The Supreme Court is set to decide whether corporate whistle-blowers are protected from being fired if they disclose wrongdoing to company officials rather than to the Securities and Exchange Commission.
Top court to weigh if protections cover all whistleblowers
WASHINGTON — The Supreme Court is set to decide whether corporate whistleblowers are protected from being fired if they disclose wrongdoing to company officials rather than to the Securities and Exchange Commission.
At issue in the case to be argued Tuesday is the scope of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which aimed to encourage whistleblowers and prevent the kind of retaliation seen against those who tried to sound an alarm at Lehman Bros. and other firms that collapsed during the Great Recession.
But it is not clear that the law does as much as its sponsors and supporters assumed. It faces a stiff challenge based on “textualism,” the approach that has won favor with most of the justices, and none more so than new Justice Neil Gorsuch. He has repeatedly declared his devotion to deciding cases based on the text of the law, not its broader purpose.
While the 2010 law clearly says companies may be sued if they “discharge (or) demote” employees for disclosing wrongdoing, it separately defines a whistleblower as an “individual who provides information … to the commission.”
The question is now whether that narrow definition excludes those who step forward to expose potential frauds by reporting them internally, rather to the SEC. And if a company were to quickly fire such an employee — before a report were made to the SEC — is the whistleblower left unprotected by the Dodd-Frank law?
Gorsuch gave the keynote address this month at the conservative Federalist Society’s annual meeting and credited the late Justice Antonin Scalia with winning over most of the justices to the view that they should focus narrowly on the words of the law. “The duty of a judge is to say what the law is, not what it should be,” Gorsuch said.
The case — Digital Realty Trust v. Somers — highlights the clash between two ways of interpreting a federal law.
Three years ago, Paul Somers was a vice president and portfolio manager working in Singapore for a real estate trust based in San Francisco. He said he became concerned that his supervisor was cutting corners, including hiding a $7 million cost overrun on a project in Hong Kong. He decided to report his concerns to the company’s top executives in San Francisco.
But a few weeks after he sent his memo, Somers was told he had been terminated. He filed a wrongful termination suit in federal court in San Francisco, alleging he had been fired in retaliation for disclosing wrongdoing in violation of the Dodd-Frank Act. He relied on one provision which broadly protects employees “in making disclosures” of potential violations of “any other law, rule or regulation” enforced by the SEC.
But lawyers for Digital Realty said his suit should be dismissed because he did not qualify as a protected whistleblower, citing the strict definition.
U.S. District Judge Edward Chen denied the motion. He said it was a close case because different provisions of the law were in conflict, but he deferred to the SEC, which said internal whistleblowers were protected.
Digital Realty appealed, but in March, the U.S. 9th Circuit Court of Appeals, in a 2-1 decision, cleared the suit to proceed. Judge Mary Schroeder pointed to the provision that broadly protected employees who disclose violations. “In view of that language, and the overall operation of the statute, we conclude that the SEC regulation correctly reflects congressional intent to provide protection for those who make internal disclosures as well as to those who make disclosures to the SEC.”
Washington lawyer Kannon Shanmugam, a former clerk for Justice Scalia, represents Digital Realty and emphasized that the law as written did not protect insiders who did not disclose violations to the SEC.
Trump administration Solicitor Gen. Noel Francisco and Sen. Chuck Grassley, R-Iowa, co-author of the whistleblower provisions, filed briefs on Somers’ side, arguing the 2010 law was intended to broadly protect company insiders who disclose wrongdoing.
Michael Celio, a corporate defense lawyer in San Francisco, said the SEC is likely to lose in the Supreme Court, but he is wary about the outcome.
“Given Justice Gorsuch’s position, they may say the SEC got this wrong,” he said. “But the danger is this would give people an incentive to go the SEC rather than to someone in their company. That’s the bad news. Every company wants people to report internally so they can fix things quickly.”