From Somers to Winter: Chilling Internal Whistleblowing in Private Companies

From Somers to Winter: Chilling Internal Whistleblowing in Private Companies

Image by Russ Allison Loar, CC BY-NC-ND 2.0.

On February 21, 2018, the Supreme Court issued its opinion for Digital Realty Trust, Inc. v. Somers—a landmark decision denying Dodd-Frank anti-retaliation protection for internal whistleblowers in private companies. Congress passed the Dodd-Frank Act in 2010, intending to “promote the financial stability of the United States by improving accountability and transparency in the financial system.” The law came eight years after Sarbanes-Oxley (SOX)—an act that empowered whistleblowers to play a pivotal role in catching corporate fraud in public companies and expanded whistleblower protections to private company employees.

Even before SOX and Dodd-Frank, internal whistleblowers were essential in weeding out corporate fraud in the financial markets. For instance, Sherron Watkins, an internal whistleblower, was the first to alert management of Enron’s off-book financing entities which eventually triggered an SEC investigation and the company’s subsequent demise. Recognizing the importance of such whistleblowers, SOX prevented companies from retaliating against any employee who reported issues of fraud not only to regulators and law enforcement but also to any “person with supervisory authority over the employee.” But SOX only covered public companies, and by 2010, in light of the Great Recession, Congress recognized the need to expand protections to whistleblowers in private companies in order to support the SEC’s onerous task of ridding corporate America of fraud.

The Dodd-Frank Act extended whistleblower protections to employees of private companies, but more narrowly defined a whistleblower as one who provides “information relating to a violation of the securities laws to the Commission.” Despite the seemingly clear definition requiring a report to the SEC, the Commission noted the tension between the Act’s definition of a whistleblower and a subsequent subsection that afforded whistleblowers anti-retaliation protection for making a report allowed or required by SOX. The SEC promulgated its own rules to state that for purposes of the Act’s anti-retaliation protection, plaintiffs did not have to report to the Commission first; internal reporting was sufficient. Plaintiffs quickly latched onto these rules to state a cause of action when their employers retaliated against them.

A circuit split quickly ensued. In Asadi v. GE Energy LLC, the Fifth Circuit found the language of the Act to be sufficiently clear so that Chevron deference was inapplicable. Soon after, in Berman v. Neo@Ogilvy LCC, the Second Circuit held that the language was sufficiently ambiguous, and required deference to the SEC’s interpretation. Then, in Digital Realty Trust, Inc. v. Somers, the Ninth Circuit followed the Second Circuit and deferred to the SEC’s rules. Despite the seemingly clear language of the Act’s definition section, by the time the Supreme Court heard arguments in Somers, the majority of district courts were deferring to the SEC’s interpretation.

The Supreme Court unanimously held that the statutory text was clear, and therefore, it was inappropriate and unnecessary to defer to the SEC’s interpretation of the Act. While the Court’s holding settles the legal issue, there is an open question of what, if anything, Congress will do to protect internal whistleblowers in private companies. The SEC handles over 4,000 calls a year, and internal whistleblowers can help weed out frivolous claims, thereby enhancing the Commission ’s enforcement efforts. The Court’s decision makes it more difficult for companies to remediate issues internally or choose to self-report when necessary. While employees of private companies can still choose to report directly to the SEC and benefit from Dodd-Frank’s anti-retaliation protections, encouraging employees to circumvent internal compliance systems may prove counter-productive.

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