Court whistleblowing ruling undercuts compliance programs

In a decision that undermines company compliance programs, the US Court of Appeals for the Fifth Circuit ruled last week that whistleblowers are not entitled to Dodd-Frank’s generous protections unless they report directly to the Securities and Exchange Commission. Under the Court’s reading of Dodd-Frank, filing an internal complaint that results in a retaliatory firing is not protected. As a result, the decision provides a strong incentive for employees to bypass internal compliance procedures and go directly to the SEC.

The Court focused on two provisions. One is the statute’s definition of 'whistleblower,' and the other details which whistleblowing activities are covered. The definition of whistleblower is unambiguous, applying only to people who report to the SEC. The other provision denotes three types of conduct that are specifically protected, including ‘making disclosures that are required or protected under…[any] law, rule, or regulation subject to the jurisdiction of the [SEC].’ The Commission had interpreted that provision as covering disclosures to employers and others, as long as the disclosure was required or protected by the laws or rules the SEC enforced.

In reaching its decision, the Fifth Circuit rejected that approach. The Court said the only provision that matters is how the term 'whistleblower' is defined, because only whistleblowers can engage in protected activity. Under Dodd-Frank, while there are three types of activity that may be covered in a whistleblower-protection claim, there is only one category of whistleblower: individuals who provide information relating to a securities law violation to the SEC, the Court explained.

Gregory Keating, co-chair of employment law firm Littler Mendelson’s whistleblowing and retaliation practice, calls it a very significant decision. ‘While a number of federal district courts which have addressed the issue have all adopted a broad interpretation of Dodd-Frank's whistleblower definition, the Fifth Circuit focused on the plain language of the statute and dramatically narrowed the field of would-be whistleblowers,’ he says. As a result, he noted, courts will see ‘an increase in motions to dismiss [retaliation claims for internal reporting of misconduct] by attorneys representing employers.’

And, given the growing split among the Courts, this issue may ultimately have to be resolved by the US Supreme Court, Keating adds. 

The other decisions, as he noted, all went the other way and were issued by District Courts, while the Fifth Circuit is the first Circuit Court to render an opinion on this point. The first interpretation of the provision came from the Southern District of New York in 2011, followed by the District of Connecticut’s decision in 2012, with which the Middle District of Tennessee and the District of Colorado concurred in 2012 and 2013, respectively. As a result, employers in those districts can currently expect their employees to chance reporting internally before going to the SEC; in the Fifth Circuit, however, the situation is different.

A compliance officer in the Fifth Circuit can’t do much to incentivize employees to report internally first, says Toby M. Galloway, a partner with Kelly Hart who specializes in government and internal investigations, and white-collar defense. 

One could try encouragement or appeals to loyalty, but under this decision, a whistleblower could never be protected from adverse job action by reporting internally, he says. ‘Thus, any attorney representing a whistleblower would be unwise to have his or her client report internally, given this decision,’ Galloway says. ‘The Fifth Circuit appears to have given no thought to the policy ramifications of this decision.’

This decision further points out ‘the need to take aggressive steps to emphasize and foster a culture of true compliance with state of the art training and an integrated compliance procedure,’ according to Keating.

The best response to the incentive to bypass internal systems might be to push for revised legislation to comport with the contrary district court decisions and the SEC’s own published guidance, says Galloway. This decision, and any similar ones that follow, will perhaps set off a lobbying frenzy as employers seek to amend the statute.