Internal whistleblowers:

Emerging judicial debate for anti-retaliation protections

The Fifth Circuit was the first federal court of appeals to examine the extent to which the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 protects internal whistleblowers, or those who report violations of the securities laws to their supervisors rather than directly to the SEC, from retaliation.  

In Asadi v. G.E. Energy (USA) LLC, 720 F.3d 620 (5th Cir. July 17, 2013), the Fifth Circuit opted not to follow the persuasive guidance of the pro-whistleblower district court decisions that preceded it,1 instead finding that Dodd-Frank’s protections do not extend to internal whistleblowers.  

In coming to this conclusion, the Fifth Circuit examined two separate sections of Dodd-Frank that address who is protected from retaliation and what actions give rise to a private cause of action for retaliation. 

The pertinent subsections of Dodd-Frank shedding light as to whether Congress intended to protect internal whistleblowers from retaliation are subsections 78u-6(h)(1)(A) and 78u-6(a)(6) of the statute. Subsection 78u-6(h)(1)(A) sets forth the statute’s robust anti-retaliation protections, prohibiting employers from retaliating against a “whistleblower” who provides information to the SEC, participates in any investigatory, judicial, or administrative action of the SEC, or who makes a disclosure that is “required or protected under the Sarbanes-Oxley Act of 2002,” other specified laws, “and any other law, rule, or regulation subject to the jurisdiction” of the SEC.

In turn, subsection 78u-6(a)(6) defines “whistleblower” as anyone who provides information relating to a violation of the securities laws “to the [SEC], in a manner established, by rule or regulation, by the [SEC].” A narrow reading of these subsections may improperly suggest that internal whistleblowers are precluded from anti-retaliation protections because they have reported information to their supervisors, rather than directly to the SEC. Numerous defendant-employers sued by internal whistleblowers for retaliation have relied on this argument to dismiss the lawsuits against them, claiming that Dodd-Frank was intended only to protect external whistleblowers, or those who report outside of the organization. The Fifth Circuit in Asadi has supported these arguments.

The Asadi opinion

Plaintiff, Khaled Asadi, began his lawsuit against his former employer, G.E. Energy, in a federal district court in Texas. While stationed in Jordan to secure and manage service contracts with the Iraqi government, Asadi became concerned that G.E. Energy was committing violations of the Foreign Corrupt Practices Act by hiring an individual “closely associated” with the Iraqi Minister to secure a lucrative business agreement.2 After reporting these concerns to his supervisors,

Asadi began to receive sudden negative performance reviews and was eventually terminated, prompting him to sue his employer under Dodd-Frank for retaliation. As expected, G.E. Energy moved to dismiss on the basis that Asadi was not a “whistleblower” entitled to protection under the statute because he did not report directly to the SEC. Opting not to tackle the question of whether internal whistleblowers are protected by Dodd-Frank, the district court granted G.E. Energy’s motion to dismiss on the basis that Dodd-Frank does not apply extraterritoriality to protect whistleblowers who are located abroad.

Asadi appealed to the Fifth Circuit, where G.E. Energy once again argued that Asadi was statutorily ineligible for protection under Dodd-Frank on the basis that he was not a “whistleblower.” To answer the question of statutory interpretation before it, the court conducted an analysis of Dodd-Frank’s language, requiring it to first determine whether the text of the statute is plain and unambiguous as to clearly express the intention of Congress. Considering the question before it to be “relatively straightforward,” the court examined the two pertinent subsections—(a)(6) and (h)(1)(A)—finding that subsection (a) provides the definitions, like “whistleblower,” that are used throughout the rest of the statute to define who is protected from retaliation in subsection (h)(1)(A). Referring to the definition of “whistleblower” as individuals who provide information relating to a violation of the securities laws to the SEC, the Fifth Circuit held that “this definition, standing alone, expressly and unambiguously requires that an individual provide information to the SEC to qualify as a ‘whistleblower’ for purposes of [Section] 78u-6.”

The court rejected Asadi’s argument that the third prong of subsection (h)(1)(A), which protects from retaliation disclosures “that are required or protected under [the federal securities laws and other specified laws] and any other law, rule, or regulation subject to the jurisdiction of the [SEC]” would cover internal whistleblowers, even if they do not provide information to the SEC. In doing so, the court determined that Asadi’s construction of the statute was based on a “perceived conflict” between subsections 78u-6(a)(6) and (h)(1)(A), while rejecting both a string of district court decisions that found a conflict between the two subsections as well as recent SEC regulations that clearly include internal whistleblowers among those who are protected from retaliation.

Flaws of the Fifth Circuit’s analysis

Federal courts that examine statutory construction questions are required to conduct a two-step analysis in which, first, a court examines whether the intent of Congress is unambiguous from the face of the statute. If no ambiguity exists, a court will give effect to the clear language of the statute.3 If, however, a court determines that Congress has not directly addressed the precise question at issue and that the statute is ambiguous, a court is obligated to give deference to an administrative agency’s construction of the statute if it is reasonable.

The decision in Asadi is erred because it fails to acknowledge the ambiguity inherent in the statute as to whether internal whistleblowers are protected from retaliation. By finding no ambiguity, the Fifth Circuit avoided the need to give deference to the SEC’s reasonable construction of the statute, which protects internal whistleblowers. The Fifth Circuit’s analysis disregards the fact that the third prong of subsection 78u-6(h)(1)(A) explicitly protects “disclosures that are required or protected under the Sarbanes-Oxley Act of 2002, the Securities Exchange Act of 1934 . . . and any other law, rule, or regulation subject to the jurisdiction of the [SEC].”

This subsection clearly cross-references other federal statutes, the protections under which are incorporated by reference into Dodd-Frank. Ambiguity exists because of the reference to the Sarbanes-Oxley Act specifically, a statute that explicitly protects from retaliation employees who reasonably believe that a violation of the securities laws has occurred and reports such information to “a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct) . . . .” Because the Sarbanes-Oxley Act so clearly protects disclosures by internal whistleblowers from retaliation and Dodd-Frank incorporates by reference those provisions in subsection (h)(1)(A), it becomes evident that an ambiguity exists when subsection (h)(1)(A) is aligned with the more limiting definition of “whistleblower” found in subsection (a)(6).

In 2011, the SEC, as the administrative agency responsible for interpreting the language of Dodd-Frank, promulgated regulations that reconcile the conflict between Dodd-Frank’s definition of a whistleblower as one who reports to the SEC with the broader anti-retaliation provisions that imply that protections are available for external and internal whistleblowers alike. In its explanation of these final regulations, the SEC noted that whistleblowers who report suspected securities law violations to their supervisors or to persons or governmental authorities other than the SEC are protected from retaliation under Dodd-Frank. The Asadi decision avoids the need to grant deference to these regulations by rejecting the existence of ambiguity in the statute.

In a pending appeal before the Second Circuit, Liu v. Siemens AG (No. 13-4385), the SEC filed an amicus brief on February 20, 2014 in which it made explicit its view on whether Dodd-Frank protects internal whistleblowers. This case originated in the Southern District of New York, as an employee of a Chinese subsidiary of the parent corporation, Siemens A.G., sued Siemens for being terminated after making internal reports, bringing a retaliation claim under Dodd-Frank.4 The district court granted Siemens’ motion to dismiss, deciding that Dodd-Frank’s anti-retaliation protections do not apply extraterritorially.

While the district court briefly acknowledged Siemens’ argument that Liu was not a “whistleblower” under the statute, it avoided the need to answer this question, noting only that while the decision in Asadi “is appealing in that it avoids rewriting the statute . . . it rejects the SEC’s interpretation of a statute it is charged with enforcing.” On appeal, the SEC’s amicus brief supports Liu’s arguments that he would qualify for protection under the statute as an internal whistleblower.

The SEC takes a firm stand that the language of Congress is ambiguous “given the considerable tension between” subsections (h)(1)(A) and (a)(6) and, in light thereof, the SEC has adopted a reasonable interpretation that merits deference by the courts. Noting that the protection of internal whistleblowers from retaliation “supports a core overall objective of the whistleblower rulemaking,” the SEC has determined that subsection (h)(1)(A) is best read as an exception to the more limiting definition of whistleblower in subsection (a)(6). As the SEC states, such an interpretation enhances the agency’s ability to bring enforcement actions against employers who retaliate against individuals who make internal reports and ensures that companies continue to benefit from internal reporting channels.

Ramifications of the Asadi decision for internal compliance channels

If other federal courts of appeal follow Asadi, the utilization of internal compliance programs within companies is likely to be threatened, as internal whistleblowers are currently left without the assurance that they may take advantage of the robust protections from retaliation that have become available under Dodd-Frank when they make internal reports. One of the most common deterrents to potential whistleblowers is fear of retaliation, which may take the form of financial disincentives, such as termination from employment or exclusion from bonuses, and non-financial disincentives that are more subtle, like alienation and ostracism from colleagues.5 Given the value that whistleblowers provide to companies, such persons should have the highest level of protection possible.

Tips from whistleblowers have been found to be 13 times more effective than external audits in bringing possible violations to the forefront. Internal, rather than external, whistleblowing allows companies to detect fraud at its earliest stages, avoiding bad publicity or governmental investigation, and allowing for a timely resolution of the issue. The existence of an effective internal compliance program within a company is also a mitigating factor in determining the sentence to be imposed on corporations and organizations that are convicted of criminal activity under the Federal Sentencing Guidelines.

During the SEC’s rulemaking process to implement Dodd-Frank’s whistleblower provisions in 2011, which introduced cash rewards to whistleblowers in exchange for their information, the corporate and financial community was strongly opposed to the fact that the proposed SEC rules did not require whistleblowers to first report internally to supervisors to receive a bounty.

Many commentators argued to the SEC that such a structure would encourage whistleblowers to bypass internal compliance channels and report directly to the SEC. To alleviate these concerns, the SEC implemented changes specifically aimed at incentivizing whistleblowers to utilize internal compliance channels and internally report violations. If the corporate community accepts the decision in Asadi and continues to claim, as the defendants have in cases like Asadi, that internal whistleblowers are not eligible for anti-retaliation protections under Dodd-Frank, a clear contradiction of their position exists.

Given the invaluable role that internal compliance plays in today’s society and its potential to transform corporate cultures that encourage silence, the role that internal whistleblowers play in the fraud detection process is critical, and such persons should be subject to the highest possible level of protection from retaliation. It is likely that the Second Circuit will be the next court to provide insight as to whether Dodd Frank’s protections extend to internal whistleblowers, determining whether the SEC’s interpretation of Dodd-Frank as broadly protecting internal whistleblowers will prevail.

A more extensive version of this article by the author entitled, “Inside or Out? The Dodd-Frank Whistleblower Program’s Anti-Retaliation Protections for Internal Reporting,” is forthcoming in TEMPLE LAW REVIEW, Volume 86, Issue 4 in the Summer of 2014.   

ENDNOTES 

  1. See Murray v. UBS Securities, LLC, No. 12 Civ. 5914, 2013 WL 2190084 (S.D.N.Y. May 21, 2013), Genberg v. Porter, No. 11 Civ. 2434-WYD-MEH, 2013 WL 1222056 (D. Colo. Mar. 25, 2013); Kramer v. Trans-Lux Corp., No. 11 Civ. 1424(SRU), 2012 WL 4444820 (D.Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F.Supp.2d 986 (M.D.Tenn. Apr. 3, 2012); Egan v. TradingScreen, Inc., No. 10 Civ. 8202(LBS), 2011 WL 1672066 (S.D.N.Y. May 4, 2011); and 17 C.F.R. § 240.21F-2(b)(1)).
  2. Asadi v. G.E. Energy LLC, 2012 WL 2522599, at *1 (S.D. Texas June 28, 2012).  
  3. Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984).
  4. Liu v. Siemens A.G., No. 13 Civ. 317, 2013 WL 5692504 (S.D.N.Y. Oct. 21, 2013). 
  5. David M. Mayer, Samir Nurmohamed, Linda Klebe Treviño, Debra L. Shapiro & Marshall Schminke, Encouraging employees to report unethical conduct internally: It takes a village, 121 ORG. BEHAVIOR & HUMAN DECISION PROCESSES 89, 100-01 (2013); FREDERICK D. LIPMAN, WHISTLEBLOWERS: INCENTIVES, DISINCENTIVES, AND PROTECTION STRATEGIES 57-60 (John Wiley & Sons, Inc. 2012).

 

 

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