Most likely, what comes to mind when you think about companies’ impeding the ability of a whistleblower to communicate with the SEC are allegations of overly ambitious confidentiality provisions in employment agreements or company policies. Not so in this case. In April, the SEC issued an Order in connection with a settled action charging David Hansen, a co-founder and officer of NS8, Inc., a privately held fraud-detection technology company, with violating the whistleblower protections of the Exchange Act. The SEC alleged that, after an NS8 employee raised concerns to Hansen about a possible securities law violation, Hansen took action to limit the employee’s access to the company’s IT systems. The SEC charged that these actions impeded the employee’s ability to communicate with the SEC in violation of Rule 21F-17(a) and imposed a $97,000 civil penalty. SEC Commissioner Hester Peirce dissented, contending that the SEC’s Order “does not explain what, precisely, Mr. Hansen did to hinder or obstruct direct communication between the NS8 Employee and the Commission.”
In February 2018, SCOTUS handed down its decision in Digital Realty v. Somers, holding that the Dodd-Frank whistleblower anti-retaliation protections apply only if the whistleblower blows the whistle all the way to the SEC; internal reporting to the company alone would not suffice. As Justice Gorsuch remarked during oral argument, the Justices were largely “stuck on the plain language” of the statute. However, by requiring SEC reporting as a predicate, it was widely thought that the decision might have a somewhat perverse impact: while the win by Digital would limit the liability of companies under Dodd-Frank for retaliation against whistleblowers who did not report to the SEC, the holding that whistleblowers were not protected unless they reported to the SEC could well discourage internal reporting by driving all securities-law whistleblowers directly to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor. (See this PubCo post.)
Today, SCOTUS handed down its decision in Digital Realty v. Somers, a case addressing the split in the circuits regarding the application of the Dodd-Frank whistleblower anti-retaliation protections: do the protections apply regardless of whether the whistleblower blows the whistle all the way to the SEC or just reports internally to the company? You might recall that during the oral argument, the Justices seemed to signal that the plain language of the statute was clear and controlling, thus suggesting that they were likely to decide for Digital, interpreting the definition of “whistleblower” in the Dodd-Frank anti-retaliation provision narrowly to require SEC reporting as a predicate. There were no surprises. As Justice Gorsuch remarked during oral argument, the Justices were largely “stuck on the plain language.” The result may have an ironic impact: while the win by Digital will limit the liability of companies under Dodd-Frank for retaliation against whistleblowers who do not report to the SEC, the holding that whistleblowers are not protected unless they report to the SEC may well drive all securities-law whistleblowers to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor.
Second Circuit defers to SEC interpretation of “whistleblower” for purposes of retaliation suit under Dodd-Frank
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 […]