High Court Petitioned on Whistle-Blower Retaliation Issue

Stay up-to-date with the latest developments in securities law through access to both news and all statutes and regulations. Find relevant corporate filings through a searchable EDGAR database. And...

By Antoinette Gartrell

A real estate investment trust asked the U.S. Supreme Court April 26 to decide whether employees are protected by Dodd-Frank anti-retaliation protections if they don’t report potential violations to the SEC ( Digital Realty Trust, Inc. v. Somers, U.S., No. 16-1276, 4/26/17 ).

Former Digital Realty Trust Inc. Vice President Paul Somers was protected from retaliation even though he didn’t share his concerns with the Securities and Exchange Commission, a federal appeals court held. The U.S. Court of Appeals for the Ninth Circuit said the SEC’s rule that so-called reporting out isn’t required to state a Dodd-Frank retaliation claim reflects congressional intent.

The issue has divided the federal circuits, meaning that the justices could step in to resolve the question. The conflict “cries out for the Court’s review,” Digital Realty said in its petition.

Virginia attorney Dallas Hammer of Zuckerman Law agreed. He said that the deeper the circuit split, the more likely the Supreme Court is to resolve an issue to promote consistency throughout the country. If the high court determines that “reporting out” is required, Dodd-Frank’s anti-retaliation provision will likely become “a dusty, rarely-used cautionary tale about sloppy drafting,” he said.

Internal reporting should be protected because it’s the statutory interpretation that makes the most sense, Washington lawyer David J. Marshall, Katz Marshall & Banks LLP, told Bloomberg BNA. Forcing well-meaning employees to bypass internal compliance programs and run to the SEC for protection simply delays corrective action, he said.

In this case, the Ninth Circuit joined the Second Circuit in concluding that reporting out isn’t required. However, the Fifth Circuit has held otherwise. Despite the deep split, the high court could decide to wait until other appellate courts take a position on the question, Marshall said.

Wrongful Termination

According to Somers, he complained to upper management that a supervisor violated Sarbanes-Oxley Act internal-control requirements, but was wrongfully fired before he could report his suspicions to the SEC. Digital Realty moved to dismiss Somers’ complaint, saying he wasn’t a “whistle-blower” under Dodd-Frank. The district court disagreed relying on the SEC’s interpretation of the term “whistle-blower.”

Affirming, a divided Ninth Circuit deepened the circuit split saying that Congress didn’t intend to limit protections to those who disclose information to the SEC”

In its petition for review, Digital Realty argued that “standing alone,” the act’s whistle-blower definition “expressly and unambiguously requires that an individual provide information to the SEC.”

Somers’ response is due May 25.

Counsel for Digital Realty, Kannon K. Shanmugam of Williams & Connolly LLP, Washington, declined to comment.

To contact the reporter on this story: Antoinette Gartrell in Washington at agartrell@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Securities & Capital Markets on Bloomberg Law