Courts Filling in Gray Areas of Dodd-Frank Whistleblower Rule

Federal courts are providing the first glimpses into how they intend to interpret the scope of the Dodd-Frank Act whistleblower provisions, and so far, their decisions have cut both ways.

Two federal courts recently ruled on the whistleblower provisions, with one expanding the scope of the rule and another restricting it. When analyzed together, “they give very conflicting views as to the scope of the whistleblower provisions,” says Tom Gorman, a former SEC senior counsel in the enforcement division and now a partner with Dorsey & Whitney.

That means those on both sides of the rule could be in for a protracted fight over exactly who the law applies to and what actions may be considered as retaliating against whistleblowers. “Ultimately, I think, some of these issues will have to be resolved by the Supreme Court,” says Gorman.

In the latest case, Leshinsky v. Telvent GIT, the U.S. District Court for the Southern District of New York ruled in early July that the whistleblower protections provided by the Dodd-Frank Act for employees of subsidiaries should apply retroactively, since the law was really an amendment to the existing rules set out in Section 806 of the Sarbanes-Oxley Act. Section 806 protects individuals that report conduct that may be a violation of federal securities laws.

In the case, plaintiff Phillip Leshinsky, a former employee of a privately-held subsidiary of publicly-traded technology company Telvent, alleged that he was wrongfully terminated in July 2008 after raising objections to a proposal to use fraudulent information in order to win a contract with the New York Metropolitan Transit Authority. Leshinsky alleged that this termination was in violation of the whistleblower protections under Section 806.

In its defense, Telvent argued that the court lacked jurisdiction over the case because Section 806 applied only to publicly-traded parent companies, not their subsidiaries. Judge Paul Oetken, who presided over the case, disagreed.

The “novel question” in the case, Oetken said, was whether Section 929A of the Dodd-Frank Act applied retroactively to claims that arose prior to the law taking effect. Under Section 929A, whistleblower provisions under SOX extend to “any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company.”

To determine whether the amendment applied retroactively “by virtue of being a clarification,” Oetken considered three factors:

Legislative intent;

Whether the meaning of the statute raised any conflict or ambiguity prior to the amendment; and

Whether the amendment is consistent with a reasonable interpretation of the prior enactment and its legislative history.

After a close examination of these factors, Oetken found that the court did, in fact, have subject matter jurisdiction over the claims and denied Telvent's motion to dismiss.

“Employers should not assume that the retaliation protections of Dodd-Frank do not apply when an employee only reports misconduct internally.”

—Mary Beth Hogan,

Partner,

Debevoise & Plimpton

“In light of the fact that corporate malfeasance can—and often does—occur within subsidiaries of a public company, and that such malfeasance was precisely what precipitated the passage of Sarbanes-Oxley, it is certainly reasonable to infer that, in enacting whistleblower protections, Congress intended to protect the employees of a corporation's subsidiaries in addition to employees of the parent itself,” Oetken wrote.

Alice Jump, a partner with law firm Reavis Parent Lehrer, who represented Leshinksy, says the “well-reasoned and thorough” opinion is “reflective of the reality that corporations often operate through subsidiaries.”

Whether the decision will have a widespread effect on similar cases is difficult to say, Jump says, “but I think the analysis about retroactivity and clarification of the amendments is very compelling.”  

Don't expect a flood of new retaliation claims dating back several years, however. Any increase in employers' exposure to retaliation claims under SOX likely will prove minimal given the 180-day limitations period that applies to whistleblower claims, wrote law firm Epstein Becker & Green in a client alert. “The decision should not revive claims by employees of privately-held subsidiaries who have not already filed and are, therefore, beyond the limitations period.”

Whistleblower Restrictions

While the Leshinsky case slightly expanded the scope of the Dodd-Frank whistleblower rule, another reined it in. In Asadi v. GE Energy, the U.S. District Court for the Southern District of Texas ruled on June 28 that whistleblowing activity that occurs outside the United States is not covered under the anti-retaliation whistleblower provisions of Dodd-Frank.

The case stemmed from a lawsuit brought by Khaled Asadi, a U.S.-based employee of GE Energy who was on temporary relocation in Jordan to secure and manage energy service contracts between GE and the Iraqi government. Alleging that he was wrongfully terminated after notifying his supervisor and a company ombudsperson of a potential violation of the Foreign Corrupt Practices Act, Asadi filed a lawsuit under the whistleblower anti-retaliation rules contained in Dodd-Frank.

Asadi argued that he qualified as a whistleblower under Dodd-Frank, because the disclosures that he made were both “required” and “protected” under SOX. U.S. District Judge Nancy Atlas, who presided over the case, sidestepped this issue, however, finding that Asadi's claims failed on other grounds, and ultimately dismissed the claims against GE.

WHISTLEBLOWER DECISION

Below is an excerpt from the decision in Asadi v. GE Energy:

This case requires the Court to decide whether Dodd-Frank's Anti-Retaliation

Provision applies extraterritorially. Asadi argues that it does. He further argues that SOX and the FCPA, as incorporated into the Anti-Retaliation Provision, operate to extend the Provision's territorial reach.

The Supreme Court, in Morrison v. National Australia Bank, recently reaffirmed the ‘longstanding principle' that Congress' legislation does not apply outside the United States ‘unless a contrary intent appears.' “Thus, ‘unless there is the affirmative intention of the Congress clearly expressed' to give a statute extraterritorial effect, ‘we must presume it is primarily concerned with domestic conditions.'” This presumption against extraterritoriality means that, ‘When a statute gives no clear indication of an extraterritorial application, it has none.' In addition to the statutory language itself, the courts may consult the language's ‘context.'

In Morrison, the Court considered Section 10(b) of the Securities and Exchange Act of 1934, which is silent regarding extraterritorial effect. The Morrison plaintiffs were foreign investors who sued foreign and American defendants for alleged misconduct in trading on foreign exchanges. The Supreme Court relied on the statute's plain language in holding that it had no extraterritorial application: ‘In short, there is no affirmative indication in the Exchange Act that § 10(b) applies extraterritorially, and we therefore conclude that it does not.'

Like the language of Section 10(b), the language of the Dodd-Frank Anti Retaliation Provision is silent regarding whether it applies extraterritorially. The Court therefore applies the presumption that the Provision does not govern conduct outside the United States.

Source: Asadi v. GE Energy.

Of most relevance, Atlas rejected Asadi's argument that the anti-retaliation provisions of Dodd-Frank applied exterritorialy. Citing U.S. Supreme Court precedent set in Morrison v. National Australia Bank, the opinion reiterated that “when a statute gives no clear indication of an extraterritorial application, it has none.”

The extraterritorial application of the decision is “very important, because a lot of companies have real Dodd-Frank vulnerability overseas,” says Paul Enzinna, a partner in the disputes and litigation practice of law firm of BrownRudnick.

Dodd-Frank protects whistleblowers for any report of securities laws violations, including the FCPA—and FCPA violations, by definition, occur overseas. “This decision seems to say that is not covered by Dodd-Frank,” says Enzinna.

Atlas further noted that Section 929P of Dodd-Frank reinforces the limited extraterritorial scope of the Act by giving district courts jurisdiction over extraterritorial claims only in enforcement actions brought by the SEC or the Department of Justice. “By their plain language, these provisions do not apply to private actions,” the opinion stated.

Another aspect of the ruling could have a larger effect on how the scope of the Dodd-Frank whistleblower rules is defined. When Atlas first addressed the definition of “whistleblower” under Dodd-Frank, she determined that it is someone who reports a securities law violation to the Securities and Exchange Commission. In this case, Asadi reported the violation to his supervisor. “Therefore, the plaintiff does not fit within Dodd-Frank's definition of a whistleblower,” the opinion stated.

“The decision makes clear that if an employee wants to be considered for the Dodd-Frank bounty, the employee needs to report to the SEC,” says Mary Beth Hogan, a partner with law firm Debevoise & Plimpton. “If employees did not previously understand that requirement, the decision may make reports to the SEC more likely.”

“If I were advising an employee, I would tell them, ‘you need to go to the SEC,' says Enzinna.

Whether or not that decision could influence how companies treat whistleblowers who only report their concerns internally remains to be seen. GE, for one, says it doesn't matter if the claims are reported externally or not, they will treat all whistleblowers the same.

“GE applauds the decision,” says Sean Gannon, a spokesman for the company. “GE has an unwavering commitment to open reporting and we are proud of our record, regardless of whether concerns are raised internally or externally. We believe legitimate whistleblowers deserve to have their claims treated with respect and investigated vigorously.”

In this case, however, Gannon says the allegations surrounding the FCPA violations brought against GE, and Asadi's termination for reporting such violations, are outright false. “Asadi's termination had absolutely nothing to do with any allegations he made,” says Gannon. “Asadi, never claimed to have been retaliated against during his exit process; it was only months later that Mr. Asadi suddenly claimed he had been retaliated against as a whistleblower.”

From a practical standpoint, the decision may have a “chilling effect,” Gorman says, on Dodd-Frank whistleblower retaliation claims brought by employees working outside the United States. For companies, however, it's another powerful weapon to add to their defense arsenal.

More to Come

Both cases highlight “two very different kinds of approaches,” says Gorman. Whereas the Leshinksy case is a traditional statutory interpretation case, examining Congress' intent of the statute, the Asadi case really doesn't get into the weeds of the statute at all.

For example, the court did not directly address the issue of whether an employee who only reports internally and then sues the employer under Dodd-Frank for retaliation can recover from the employer under that statute. “Rather, because the court found that most of the conduct at issue occurred outside the U.S., Dodd-Frank did not apply in any event,” explains Hogan.

The question, thus, leaves the door open for another court to decide. However, Hogan says, “Employers should not assume that the retaliation protections of Dodd-Frank do not apply when an employee only reports misconduct internally.”

“Obviously, if you're a company and, in the future somebody reports a whistleblower claim internally and then raises a retaliation claim, you're going to want to cite this case,” agrees Enzinna.