United States of America: Uncertainty over scope of whistleblower protections under the Dodd-Frank Act

The Dodd-Frank Act, enacted in 2010, offered new protections against retaliation to employees who report violations of the federal securities laws at their companies. However, as two recent federal district court decisions demonstrate, the scope of these protections under the law, particularly which employees can seek whistleblower protection and when they can do so, remains far from settled in the US courts.

In late 2013, district courts in New York and Massachusetts firmly rejected an earlier 2013 decision by the US Court of Appeals for the Fifth Circuit in Asadi v GE Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013). In Asadi, the court had held that employees who have only raised issues internally at their companies are not protected from retaliation under Dodd-Frank. Rather, to be entitled to Dodd-Frank whistleblower protection, an employee must formally report suspected violations of the securities laws to the Securities and Exchange Commission (SEC). In doing so, the Asadi court rejected a 2011 SEC interpretation of Dodd-Frank, which stated that ‘up-the-ladder’ internal reporting of violations entitles whistleblowers to protection against retaliation. The Fifth Circuit’s decision was, in many respects, good news for employers concerned about an expansive interpretation of Dodd-Frank’s retaliation provisions.

However, the decisions by the courts in Ellington v Giacoumakis, 2013 U.S. Dist. LEXIS 148939 (D. Mass. Oct. 16, 2013) and Rosenblum v Thomson Reuters (Mkts.) LLC, 2013 U.S. Dist. LEXIS 153635 (S.D.N.Y. Oct. 25, 2013) demonstrate that litigation on the subject continues in earnest. Both courts ruled in favor of employees seeking whistleblower protection. The courts found Dodd-Frank’s definition of a whistleblower to be at odds with the law’s anti-retaliation provisions, and therefore followed the SEC interpretation that employees whose contracts were terminated for reporting violations internally should also be protected against retaliation.

It is likely that additional US Courts of Appeal will weigh in concerning the scope of Dodd-Frank’s whistleblower protections, and the issue is likely to eventually reach the US Supreme Court. The Fifth Circuit’s Asadi decision has a strong legal rationale grounded in the statutory language of Dodd-Frank, and may be persuasive to other Courts of Appeal; however, the policy implications of excluding internal whistleblowers from Dodd-Frank’s protections continue to trouble a number of lower federal courts. The Fifth Circuit’s position is a mixed blessing for employers, as it interprets narrowly the scope of Dodd-Frank’s whistleblower provisions, but also may incentivise employees to bypass a company’s internal reporting procedures and communicate directly with the SEC, eliminating an opportunity to correct problematic practices through informal, internal processes.

While we have focused on Dodd-Frank given its high profile and close relevance to financial institutions, there are numerous federal whistleblower laws which can impact employers in many contexts, including laws pertaining to securities, employment, environment, antitrust, and government contracting. Most of these laws similarly prohibit retaliation and provide for fees and other damages. Notably, under many other federal whistleblower laws, an employee does not have to be ‘right’ about what they report, rather, a ‘reasonable belief’ standard often applies. In addition, there are whistleblower protections in thirty states and the District of Columbia. Indeed, New York City even has its own whistleblower law. Generally speaking, the movement at all governmental levels has been toward greater, rather than lesser, enforcement of anti-retaliation protections.

Actions for employers

Notwithstanding the uncertainty regarding the scope of Dodd-Frank’s whistleblower protection, employers would still be wise to maintain vibrant internal complaint and reporting procedures to minimise the potential for retaliation claims to arise at all. It will be important to monitor developments in 2014.

Scott Balber, Partner and Christopher Leahy, Senior Associate