The Enron Corp. debacle and then the 2008 financial crisis caused quite a stir across the country. As the dust settled from these major financial meltdowns, Congress set out to pass legislation that would attempt to protect our financial institutions by making them more accountable. Congress enacted several laws to combat this threat, including the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act provision to the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. For years, there has been confusion on when an employee is considered a “whistleblower” for purposes of these laws; the Supreme Court has finally settled this debate.
In Somers, Paul Somers brought suit against his former employer, Digital Reality Trust, Inc. (DRT), for retaliatory termination of his employment because he reported financial misconduct of the company internally. Somers worked as Vice President of DRT from 2010 to 2014. Somers was terminated shortly after internally alerting upper management of alleged financial misconduct by his supervisor. Somers reported the alleged violations internally only, and did not alert the Securities and Exchange Commission (SEC). He also did not file an administrative complaint within 180 days of his termination.
Issue and Analysis
The central issue surrounding this case is whether Somers is afforded protection as a “whistleblower” as it is defined in the Dodd-Frank Act.
Now, the Sarbanes-Oxley Act was originally passed to protect employees from potential retaliation from employers over reporting corporate misconduct. This Act afforded protection if the employee provided information or assistance to any government regulatory agency or a person with supervisory authority. The employee would need to file a complaint with the Secretary of Labor within 180 of their termination.
Here, Somers did not file an administrative complaint with the Secretary of Labor within 180 days of his termination so the protections of Sarbanes-Oxley did not apply. This led Somers to seeking relief under Dodd-Frank.
Dodd-Frank was designed to incentivize people to come forward by providing for a rewards system and to protect employees from retaliation at work if they report corporate misconduct to the SEC. The Congressional language in Dodd-Frank is unambiguous: “[w]histleblowers who voluntarily provid[e] original information to the Commission that le[ads] to the successful enforcement of [a] covered judicial or administrative action.”
Here, Somers only reported the corporate misconduct to management within DRT, and not to the SEC. Somers attempted to argue that reporting to the SEC was only required for the reward portion of the law, but the Court declined this interpretation because the definition of whistleblower explicitly states that the whistleblower must report to the SEC. The Court explains to Somers that the original intent of the Act was to encourage SEC disclosures, thus the whistleblower language is consistent with Congressional intent.
Because of the clear statutory language in the Dodd-Frank Act, the Court held that Somers was not covered by the Act since he failed to report the corporate misconduct of Digital Reality Trusts, Inc. to the Securities and Exchange Commission before his employment termination.
Rule of Law
The Court gives a fairly straightforward interpretation of the law in this case; if there is suspected corporate financial misconduct occurring, at least report the misconduct to the SEC in order to qualify for whistleblower protections.
There are several key takeaways from this decision. First, employers should be mindful of situations surrounding employee termination or possible actions that could be construed as “retaliatory.” An employee can report suspected misconduct to the SEC and their identity will be kept anonymous. It would be beneficial to have in the corporate handbook procedures for dealing with this type of scenario to protect the employee as well as the employer.
Second, employees should remember to report to the SEC any suspected financial misconduct before taking it to company management, or at least concurrently. The actions of employees are likely going to be dependent on the corporate culture of the company and their level of comfort with management. Employers should foster a culture of open communication to dissuade this type of adversarial approach to settling these disputes.