Leiden Law Blog

Protection of Whistleblowers under the U.S. Dodd-Frank Act

Posted on by Cees de Groot in Private Law
Protection of Whistleblowers under the U.S. Dodd-Frank Act

The U.S. federal Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits employers from retaliating against whistleblowers who disclose information that relates to violations of securities laws. A whistleblower is ‘any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission’. Whistleblowers are protected against retaliation to the effect that ‘No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower [inter alia] in providing information to the Commission’. The first of these provisions specifically refers to information that whistleblowers provide ‘to the Commission’, i.e. the Securities and Exchange Commission (‘SEC’), and the second refers inter alia to lawful acts on the part of whistleblowers ‘in providing information to the Commission’, i.e. the SEC.

Under the ‘Dodd-Frank Act’, a whistleblower ‘who alleges discharge or other discrimination […] may bring an action [...] in the appropriate district court of the United States for the relief provided in subparagraph (C)’. Subparagraph (C) provides a whistleblower with relief that includes ‘reinstatement with the same seniority status that the individual would have had, but for the discrimination’, ‘2 times the amount of back pay otherwise owed to the individual, with interest’, and ‘compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees’.

The formulation of both provisions that refer to whistleblowers who (lawfully) provide information to the SEC, raises the question of whether a whistleblower is protected against retaliation under the ‘Dodd-Frank Act’ if he or she did not report information on violations of securities laws to the SEC, but instead provided this information internally to the management of the company that allegedly violated securities laws. This issue has led to opposing opinions at the levels of U.S. district and (on appeal) circuit courts, and is now before the U.S. Supreme Court for its decision. In the course of these proceedings before the Supreme Court, the SEC and the Department of Justice (‘DOJ’) submitted an amicus curiae brief in which they stated their views (maybe to some extent contravening the literal text of the ‘Dodd-Frank Act’).

The SEC and DOJ argued that internal reporting gives companies the opportunity to correct wrongdoings themselves, something which ‘promotes efficient use of both corporate and government resources’. Also, the SEC and DOJ noted that a strict interpretation of the protection against retaliation ‘would substantially diminish the retaliation prohibition’s deterrent effect’. Added to that, the SEC and DOJ drew attention to the fact that the ‘Dodd-Frank Act’ was meant to repair shortcomings of the ‘Sarbanes-Oxley Act’, which did provide for protection of whistleblowers against retaliation following internal reporting, but had failed to be of use in preventing the financial crisis of 2008. And: ‘Read in accordance with its ordinary meaning, the term “whistleblower” is not limited to people who report to the Commission’.

The Brief for the United States as Amicus Curiae Supporting Respondent, in the case of Digital Realty Trust, Inc. v. Paul Somers before the Supreme Court of the United States (case no. 16-1276) can be found at: www.sec.gov and www.scotusblog.com.

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