by Cydney Posner

In Berman v. Neo@Ogilvy LLC, a three-judge panel of the Second Circuit reversed and remanded a decision of the SDNY, which had dismissed a claim for retaliation by a  former employee on the basis that Dodd-Frank’s whistleblower protections apply only to employees discharged for reporting violations to the SEC and not to employees who report violations only internally.  A divided court concluded that the relevant provisions of Dodd-Frank “create a sufficient ambiguity to warrant our deference to the SEC’s interpretive rule, which supports [the employee’s] view of the statute.”

The case involved the finance director of a media agency who, while employed, discovered practices that he viewed to amount to accounting fraud. After reporting these violations internally, he was terminated from employment. Following his discharge, he reported his allegations to the Audit Committee and subsequently to the SEC.  He then sued. The district court, relying on the statute’s definition of “whistleblower,” dismissed the claim, holding that the anti-retaliation provisions provided whistleblower protection only to those discharged for reporting alleged violations to the SEC.  In this case, the employee was terminated well before he reported to the SEC.

Dodd-Frank added Section 21F to the Exchange Act, establishing new incentives and protections for whistleblowers, including monetary awards for reporting information,  confidentiality provisions and employment retaliation protections.  However, the Court’s majority viewed the sections of the statute relevant here to be in conflict, one section limiting the definition of “whistleblower” to  persons who provide information relating to a securities law violation to the SEC, and another — the section prohibiting retaliation  — being much broader and, in subsection (iii), expressly prohibiting retaliation for reporting under SOX, which contemplates internal reporting.  The Court articulated the precise issue to be whether the tension between the definition of “whistleblower” and the broader anti-retaliation provisions “creates sufficient ambiguity as to the coverage of subdivision (iii) to oblige us to give Chevron deference to the SEC’s rule.”

In analyzing the statute, the Court looked first at the SEC’s interpretation as evidenced by SEC rules implementing the Dodd-Frank whistleblower provisions, the adopting release and a subsequent interpretive release. Exchange Act Rule 21F-2 expressly provides, in subsection (b)(1)(iii), that the “anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.”  In addition, the SEC’s adopting release made clear that, in its view, the anti-retaliation provisions of the statute applied to “different categories of whistleblowers, and the third category [described in subsection (iii)] includes individuals who report to persons or governmental authorities other than the Commission.”  The Court also noted that, in early August, the SEC issued an interpretive release to “clarify that, for purposes of the employment retaliation protections provided by Section 21F of the Securities Exchange Act of 1934…, an individual’s status as a whistleblower does not depend on adherence to the reporting procedures specified in Exchange Act Rule 21F-9(a) [procedures for qualifying for a whistleblower award], but is determined solely by the terms of Exchange Act Rule 21F-2(b)(1) [anti-retaliation].”  That release indicates that, to resolve the statute’s “ambiguity,” the  SEC included in its rule two separate definitions of “whistleblower,” one of which applied only to the award and confidentiality provisions and one of which applied for purposes of the anti-retaliation protections and did not require reporting to the SEC. The SEC also noted that, while the Court of Appeals for the Fifth Circuit had

“expressed some uncertainty about this reading in a recent decision,… that construction is not consistent with Rule 21F-2 and would undermine our overall goals in implementing the whistleblower program….Specifically, by providing employment retaliation protections for individuals who report internally first to a supervisor, compliance official, or other person working for the company that has authority to investigate, discover, or terminate misconduct, our interpretive rule avoids a two-tiered structure of employment retaliation protection that might discourage some individuals from first reporting internally in appropriate circumstances and, thus, jeopardize the investor-protection and law-enforcement benefits that can result from internal reporting…. Providing equivalent employment retaliation protection for both situations removes a potentially serious disincentive to internal reporting by employees in appropriate circumstances. A contrary interpretation would undermine the other incentives that were put in place through the Commission’s whistleblower rules in order to encourage internal reporting.”

Invoking the recent decision in King v. Burwell, 135 S. Ct. 2480 (2015),  where SCOTUS avoided an interpretation that would have undermined the operation of the statute by looking at the Affordable Care Act as a whole, the Court observed that there are categories of whistleblowers, such as attorneys and accountants, who cannot report to the SEC until after they have reported internally. As a result, these categories of employees would have “almost no Dodd-Frank protection for retaliation” as they “must await a company response to internal reporting before reporting to the Commission, and any retaliation would almost always precede Commission reporting.” In addition, the Court was not persuaded by either side’s textual arguments that their reading would render some language of Dodd-Frank superfluous. Instead, the Court contended that “[a]ll these arguments ignore the realities of the legislative process,” when conferees are hastily trying to reconcile House and Senate bills and may be careless in the process:

“When the conferees, at the last minute, inserted subdivision (iii) within subsection 21F(h)(1)(A) [anti-retaliation], did they expect subdivision (iii) to be limited by the statutory definition of ‘whistleblower’… or did they expect employees to be protected by subdivision (iii) whenever they report violations internally, without reporting to the Commission? The texts leave the matter unclear, and no legislative history even hints at an answer.”

At the end of the day, the Court thought it “doubtful that the conferees who accepted the last-minute insertion of subdivision (iii) would have expected it to have the extremely limited scope it would have if it were restricted by the Commission reporting requirement in the ‘whistleblower’ definition….” But the Court did not have to decide whether to read the statute literally or broadly to carry out its apparent purpose. Instead, the Court concluded that,  at a minimum, the tension between the two provisions “renders section 21F as a whole sufficiently ambiguous to oblige us to give Chevron deference to the reasonable interpretation” of the SEC.

The dissent  contends that the majority

“have altered a federal statute by deleting three words (“to the Commission”) from the definition of ‘whistleblower’ in the Dodd‐Frank Act. No doubt, my colleagues in the majority, assisted by the SEC or not, could improve many federal statutes by tightening them or loosening them, or recasting or rewriting them. I could try my hand at it. But our obligation is to apply congressional statutes as written.”

The dissenting judge concluded that the employee was protected from retaliation only under SOX, not Dodd-Frank, because he did “not allege facts that make him a ‘whistleblower’ as that term is defined in Dodd‐Frank.” Further, he disputed the majority’s characterization of the anti-retaliation provisions as applicable to “employees”; rather “Dodd‐Frank’s whistleblower‐protection provisions do not mention this (generic) employee. Instead, the statute lists three ways that ‘a Whistleblower’ may take protected activity,” including, in one case, by making disclosures under SOX…. The thing about a definition is that it is, well, definitional.”  In addition, he contends, “the majority has no support for the proposition that when a plain reading of a statutory provision gives it an ‘extremely limited’ effect, the statutory provision is impaired or ambiguous.” The Court’s invocation of King v. Burwell is inapposite, he argues, because that case is “not a wholesale revision of the Supreme Court’s statutory interpretation jurisprudence, which for decades past has consistently honored plain text over opportunistic inferences about legislative history and purpose.” In contrast to the limited impact that a decision against the employee would have here, in King, SCOTUS “adapted wording to avoid what it considered the upending of a ramified, hugely consequential enactment….”

Interestingly, the district courts are in conflict on the issue and, and with this opinion, the Second Circuit is now in conflict with the Fifth Circuit on this issue. We’ll have to wait to see if the issue goes any higher.


Posted by Cydney Posner