Lead Opinion
Dissent by Judge OWENS
OPINION
INTRODUCTION
This appeal presents an issue of securities law that has divided the federal district and circuit courts. It results from a last-minute addition to the anti-retaliation protections of the Dodd-Frank Act (“DFA”) to extend protection to those who make disclosures under the Sarbanes-Ox-ley Act and other laws, rules, and regulations! 15 U.S.C. § 78u-6(h)(l)(A)(iii). The underlying issue is whether, in using the term “whistleblower,” Congress intended to limit protections to those who come within DFA’s formal definition, which would include only those who disclose information to the Securities and Exchange Commission (“SEC”). See 15 U.S.C. § 78u-6(a)(6). If so, it would exclude' those, like the plaintiff in this case, who were fired after making internal disclosures of alleged unlawful activity.
The Fifth Circuit was the first to weigh in on the question and strictly applied DFA’s definition of “whistleblower” to the
The Second Circuit, viewing the statute itself as ambiguous, applied Chevron deference to the SEC’s regulation. Berman v. Neo@Ogilvy LLC,
The district court in this case followed the Second Circuit’s approach, denied Defendant’s motion to dismiss, and certified an interlocutory appeal. We agree with the district court that the regulation is consistent with Congress’s overall purpose to protect those who report violations internally as well as those who report to the government. This intent is reflected in the language of the specific statutory subdivision in question, which explicitly references internal reporting provisions of Sar-banes-Oxley and the Securities Exchange Act of 1934 (“Exchange Act”). In view of that language, and the overall operation of the statute, we conclude that the SEC regulation correctly reflects congressional intent to provide protection for those who make internal disclosures as well as to those who make disclosures to the SEC. We therefore affirm.
BACKGROUND
Plaintiff-Appellee, Paul Somers, was employed as a Vice President by Defendant-Appellant, Digital Realty Trust, Inc. (“Digital Realty”), from 2010 to 2014. According to Somers’s complaint in district court, he made several reports to senior management regarding possible securities law violations by the company, soon after which the company fired him. Somers was not able to report his concerns to the SEC before Digital Realty terminated his employment.
Somers subsequently sued Digital Realty, alleging violations of various state and federal laws, including Section 21F of the Exchange Act. That section, entitled “Securities Whistleblower Incentives and Protection,” includes the anti-retaliation protections created by DFA. Digital Realty sought to dismiss the DFA claim on the ground that, because Somers only reported the possible violations internally and not to the SEC, he was not a “whistleblower” entitled to DFA’s protections.
The district court, in a published opinion, denied Digital Realty’s motion to dismiss the DFA claim. The court conducted an extensive analysis of the statutory text, DFA’s legislative history, and the procedural and practical implications of harmonizing the narrow definition of “whistle-blower” with the broad protections of the anti-retaliation provision. Somers v. Dig. Realty Tr. Inc.,
The case must be seen against the background of twenty-first century statutes to curb securities abuses. Congress enacted the Sarbanes-Oxley Act in 2002, following a major financial scandal. Its purpose was “[t]o safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation.” Lawson v. FMR LLC, — U.S. —,
Like Sarbanes-Oxley, DFA was passed in the wake of a financial scandal — the subprime mortgage bubble and subsequent market collapse of 2008. See Samuel C. Leifer, Note, Protecting Whistleblower Protections in the Dodd-Frank Act, 113 Mich. L. Rev. 121, 129-30 (2014) (discussing the mortgage crisis and Congress’s response). In enacting DFA, Congress said the main purposes included “promoting] the financial stability of the United States by improving accountability and transparency in the financial system” and “protecting] consumers from abusive financial services practices.” Pub. L. No. 111-203, 124 Stat. 1376, 1376 (2010). DFA provided new incentives and employment protections for whistleblowers by adding Section 21F to the Securities Exchange Act of 1934. Section 21F defines a whistleblower as, “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, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. § 78u-6(a)(6). This definition thus describes only those who report information to the SEC.
The anti-retaliation provision in question in this case is found in a later subsection of Section 21F. It provides broad protections and states:
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—
(i) in providing information to the Commission in accordance with this section;
(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter, including section 78j-l(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.
15 U.S.C. § 78u-6(h)(l)(A). The issue in this case concerns subdivision (iii), which gives whistleblower protection to all those who make any required or protected dis
Subdivision (iii) was added after the bill went through Committee. There is no legislative history explaining its purpose, but its language illuminates congressional intent. By broadly incorporating, through subdivision (iii), Sarbanes-Oxley’s disclosure requirements and protections, DFA necessarily bars retaliation against an employee of a public company who reports violations to the boss, i.e., one who “provide[s] information” regarding a securities law violation to “a person with supervisory authority over the employee.” 18 U.S.C. § 1514A(a). Provisions of Sarbanes-Oxley and the Exchange Act mandate internal reporting before external reporting. Auditors, for example, must “as soon as practicable, inform the appropriate level of management” of illegal acts, and only after such internal reporting may auditors bring their concerns to the SEC. 15 U.S.C. § 78j-l(b). Leaving employees without protection for that required preliminary step would result in early retaliation before the information could reach the regulators. As the Second Circuit noted, “[I]f subdivision (iii) requires reporting to the [SEC], its express cross-reference to the provisions of Sarbanes-Oxley would afford an auditor almost no Dodd-Frank protection for retaliation because the auditor must await a company response to internal reporting before reporting to the Commission, and any retaliation would almost always precede Commission reporting.” Ber-man,
That DFA’s definitional provision describes “whistleblowers” as employees who report “to the Commission” thus should not be dispositive of the scope -of DFA’s later anti-retaliation provision. Terms can have different operative consequences in different contexts. See King v. Burwell, — U.S. —,
Reading the use of the word “whistle-blower” in the anti-retaliation provision to incorporate the earlier, narrow definition would make little practical sense and undercut congressional intent. As the Second Circuit pointed out, subdivision (iii) would be narrowed to the point of absurdity; the only class of employees protected would be those who had reported possible securities violations both internally and to the SEC, when the employer — unaware of the report to the SEC — fires the employee solely on the basis of the employee’s internal report. See Berman,
We recognize there is intercircuit disagreement. The Second Circuit in Berman disagreed with the Fifth Circuit, which had earlier applied the formal definition of whistleblower to limit the scope of the anti-retaliation provision. Asadi,
For all these reasons, we conclude that subdivision (iii) of section 21F should be read to provide protections to those who report internally as well as to those who report to the SEC. We also agree with the Second Circuit that, even if the use of the word “whistleblower” in. the anti-retaliation provision creates uncertainty because of the earlier narrow definition of the term, the agency responsible for enforcing the securities laws has resolved any ambiguity and its regulation is entitled to deference. In 2011, the SEC issued Exchange Act Rule 21F-2, 17 C.F.R. § 240.21F-2, pursuant to its rule-making authority under 15 U.S.C. § 78u-6(j). The SEC’s rule
The regulation accurately reflects congressional intent that DFA protect employees whether they blow the whistle internally, as in many instances, or they report directly to the SEC. The district court correctly so recognized.
The judgment of the district court is AFFIRMED.
Dissenting Opinion
dissenting:
I agree with the Fifth Circuit in Asadi v. G.E. Energy (USA), L.L.C.,