On November 28, 2017, the Supreme Court heard oral argument in Digital Realty Trust Inc. v. Paul Somers, a case that will determine whether employees who report fraud-related conduct internally will be protected by the Dodd-Frank Act’s anti-retaliation provisions or whether the employee must report directly to the government to earn that protection. 

The Dodd-Frank Act, passed in 2010, expanded whistleblower protections and incentives that were initially created under the 2002 Sarbanes-Oxley Act. The protections under Sarbanes-Oxley, which will not be disturbed by the Court, requires the employee to arbitrate before the U.S. Department of Labor before bringing an action in court and provides a statute of limitations of only 180 days from the date the employee becomes aware of the adverse employment action.  Dodd Frank, in some circumstances, provides up to 10 years to bring suit directly in federal court where whistleblowers can sue for double back pay.  Internal whistleblowers will still be protected from retaliatory employment action regardless of the outcome of this case, but they may only be left with the more limited protections offered under Sarbanes-Oxley.

Currently at issue is the definition of whistleblower in Dodd-Frank, which covers employees who provide “information relating to a violation of the securities laws to the [Securities and Exchange] Commission.” Despite the definition, the SEC interpreted Dodd-Frank to protect employees who only report internally.  In recent years, a split among the federal circuit courts has developed regarding whether to adopt the SEC’s interpretation of this provision.  In 2013, the Fifth Circuit unanimously held that the plain language of the statute provides that the term whistleblower only includes individuals who lodge a complaint directly with the SEC—internal reporting does not afford employees protection under Dodd-Frank.  Because the court found that the language of the statute was clear, it gave no weight to the SEC’s interpretation of the law.  The Second Circuit, and most recently the Ninth Circuit, however, held that failing to cover internal reporting was inconsistent with the purpose of the law and adopted the SEC’s interpretation that internal whistleblowers are protected from retaliatory employment action.

In the case currently before the Supreme Court, the employer urged the Court to adopt the Fifth Circuit’s interpretation that internal reporting does not qualify for the protection of Dodd-Frank. During oral argument, the Justices expressed a great deal of skepticism toward the employee’s position and seemed inclined to agree with the employer on applying the narrower definition of whistleblower found in the statute.  Numerous commentators suggest that, if the Court finds for the employer, the result may be to push employees to report to the SEC in order to gain the greater protections of Dodd-Frank. While a ruling in the employer’s favor may limit the employer’s exposure of claims of retaliatory discharge, a policy that has the effect of discouraging internal reporting and pushing employees to report the company to the SEC could prove counter-productive.  Given the protection still offered by Sarbanes-Oxley, and the fact that the average employee may not be knowledgeable about the law before making reports, it seems unlikely that will be true in the average case.

A decision for the employer would not permit termination and retaliation against internal whistle-blowers. Instead, those individuals would have a shorter period of time to file suit and would be required to arbitrate before the Department of Labor before bringing suit.  In the meantime, employers should try to ensure that they develop policies that encourage internal whistleblowing so that more savvy employees will not be compelled to report potential violations to the SEC.  Employers should continue to investigate legitimate concerns and ensure that employees are not retaliated against for their concerns.