Fifth Circuit Rejects GE Iraq Exec's Broad Interpretation of Dodd-Frank “Whistleblower”
In federal courts across the country, employers have sought to limit the Dodd-Frank Act’s definition of “whistleblower.” Just last week, this challenge seemed futile. Both the SEC (in its regulations) and a number of federal district courts had rejected employers’ reading of the statute, under which the “whistleblower” term – and the accompanying right of action for retaliation – would be limited to those employees who reported misconduct to the SEC.
Last Wednesday, the Fifth Circuit flipped the script, holding that “the plain language of the Dodd-Frank whistleblower-protection provision creates a private cause of action only for individuals who provide information relating to a violation of the securities laws to the SEC.” Asadi v. GE Energy (USA), L.L.C., No. 12-20522 (5th Cir. Jul. 17, 2013), slip op. at 5.
Khaled Asadi, the plaintiff in the case, was GE Energy’s former Iraq Country Executive. While serving in that position, he reported concerns about potential Foreign Corrupt Practices Act violations, and lost his job soon after. He then filed suit for retaliation under Dodd-Frank. The district court rejected his claim, but for a different reason, ruling that the law did not protect his “extraterritorial” whistleblowing activity.
On appeal, the Fifth Circuit didn’t even get to that issue. Instead, it rejected Asadi’s claim on the ground that he hadn’t reported any violation of the securities laws to the SEC, and therefore did not fall within Dodd-Frank’s definition of “whistleblower[s]” who can bring retaliation claims. The definition of “whistleblower” in Dodd-Frank “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 . . .” § 78u-6(a)(6). Under this unambiguous definition, wrote the Fifth Circuit (Judge Elrod), an individual must provide information to the SEC to qualify as a whistleblower.
The court disagreed with Asadi’s argument that the whistleblower definition conflicts with Dodd-Frank’s provision barring retaliation. Asadi, like other plaintiffs before him, pointed out that the retaliation provision describes three categories of actions for which an employer may not retaliate, and only two of them include providing information to the SEC. § 78u-6(h)(1)(A). The Fifth Circuit reconciled these provisions by stating that the three categories in 6(h)(1)(A) define only the conduct that is protected, and do not “define which individuals qualify as whistleblowers.” Slip op. at 8. The court also had another problem with Asadi’s reading of the provision: it would effectively render the Sarbanes-Oxley anti-retaliation provision moot, because Dodd-Frank is a much more desirable remedy than SOX. Id. at 14.
Finally, the court decided not to defer to the SEC’s interpretation of the anti-retaliation protections in Dodd-Frank, stating that the SEC regulations were inconsistent and conflict with the plain language of the statute.
The practical impacts of the Fifth Circuit decision are as follows.
First, the decision increases the chance of a circuit split over the meaning of Dodd-Frank, which is more likely to lead to Supreme Court review of the issue.
Second, employees who do not report misconduct to the SEC now have a greater likelihood of losing a Dodd-Frank claim, because there is now precedent on the employers' side. And in the Fifth Circuit, they will definitely lose, at least until the Supreme Court weighs in. Further, because of the much shorter statute of limitations for Sarbanes-Oxley claims, they may be left without a federal remedy if their Dodd-Frank claims are rejected. To that end, at oral argument in Asadi, GE Energy's counsel noted that the statute of limitations on Asadi's Sarbanes-Oxley claim had already expired.
Third, employees who detect corporate misconduct now have another strong incentive to go straight to the SEC with their concerns. Indeed, Jenna Greene of the National Law Journal has written that the decision “may undermine painstakingly developed corporate compliance programs,” because it encourages employees to blow the whistle to the SEC rather than reporting misconduct internally.