Why Courts are Still Divided Over Dodd-Frank Whistleblower Protection

Craig Eagle  |

Dodd-Frank includes whistleblower protection rules, which are meant to protect employees who report wrongdoings in their corporations. Corporate America has tried to block these rules by lobbying the Securities and Exchange Commission (SEC) to limit whistleblower protection and therefore limit its effectiveness.

The cornerstone of the legislation is to prohibit employers' retaliation against whistleblowers. Moreover, there is a bounty system that sets an incentive for whistleblowers to disclose violations. If the SEC yields monetary sanctions of over $1 million, the commission will pay an award between 10%  and 30% of the total monetary sanctions to the whistleblower.

However, as these rules are being interpreted differently, there is a need for clarification. “If the SEC doesn’t adopt appropriate counter-measures, gag orders, retaliation and other forms of legal bullying will quickly erode the potential of this powerful investor protection tool,” says Jordan Thomas, from whistleblower representation at Labaton Sucharow.

Dodd-Frank Doesn't Clarify who Qualifies for the Anti-retaliation Provision

American courts are divided when it comes to the legal definition of the term “whistleblower.” Current legislation doesn't clarify whether an employee who only reports violations internally, but not to the SEC, qualifies for Dodd-Frank's anti-retaliation provision.

Therefore, the SEC promulgated two legal definitions of the term “whistleblower.” One states the requirements for the award program and another describes who qualifies for the anti-retaliation provision.

According to the SEC's definitions, whistleblowers have to report directly to the SEC in order to receive a bounty, reporting internally is not sufficient. However, the SEC didn't set such a requirement for employees to qualify for the anti-retaliation provision.

SEC Issued Interpretative Rules Stating that Individuals Don't have to Report to Them to Qualify as Whistleblowers

Dodd-Frank leaves corporations and employees in legal limbo. On July 13, 2013, the Fifth Circuit Court of Appeals concluded that Dodd-Frank only protects employees who report directly to the SEC.

While some courts have followed this decision, other have not. To clarify the situation, the SEC issued an interpretative rule, which states that an individual's status as whistleblower does not require reporting to the SEC. The reason for the SEC's decision was their belief, that their interpretation serves the overall goal of Dodd-Frank's whistleblower program, which is to set an incentive for employees to report violations.

New Jersey District Court follows SEC's Interpretative Rule

One of the first court cases in the aftermath of the SEC's interpretative rule took place in New Jersey. An employee of Lime Energy was terminated, because she reported internally that the company was not recording their revenues properly. The company argued that she doesn't qualify as a whistleblower under Dodd-Frank, because she didn't report to the SEC.

The New Jersey District Court concluded on August 13, 2015, that the employee qualifies for the anti-retaliation provision, because the SEC's interpretative rule says that individuals are not required to disclose their allegations to the SEC.

The court followed the SEC's interpretation instead of the Fifth Circuit Court of Appeals' conclusion in 2013. It remains to be seen if the SEC's rule will be accepted as a general rule by other courts or if they follow the Fifth Circuit Court of Appeals.

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