Circuit Split Clouds Definition of “Whistleblower” under Dodd-Frank Act, Complicating Corporate Compliance

829-Brower_GregjohnsonGuest Commentary

by Greg Brower and Brett W. Johnson, Snell & Wilmer LLP*

A recent decision by the U.S. Court of Appeals for the Second Circuit further complicated the issue of when an employee can be considered a whistleblower under the Dodd-Frank Act. In Berman v. Neo@Ogilvy, the Second Circuit reversed a district court decision that the plaintiff was not a whistleblower, concluding that the governing definition of “whistleblower” was not the one found in the language of Dodd-Frank, but was the broader one found in a subsequently adopted SEC rule. This interpretation runs counter to a 2013 decision from the Fifth Circuit, Asadi v. G.E. Energy, LLC, and sets up a circuit split that the Supreme Court may be asked to resolve.

In January 2014, Berman sued his employer and its parent company, alleging that he was discharged in violation of Dodd-Frank’s whistleblower protection provisions. According to the complaint, while working for his former employer, Berman discovered various practices that amounted to accounting fraud. The complaint alleged that Berman believed these practices violated Generally Accepted Accounting Principles, the Sarbanes-Oxley Act, and Dodd-Frank, and that he reported these violations internally. As a result of these internal complaints, the suit alleges, Berman was terminated. It is undisputed that Berman did not report any of his alleged findings to the SEC until about six months after he was fired. The defendants moved to dismiss the complaint and the matter was referred to the assigned magistrate judge, who agreed with the plaintiff and filed a Report & Recommendation endorsing that he was entitled to be considered a whistleblower under Dodd-Frank because the definition contained within the SEC rule was unrestricted by the definitional language in the Dodd-Frank statute. The district court disagreed however, finding that the definitional language contained in Dodd-Frank itself controlled, and because the plaintiff had been terminated long before he reported anything to the SEC, dismissed his complaint.

In reversing the district court, a three judge panel of the Second Circuit found that the Dodd-Frank “whistleblower” definition was vague enough to allow for a broader definition contained in the subsequently adopted SEC rule to control. After first finding that no “absolute conflict” between the statute and rule exists, the court determined that “a significant tension between the two … nevertheless remains,” and concluded that because Congress could not have intended that the definition of whistleblower be as narrow as the statutory language would suggest, the definition found within the SEC rule would be applied.

The dissenting opinion by Judge Jacobs is worth noting for its strength and clarity. Clearly siding with the rationale put forth in Asadi, he found that the lack of ambiguity in the Dodd-Frank language was dispositive. He also took issue with the idea that Congress could not have possibly intended that a statute have such a limited effect as would Dodd-Frank if its definition of whistleblower was accepted literally.

Thus, two federal circuits have now come to opposite conclusions on whether the Dodd-Frank definition of whistleblower or the SEC definition of whistleblower should control. The decision of the Second Circuit panel, which was itself split, acknowledged its divergence with Asadi, and further acknowledged that three other district courts have also followed that ruling. The court nevertheless seemed to be comforted by the fact that “a far larger number” of other district courts have deferred to the SEC’s rule, concluding that “although our decision creates a circuit split, it does so against a landscape of existing disagreement among a large number of district courts.”   U.S. Supreme Court review would likely focus on whether the statute is ambiguous in the first place and, if so, whether, the SEC’s rule, as an interpretation of the statute, is entitled to Chevron deference. The stakes are high as corporate compliance efforts continue to be complicated, and made costly, by the ambiguity that has emerged from litigation over this issue.

*Mr. Brower is also a member of WLF’s Legal Policy Advisory Board. He and Mr. Johnson authored a WLF Legal Backgrounder in 2013 that addressed the Asadi decision discussed in this post, When Enough Is Not Enough: Two Court Rulings Complicate Corporate Compliance Efforts.

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