Case No. 16-1276 | 9th Cir. Decision
In a case sure to garner the attention of corporate compliance departments, Digital Realty Trust will shed some light on the scope of Dodd-Frank’s protections for whistleblowers. In a reaction to the misdeeds at play during the 2008 financial crisis, Congress enacted Dodd-Frank in 2010 as its toughest regulatory measure on Wall Street yet. The legislation created a whistleblower program that awarded individuals who reported any number of corporate violations. To date, the program has paid out over $154 million to whistleblowers. Importantly, the statute includes an anti-retaliation provision that prohibits employers from retaliating against whistleblowers. The question at issue in Digital Realty Trust is whether the anti-retaliation provision protects employees who do not report violations to the Securities and Exchange Commission (“SEC”). There is a circuit split which the Court has been called on to resolve.
In this particular case, Digital Realty Trust maintained its own code of ethics requiring employees to disclose wrongdoings internally. After the company’s Vice President did just that—disclosed possible securities violations to senior management—Digital promptly fired him. The Northern District of California, citing a 2011 SEC rule that redefined the statute to include protections for those reporting internally, ruled that the Vice President should have been protected. The Ninth Circuit affirmed the lower court’s decision and reliance on the 2011 SEC rule.
The statutory text defines a whistleblower as an “individual who provides . . . information relating to a violation of the securities laws to the Commission.” The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010). Digital argues that this statute is unambiguous, as it very clearly only applies to individuals reporting to the SEC. Although they are likely correct, the 2011 SEC rule that the lower courts pointed to did, in fact, attempt to extend the statute to provide coverage for those who only report internally. Digital, however, argues that the SEC violated the Administrative Procedure Act when it published this rule without providing fair notice to the public. Thus, Digital claims, the Court should follow the plain language of the statute and disregard the rule’s clarification.
If the Court does find in favor of Digital and holds that the anti-retaliation provision only extends to those individuals who reported violations to the SEC, there is a concern in the corporate world that the role of compliance departments will be largely weakened. One law firm partner, in a Law360 article, darkly suggested, “If the Supreme Court decides in favor of Digital, corporate compliance programs will be dead, and their reputations forever tarnished.” Stephen Kohn, Digital Realty Trust v. Somers May Kill Corporate Compliance, Law360 (Sept. 21, 2017), https://www.law360.com/articles/964208/digital-realty-trust-v-somers-may-kill-corporate-compliance.