The case of Digital Realty Trust v. Somers, 850 F.3d 1045 (9th Cir. 2017), cert. granted 137 S.Ct. 2300 (2017) has done something rare. The case has flummoxed the justices of the U.S. Supreme Court. The case involves a whistle-blower who was terminated by his employer and the issue is whether he is protected under federal law for his actions.
Paul Somers was employed as a vice president at Digital Realty Trust, and he made several reports to the firm’s senior management team about possible securities violations by the company. His reports included issues of unrecorded cost overruns on projects and his boss granting no-bid contracts to friends. He was fired, and he did not report the securities violations to the Securities Exchange Commission (SEC). Mr. Somers then filed suit against Digital for violations of federal law, including Section 21F of the Securities Exchange Act, which is called “Securities Whistleblower Incentives and Protections,” a section added by the Dodd-Frank Act and which includes anti-retaliation protections for whistle-blowers.
Digital moved to have the case dismissed because Mr. Somers reported the securities issues only internally and not to the SEC. Section 21F provides:
No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower—
(i) in providing information to the Commission in accordance with this section;
(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information;
(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq. ), this chapter, including section 78j-1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.
The district court analyzed the statutory provisions and denied the motion to dismiss, concluding that Congress did not intend to eliminate protections for employees who only reported securities violations internally. Mr. Somers appealed.
On appeal, the Ninth Circuit grappled with the issue of Section (iii) of Section 21F, which was added after the Dodd-Frank bill had gone through committee, so there is no legislative history to guide the courts when there is retaliation because of a securities violation issue but the employee does not actually make a report to the SEC.
There was, however, at the time of the passage of Dodd-Frank and Sarbanes-Oxley, concern about requiring internal reporting before an employee goes to the SEC. Sarbanes-Oxley does mandate internal reporting before external reporting. However, the definitional section of Dodd-Frank defines a whistle-blower as someone who reports information to the SEC. A strict application of Dodd-Frank's definition of whistleblower would, in effect, all but read subdivision (iii) out of the statute.
Precedent was split among the federal circuits, with some taking the statutory section at its word and affording no protection for internal whistle-blowers while other circuits held that taking the statute as a whole meant that whistle-blowers were protected. The Ninth Circuit went with the latter view and affirmed the district court’s decision. Mr. Somers appealed to the U.S. Supreme Court, and the court heard oral argument on the case this week.
The result of a literal interpretation of the law would be that employers could be held liable for firing an employee who has made a confidential report to the SEC. In addition, a literal reading could mean that any employee who has made a report to the SEC of a securities violation is protected throughout his life, i.e., once a whistle-blower, always protected. What is also unclear is the relationship between the whistle-blower protections under Dodd-Frank and Sarbanes-Oxley and whether they are different in application. Sarbanes-Oxley has a much shorter statute of limitations and requires an administrative process, which Mr. Somers did not follow, so he had to rely on Dodd-Frank.
Legal scholars referred to it as a fascinating session with the justices because they were confused. Justice Gorsuch said that Congress was clear in its intent to protect only those who report to the SEC. Justice Kagan said, “It’s peculiar. It’s probably not what Congress meant. But what makes it the kind of thing where we can say we’re going to ignore it?” Adam Liptak, “Justices Seem Ready to Limit Whistle-Blower Protections,” New York Times, November 29,... The justices allowed the lawyer for Digital Realty to speak for long periods of time without interruption, generally a sign that the lawyer’s arguments are succeeding. Chief Justice John Roberts conducted a study of arguments before the U.S. Supreme Court and concluded that the side that gets peppered with the most questions generally loses. The lawyer for Mr. Somers was a target for the justices’ questions during the argument.
Who is a whistle-blower under Dodd-Frank?
Who is a whistle-blower under Sarbanes-Oxley?
What are the differences?
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