron doctrine may increase
While the Court did not address Chevron’s viability head-on, it found that affording Chevron deference to the SEC’s contrary interpretative regulations was inappropriate since the statutory definition of whistleblower was unambiguous. Digital Realty opens the door to increased challenges of the Chevron doctrine in virtually all cases where the language of the statute differs from the regulatory guidelines or interpretation. Litigators should, therefore, not take it as a given that a regulating entity’s interpretative regulations are dispositive.
Client Alert 2018-076
