Supreme Court Will Hear Key Case on Federal Whistleblower Law

by Jay P. Holland
June 28th, 2017

The U.S. Supreme Court announced on Monday, June 26, that it plans to hear arguments later this year on a case that is of great importance to corporate whistleblowers and to people who support them.

The case centers on the Dodd-Frank law, which was passed by Congress in 2010 in the wake of the financial meltdown and provides major protections for whistleblowers, such as freedom from retaliation and potentially large cash awards for pointing out corporate wrongdoing.

The issue before the Court is who qualifies as a whistleblower under Dodd-Frank? Specifically, do the whistleblower protections extend to someone who reported the alleged wrongdoing internally, within the corporation, or do they only help people who choose to report the problems to the federal Securities and Exchange Commission?

In the case that the Court agreed to take, a company called Digital Realty Trust is facing off against a whistleblower, a former company vice president who was fired after complaining about Digital's alleged violations of securities laws. The employee initially made his complaints internally, not to the SEC.

The U.S. Court of Appeals for the 9th Circuit ruled that the employee qualifies for whistleblower protections. In two other cases, the U.S. Court of Appeals for the 2nd Circuit ruled the same way, but the U.S. Court of Appeals for the 5th Circuit held that an employee must go to the SEC to qualify for whistleblower protection.  The Supreme Court granted Digital's Petition for Writ of Certiorari to resolve this circuit split. 

The actual words of the Dodd-Frank law give whistleblower status to an employee who reports wrongdoing "to the commission," in other words to the SEC. But the SEC itself, in regulations that it issued and in court, has consistently taken the view that people who report internally also qualify. 

In 2015, the SEC said that, if protections were to be limited only to whistleblowers who contact the agency, it would risk discouraging "some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the investor-protection and law-enforcement benefits that can result from internal reporting." The 9th Circuit agreed and said that the term "whistleblower" needs to be read broadly so as to encourage people to report things that don't appear to be right. It also said that since the SEC is the chief regulator of corporate malfeasance, its views are entitled to deference (known as "Chevron" deference, after the Supreme Court decision) from the courts.

If the Court decides that the only whistleblowers who are protected are those who report to the SEC, it's not hard to imagine that people will go straight to the SEC when they spot a possible problem and skip the internal reporting process.  Not only will that reduce the options available to whistleblowers, but it will often make things more difficult for companies. After all, a lot of companies would rather handle an allegation internally than face a formal complaint from the SEC.  Indeed, there is some irony to the position being taken by Digital and its friends at the Chamber of Commerce.  In the context of False Claims Act whistleblower claims, the Chamber and the defense bar have bemoaned the lack of a requirement to report corporate fraud internally before filing a sealed Qui Tam complaint, arguing they should have an opportunity to remedy the alleged fraud internally prior to being subjected to litigation.  Yet here, they take the position that reporting internally provides no protection for whistleblowers. So, corporate defendants appear to have an appetite for having their cake and eating it too, when it suits them best.  

It's not surprising that the Court chose to take the case. It's an important question of federal law and one on which the courts of appeals are divided. It will certainly be interesting to see how the newly minted Justice Gorsuch approaches the issue; however, he has shown an outright hostility to the concept of deference to agency interpretation in the past. So it would be very surprising if he voted in favor of the whistleblower here.  It's hard to predict what the Court as a whole will do, but as a lawyer who represents whistleblowers, I hope that the Court opts for maximum protection of these brave individuals.

Proudly displayed in Jay Holland’s office is a plaque that reads: “The Best Lawyer a Client Could Ever Have.” The customized award was a gift from a client at the end of a seven-and-a-half–year legal battle. The success wasn’t just winning the case in court; it was also serving as a loyal ally, protector, and advocate for the client throughout his long journey to achieve justice.

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