Dodd-Frank’s Shifting Definition of “Whistleblower”‎

| Jason M. Knott

In yesterday’s post, we promised to talk more about the potential conflict that defendants have identified in the Dodd-Frank Act’s whistleblowing provision, Section 922. 

As we’ve previously discussed, Section 922 changed whistleblower law in two important ways.  First, it created a bounty program, under which qualified whistleblowers can receive payments from the SEC for submitting information about violations of the securities laws.  In the first fourteen months of the program, the SEC has handed out the grand total of one award.

Second, Dodd-Frank enhanced the legal remedies for whistleblowers who are victims of retaliation, expanding the scope of prior protections found in the Sarbanes-Oxley Act of 2002 and creating new ones.

Employers, however, have identified a tension in Section 922 that they are seeking to use to defeat whistleblower retaliation claims. 

Dodd-Frank's retaliation provision states that an employer cannot retaliate against “a whistleblower” for “providing information to the Commission,” “initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon . . . such information,” or “in making disclosures that are required or protected under” Sarbanes-Oxley, the 1934 Securites Act, 18 U.S.C. § 1513(e), “and any other law, rule, or regulation subject to the jurisdiction of the Commission.” 15 U.S.C. § 78u-6(h)(1)(A). 

However, a prior section of Section 922 defines “whistleblower” as someone who “provide[s] 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).  Employers -- relying on the key phrases "to the Commission" and "in a manner established" -- have argued that if a whistleblower did not satisfy these requirements, then he did not qualify for whistleblower protection.  For example, if someone disclosed a violation of the securities laws in an internal communication, or disclosed a violation to the SEC in a manner other than that established by the Commission -- such as by in-person contact, or a simple letter -- then the employers would argue that Dodd-Frank's protection would not apply.

In August 2011, the SEC promulgated a rule that rejected this interpretation.  Instead, “[f]or the purposes of the retaliation protections afforded by” Dodd-Frank, the SEC chose to define the term “whistleblower” to include someone who does not report information directly to the SEC.  In  Kramer v. Trans-Lux, which we discussed yesterday, the court accepted this rule as being a permissible construction of the statutory language.  Judges in the Middle District of Tennessee and the Southern District of New York have also agreed that the statute can be read this way.

We’ll be watching to see if any federal judges disagree with these rulings.  If there is disagreement, some plaintiffs will be forced to meet the more stringent standard for their reporting conduct -- at least until the circuit courts (or the Supreme Court) resolve the debate.