Whistleblower Retaliation Claims: Limiting Dodd-Frank to

Whistleblower Retaliation Claims: Limiting Dodd-Frank to its Plain Language
To investigate and prosecute violations of the securities laws, the Securities and
Exchange Commission and other law enforcement agencies have always relied heavily on tips
and complaints. Since the Enron and WorldCom debacles, lawmakers and regulators have
sought to increase the number and quality of tips by encouraging corporate insiders to “blow the
whistle” when they observe violations of the securities laws. Recognizing that employees are
unlikely to report their employers’ violations of the law for fear of losing their jobs, lawmakers
have attempted to protect whistleblowers from retaliation. Congress, thus, included antiretaliation protections in its two signature reforms of the financial markets – the Sarbanes-Oxley
Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act. This well
intentioned activity has had an unfortunate side effect: a rise in specious retaliation claims.
Although the Sarbanes-Oxley and Dodd-Frank anti-retaliation provisions cover many of
the same people and much of the same conduct, there are fundamental differences between the
two. For employers, the practical difference lies in the enforcement mechanism. The SarbanesOxley provision, section 806, is primarily enforced by the Department of Labor. It features a
very short statute of limitations, 180 days. While there is a private right of action, it is limited to
instances where the DOL fails to act within 180 days. 18 U.S.C. § 1514A (b). In contrast, the
Dodd-Frank provision, section 21F, contains a robust private right of action and a lengthy
limitations period, the greater of 6 years from the violation or 3 years from discovery. 15 U.S.C.
§ 78u–6(h)(1)(B). An employer facing potential retaliation claims, then, would strongly prefer to
have them governed by Sarbanes-Oxley rather than by Dodd-Frank.
Sarbanes–Oxley, at section 806, forbids retaliation against employees who report mail
fraud, wire fraud, bank fraud, securities fraud, violations of SEC regulations, or federal laws
relating to fraud against shareholders.” 18 U.S.C. § 1514A. The employee is protected if he or
she reports internally to a supervisor, to a federal agency or to Congress. Id.
In addition to providing for the payment of bounties to whistleblowers, Dodd-Frank
prohibits retaliation against “a whistleblower … because of any lawful act done by the
whistleblower” in reporting to the SEC, participating in an SEC enforcement action or in making
disclosures that are required or protected by Sarbanes-Oxley. Securities Exchange Act, § 21F,
15 U.S.C. § 78u–6(h)(1)(A). Under Dodd-Frank, “whistleblower” means “any individual who
provides, or 2 or more individuals acting jointly who provide, information relating to a violation
of the securities laws to the Commission.” Id. at § 78u-6(a)(6)(emphasis added). Nominally, this
means that the Dodd-Frank anti-retaliation provision (like its bounty provision) applies only to
those who “blow the whistle” to the SEC. Other whistleblowers must rely on Sarbanes-Oxley.
The SEC thought otherwise. Perceiving a tension between Dodd-Frank’s definition of
“whistleblower” and the conduct protected by section 21F, the SEC determined that, for
purposes of the anti-retaliation provision only, the term “whistleblower” included individuals
who report internally or to agencies other than the SEC. 17 C.F.R. § 240.21F–2(b)(1). The SEC
reasoned that “the rule reflects the fact that the statutory anti-retaliation protections apply to three
different categories of whistleblowers, and the third category includes individuals who report to
persons or governmental authorities other than the Commission.” Implementation of the
Whistleblower Provisions of Section 21F, Release No. 34-64545 at 17. Rule 21F, thus,
subsumes all Sarbanes-Oxley whistleblowers into Dodd-Frank’s anti-retaliation provision,
substantially increasing employers’ exposure to liability.
It is difficult to reconcile the SEC’s position with the statute. To begin with, it cannot be
squared with the plain language of Dodd-Frank. The statute includes only one definition of
“whistleblower” which requires a report to the SEC. The anti-retaliation provision does not
apply to three categories of whistleblowers but only to one category, SEC whistleblowers, who
may engage in three types of protected conduct – report to the SEC; participate in SEC
enforcement proceedings; or report internally or to other agencies within the ambit of SarbanesOxley.
Moreover, Rule 21F wholly ignores the logic inherent in Dodd-Frank’s whistleblower
provisions. The purpose for providing a substantial bounty and additional protections from
retaliation was to encourage tipsters to report malfeasance to the SEC. It makes no sense to read
into Dodd-Frank’s SEC whistleblower scheme, a Congressional intent to protect those who blow
the whistle to other agencies on issues, such as bank fraud, that lie outside of the SEC’s purview.
That Congress did not intend for section 21F to apply to other types of whistleblowers is
demonstrated by Dodd-Frank’s amendments to section 806 of Sarbanes-Oxley. Dodd-Frank
strengthened section 806 by doubling the statute of limitations, adding a discovery rule and
forbidding arbitration of Sarbanes-Oxley retaliation claims. If Congress intended to extend the
anti-retaliation protection that it provided for SEC whistleblowers to all whistleblowers, then
Congress would simply have done so when it amended section 806. Alternatively, it would have
eliminated section 806 altogether in favor of section 21F.
Despite Rule 21F’s questionable legal underpinning, district courts have generally
followed the SEC’s lead and allowed employees who did not tip the SEC to bring anti-retaliation
claims under Dodd-Frank. That situation is starting to change, however. Last year, the Fifth
Circuit held that an employee who reported a suspected FCPA violation internally but not to the
SEC was not a whistleblower under Dodd-Frank. Asadi v. GE Energy (USA) LLC, 720 F.3d 620,
630 (5th Cir. 2013). The Fifth Circuit reasoned that the plain language of Dodd-Frank admitted
to but one definition of whistleblower: “individuals who provide information related to a
securities law violation to the SEC.” Id. at 625. The Asadi court further reasoned that no
conflict existed between Dodd-Frank’s definition of whistleblower and the third category listed
in § 78u–6(h)(1)(A) because the categories simply set out the activities of the whistleblower that
are protected. Id. at 625-26. The Fifth Circuit expressly held that the SEC’s position on the antiretaliation provision as set forth in Rule 21F was not entitled to deference. Id. at 629-30.
Following Asadi, district courts in other circuits have split on the issue with some following the
Fifth Circuit’s lead and others not.
No other court of appeals has reached the issue. The Second Circuit may do so in Liu v.
Siemens, AG, No. 13-4385-CV (2d Cir., filed Nov. 14, 2013). The facts of Liu are strikingly
similar to those of Asadi. Liu, an overseas employee of a foreign subsidiary, reported suspected
FCPA violations to his superiors. After he was fired, Liu sued under Dodd-Frank. Siemens
moved to dismiss the case arguing, among other things, that Dodd-Frank’s anti-retaliation
provision did not apply to overseas conduct and that Liu was not a “whistleblower” because he
did not tip the SEC. The district court dismissed the case holding that Dodd-Frank did not have
extraterritorial application but declined to decide whether Liu qualified as a whistleblower. On
appeal, Siemens argued that the dismissal should be affirmed on both grounds. Recognizing
Liu’s potential importance, the SEC filed an amicus brief arguing that Dodd-Frank’s antiretaliation provision does not require that the employee report to the SEC. The SEC did not,
however, address any of the other issues raised including the extraterritorial application of
section 21F.
Liu is crucial to the interpretation of section 21F. If the Second Circuit joins the Fifth
Circuit in applying Dodd-Frank as written, then this issue is largely resolved with two courts of
appeals holding that the statute means what it says. Moreover, a victory for the employer will
carry additional weight because of the SEC’s involvement in the case. If, however, the Second
Circuit sides with the SEC and the plaintiffs, then the issue will remain in flux until the Supreme
Court takes it up. There is a possibility that the Second Circuit will not reach the issue. It could
follow the district court and decide the case on the extraterritorial application of the statute.
However, the SEC’s appearance as an amicus makes this less likely.
Expansion of Dodd-Frank’s anti-retaliation provisions to include those who never report
their suspicions of misconduct to the SEC would be a serious blow to employers. A terminated
employee can easily create an anti-retaliation claim by pointing to an instance where he raised
some allegation of misconduct to a supervisor. E.g., Banko v. Apple, Inc., 2013 WL 7394596
(N.D. Cal. Sept. 27, 2013) (holding that a mid-level employee stated claim for retaliation based
on report to supervisor that a subordinate had received unauthorized expense reimbursements but
dismissing claim because employee did not qualify as a Dodd-Frank whistleblower). Under
Dodd-Frank, the employee has at least six years to bring such a claim increasing the likelihood
that frivolous claims will be brought. Limiting Dodd-Frank to its plain language will curtail
many questionable retaliation claims.