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Although Dodd-Frank Explicitly Defines A “Whistleblower” In A Way That Only Includes Those Who Provide Information To The SEC, An Exception Has Been Carved Out That Is Rooted In A “Catch-All” Part Of The Law

Dodd-Frank’s “Catch-All” Provision Providing Whistleblower Status To Employees Who Make Certain Internal Disclosures

The Dodd–Frank Act defines a whistleblower making disclosures under the SEC’s jurisdiction as follows: “The term ‘whistleblower’ means 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) (emphasis added). But, on the other hand, in an apparent conflict, the anti-retaliation provisions of the Dodd-Frank Act protect whistleblowers from retaliation in three categories of circumstances, one of which that does not necessarily require reporting to the SEC, as follows:

No employer may discharge . . . 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 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.), the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.), including section 10A(m) of such Act (15 U.S.C. § 78f(m)), section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

Id. § 78u–6(h)(1)(A).

By their own terms, the first two anti-retaliation categories protect whistleblowers who report potentially illegal activity to the SEC or who work with the SEC directly, in some manner, concerning potential securities violations. By contrast, the third category does not require that the whistleblower have interacted directly with the SEC – only that the disclosure, to whomever made, was “required or protected” by certain laws within the SEC’s jurisdiction. See Egan v. TradingScreen, Inc., No. 10 Civ. 8202(LBS), 2011 WL 1672066, at *5 (S.D.N.Y. May 4, 2011). Thus, for example, if one of the referenced laws in section (iii) either (a) required an employee to report a potential securities violation internally; or (b) protected an employee’s disclosure of that information to another federal agency or federal law enforcement officer, § 78u–6(h)(1)(A)(iii) would prohibit retaliation against that whistleblower by the whistleblower’s employer. As the Egan court explained in harmonizing the apparent conflict:

A literal reading of the definition of the term ‘whistleblower’ in 15 U.S.C. § 78u–6(a)(6) would effectively invalidate § 78u–6(h)(1)(A)(iii)’s protection of whistleblower disclosures that do not require reporting to the SEC . . . .

[These] contradictory provisions of the Dodd–Frank Act are best harmonized by reading 15 U.S.C. § 78u–6(h)(1)(A)(iii)’s protection of certain whistleblower disclosures not requiring reporting to the SEC as a narrow exception to 15 U.S.C. § 78u–6(a)(6)’s definition of a whistleblower as one who reports to the SEC. Therefore, Plaintiff must either allege that his information was reported to the SEC, or that his disclosures fell under the four categories of disclosures delineated by 15 U.S.C. § 78u–6(h)(1)(A)(iii) that do not require such reporting: those under the Sarbanes–Oxley Act, the Securities Exchange Act, 18 U.S.C. § 1513(e), or other laws and regulations subject to the jurisdiction of the SEC.

Egan, 2011 WL 1672066, at *5.

Other federal district courts have followed Egan on this point. See, e.g., Genberg v. Porter, NO. 11-CV-02434-WYD-MEH, 2013 WL 1222056, at *10 (D. Colo. Mar. 25, 2013), and cases cited therein.

With respect to the scope of part (iii), the “catch-all” anti-retaliation protections extend only to any “law, rule, or regulation subject to the jurisdiction of the Commission.” 15 U.S.C. § 78u–6(h)(1)(A)(iii). “Thus, where an employee reports a violation of a federal law by the employer, the DFA only protects that employee against retaliation if the federal violation falls within the SEC’s jurisdiction.” Nollner v. Southern Baptist Convention, Inc., 852 F. Supp. 2d 986, 994 (M.D. Tenn. 2012). Furthermore, “a plaintiff seeking relief under anti-retaliation provision part (iii) must demonstrate that the disclosure at issue relates to a violation of federal securities laws.” Id. at 994. In addition, anti-retaliation provision part (iii) only protects disclosures that are “required or protected” by laws, rules, or regulations within the SEC’s jurisdiction. Thus, an employee is not protected from retaliation under the “catch-all” provision if the disclosure at issue – even if it relates to an actual legal violation by the employer – concerns a disclosure that is not “required” or otherwise “protected” by a law, rule, or regulation within the SEC’s jurisdiction. Id. at 994-95 (citing Egan, 2011 WL 1672066, at *6 (“[M]erely alleging the violation of a law or rule under the SEC’s purview is not enough; a plaintiff must allege that a law or rule in the SEC’s jurisdiction explicitly requires or protects disclosure of that violation.”)).

In the 2012 Nollner decision, the court dismissed the plaintiffs’ (a husband and wife’s) Dodd-Frank retaliation claims under the “catch-all” section set out in § 78u–6(h)(1)(A)(iii). The court set out the standard for a claim under the catch-all section:

Harmonizing all of these provisions, as the court must, a plaintiff seeking protection under § 78u–6(h)(1)(A)(iii) must at least show the following: (1) he or she was retaliated against for reporting a violation of the securities laws, (2) the plaintiff reported that information to the SEC or to another entity (perhaps even internally) as appropriate; (3) the disclosure was made pursuant to a law, rule, or regulation subject to the SEC’s jurisdiction; and (4) the disclosure was “required or protected” by that law, rule, or regulation within the SEC’s jurisdiction.

Id. at 995.

In applying the standard, the Nollner court observed that the plaintiffs’ claims were based on the allegation that the defendant had violated the Foreign Corrupt Practices Act (“FCPA”), and that they had been retaliated against after they reported the alleged FCPA violations to their employer. See Nollner, 852 F. Supp. 2d at 995-96. The FCPA applies, inter alia, to any “issuer” or “domestic concern,” as defined by the Act. The defendant was not an “issuer,” but it was a “domestic concern.” Id. The Department of Justice (“DOJ”) has sole responsibility for all criminal enforcement of the FCPA. Id. As to civil enforcement, the SEC has enforcement responsibility over FCPA violations by issuers, while the DOJ has enforcement responsibility over FCPA violations by domestic concerns and other non-issuer entities subject to the FCPA. Id. Accordingly, as the court stated, “because the defendants are not issuers, only the DOJ – not the SEC – has jurisdiction over them with respect to FCPA violations.” Id. at 996. Therefore, the plaintiffs’ Dodd-Frank claims under the “catch-all” section had to be dismissed:

Here, because the defendants are not “issuers” for purposes of the FCPA, they are not “subject to the jurisdiction” of the SEC with respect to FCPA violations. Moreover, the violations reported by Mr. Nollner do not “relate to violations of the securities laws” (i.e., he is not a “whistleblower” under the DFA) and do not concern actions by a company otherwise subject to SEC jurisdiction. Thus, even assuming the allegations to be true, the Nollners may not maintain DFA retaliation claims premised on their reporting of potential FCPA violations by the defendants. Therefore, the court will dismiss the DFA claim with prejudice.

Id. at 997-98 (footnote omitted). See also Asadi v. G.E. Energy (USA), LLC, Civil Action No. 4:12–345, 2012 WL 2522599, at *6 (S.D. Tex. June 28, 2012) (rejecting Dodd-Frank retaliation claim under “catch-all” provision under same sort of reasoning).

Hat tip: An outstanding article that covers the law and final regulations in comprehensive fashion is Dodd-Frank and the SEC Final Rule: From Protected Employee To Bounty Hunter, ST001 ALI-ABA 1487 (July 28-30, 2011), which was written by Littler Mendelson, P.C. lawyers John S. Adler, Edward T. Ellis, Barbara E. Hoey, Gregory C. Keating, Kevin M. Kraham, Amy E. Mendenhall, Kenneth R. O’Brian, and Carole F. Wilder. This post is partially derived from that article.