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Whistleblower Protection Under the Dodd-Frank Act—Early Lessons from Case Law

on Wednesday, 6 February 2013 in Banking Update

In response to the 2008 financial crisis, Congress in 2010 enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA” or “Act”) to improve the accountability and the transparency of the financial system. One critical provision of the DFA is a section entitled “Securities Whistleblower Incentives and Protection,” which, among other things, creates a private cause of action for whistleblowers who allege retaliatory discharge or other discrimination. Employer violations may result in stiff statutory penalties, including reinstatement, twice the amount of back pay owed plus interest, and compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees. Although the DFA is still in its relative infancy, federal courts are starting to issue decisions interpreting the Act’s provisions regarding whistleblower retaliation. From those early decisions, employers and legal practitioners can learn lessons or strategies to avoid lawsuits and liability for DFA whistleblower retaliation.

1. The Act arguably protects certain employees who do not report to the Securities and Exchange Commission (the “SEC”), even though a “whistleblower,” by definition, must report to the SEC.

The Act defines a “whistleblower” as one who reports to the SEC. The Act’s anti-retaliation provision includes three categories of protected actions. The first two categories protect whistleblowers who (1) report to the SEC or (2) cooperate with the SEC. The third category, in contrast, covers persons who make disclosures that are “required or protected” by law, but does not expressly provide that an employee must make these disclosures to the SEC. It may seem counterintuitive, but every court that has addressed the issue, as well as the SEC in its final rules interpreting the Act, found that an employee need not meet the statutory definition of a “whistleblower” to receive protection under the Act’s prohibition against whistleblower retaliation. In short, although a “whistleblower” by definition is one who reports to the SEC, the Act may cover certain persons who make disclosures required or protected by law internally or to a federal agency or a federal law enforcement officer.

2. The Act’s whistleblower retaliation provisions may not apply outside the United States.

Generally, legislation does not apply outside the United States unless Congress manifests an express intention to give a statute extraterritorial effect. This presumption typically means that if a statute is silent about whether it applies outside the United States, it does not. One section of the DFA explicitly addresses extraterritoriality, giving federal district courts extraterritorial jurisdiction over enforcement actions brought by the SEC or the United States. In contrast, because the DFA’s anti-retaliation provision does not mention extraterritoriality, courts and commentators addressing the issue have found that the DFA’s extraterritorial reach does not extend to private actions for whistleblower retaliation.

3. The DFA generally does not apply retroactively; however, the DFA’s amendment of Sarbanes-Oxley to provide protection to whistleblowers employed by subsidiaries of public companies does apply retroactively.

Sarbanes Oxley (“SOX”) protects employees of publicly-traded companies, but before the DFA, it was unclear whether SOX also protected employees of public companies’ wholly-owned subsidiaries. The DFA amended SOX to clarify that it protected employees of a “subsidiary or affiliate whose financial information is included in the consolidated financial statements” of a public company (the “affiliate amendment”). The affiliate amendment, however, created a new question—whether the amendment applies retroactively, and courts have concluded that it does.

Generally, statutes do not apply retroactively, and the DFA is no different. With limited exceptions, numerous courts have found that the DFA’s various provisions do not apply to conduct that occurred before the enactment of the DFA. Courts are finding, however, that the affiliate amendment is a clarification of SOX, not new law. Therefore, they are giving the affiliate amendment retroactive effect. Although the DFA generally does not apply retroactively, because the affiliate amendment clarifies SOX rather than effecting a substantive change in the law, courts find that the affiliate amendment applies to conduct predating the DFA.

Importantly, these are early decisions by federal district courts. Issues regarding whistleblower protection under the DFA are still percolating, and federal appellate courts have yet to rule on these issues. That said, the early decisions have broadened protection beyond the statutory definition of a “whistleblower,” restricted the reach of the DFA’s anti-retaliation provision to the United States, and applied the DFA’s affiliate amendment of SOX retroactively. Hopefully, employers and practitioners can apply these lessons to avoid liability for whistleblower retaliation under the DFA.

Anthony D. Todero

Read the Full Newsletter: Banking Update February 06, 2013

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