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Second Circuit Holds That Dodd-Frank Protects Internal Whistleblowers From Retaliation

September 11, 2015

The Second Circuit recently held that employees who suffer retaliation for reporting alleged securities violations internally are afforded remedies under Dodd-Frank, even if they did not also report to the SEC.  Because the court found that Dodd-Frank is ambiguous about such whistleblowers’ status, it deferred to the SEC’s interpretive rule making them eligible for protection from retaliation.  In doing so, it created a circuit split and deepened the existing rift among U.S. district courts that have addressed the issue.

The Second Circuit’s decision reinforces the need for companies to maintain clear internal reporting procedures and to take care not to dissuade employees from coming forward with information about potential misconduct or to punish them when they do.  Indeed, employers may benefit from a rule protecting employees who only report internally because those employees will be more inclined to notify their employers about suspected wrongdoing rather than bypass them in favor of a regulator.

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Background

Daniel Berman, the former finance director at media agency Neo@Ogilvy LLC, sued his employer under Section 21F(h) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) for terminating him allegedly in retaliation for his internal reporting of practices he believed constituted accounting fraud.  He did not report the perceived misconduct to the SEC until months after he was terminated.

The U.S. District Court for the Southern District of New York dismissed Berman’s complaint, finding that Berman was not protected under Section 21F(h), which defines “whistleblower” to mean “any individual who provides . . . information relating to a violation of the securities laws to the Commission. . . .”[1]  Because Berman was discharged for reporting internally, not for reporting to the SEC, the lower court held that he was not a “whistleblower” entitled to Dodd-Frank’s anti-retaliation protections.

The Second Circuit’s Decision

Over the dissent of Judge Dennis Jacobs,[2] the U.S. Court of Appeals for the Second Circuit reversed the district court’s dismissal of Berman’s lawsuit in a decision issued September 10, 2015.[3]  The Second Circuit held that because Dodd-Frank is ambiguous concerning whether its anti-retaliation provision applies to employees who only report potential securities violations internally and not to the SEC, it would defer to SEC Rule 21F-2(b)(1), which clearly allows a whistleblower to obtain remedies under Dodd-Frank for suffering retaliation after reporting misconduct internally. 

Key Takeaways

In issuing its decision, the court noted it was creating a circuit split “against a landscape of existing disagreement among a large number of district courts.”[4]  Accordingly, whether Dodd-Frank protects internal whistleblowers remains far from settled among federal courts.  Nevertheless, the Second Circuit lends substantial weight to the bright-line rule that employees may seek recovery for retaliation regardless of whom they report to. 

That bright-line rule provides some certainty and clear advice for employers:  provide robust internal reporting mechanisms and do not punish employees for using those mechanisms (advice we have given in previous alerts on August 24, 2012 and October 4, 2013).  Ultimately, if employees feel that they can report potential wrongdoing to their employers without fear of adverse consequences, they may be more likely to give their employers an opportunity to address those issues before involving regulators. 

  

[1] 15 U.S.C. § 78u-6(a)(6) (emphasis added).

[2] Judge Jacobs strictly construed Section 21F(h) to limit protection to employees who report to the SEC prior to the adverse employment action.

[3] Berman v. Neo@Ogilvy LLC, No. 14-4626 (2d Cir. Sept. 10, 2015).

[4] The Second Circuit’s decision is now in conflict with the Fifth Circuit’s decision in Asadi v. G.E. Energy (USA), L.L.C., 720 F. 3d 620 (5th Cir. 2013)).

Also of Interest