Business law.

AuthorMikaelian, Tsoline
PositionDodd-Frank Act's anti-retaliation protection also applicable to internal whistleblowers

Business Law--Second Circuit Extends the Dodd-Frank Act's Anti-Retaliation Protection to Internal Whistleblowers--Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).

The Dodd-Frank Wall Street Reform and Consumer Protection Act (1) (Dodd-Frank Act) reformed federal financial regulation in response to the Great Recession. (2) The Dodd-Frank Act includes incentives and protections for whistleblowers who report violations of federal securities laws. (3) In Berman v. Neo@Ogilvy LLC, (4) the Court of Appeals for the Second Circuit considered whether the anti-retaliation provisions of the Dodd-Frank Act protect a whistleblower who does not report violations to the Securities and Exchange Commission (SEC). (5) The court held that the statute is sufficiently ambiguous so as to warrant deference under Chevron U.S.A., Inc. v. National Resource Defense Council, Inc. (6) to SEC regulations, which extend protection to internal whistleblowers who merely report violations within their organization. (7) The court's decision split from the Fifth Circuit--the only other circuit court of appeals that has addressed this issue and deemed that the statute unambiguously required whistleblowers to report to the SEC. (8)

In April 2013, Neo@Ogilvy LLC (Neo), a media services company, fired Daniel Berman, who had served as Neo's finance director since October 2010. (9) Berman alleged that during his employment at Neo, he discovered accounting fraud, violations of Generally Accepted Accounting Principles (GAAP), and various financial and securities regulations violations. (10) Berman further alleged that he was fired after he reported these violations internally to Neo, which angered a senior officer. (11) Berman, however, did not report the alleged violations to the SEC until about six months after he was fired. (12)

Berman sued Neo and WPP on January 28, 2014, alleging, inter alia, that he was fired in retaliation for his whistleblower activities, and in violation of the anti-retaliation provisions of the Dodd-Frank Act. (13) The defendants filed a motion to dismiss, arguing that Berman was not a whistleblower as defined by the Dodd-Frank Act at the time of retaliation because he had not reported the violations to the SEC. (14) The magistrate judge, however, issued a report that qualified Berman as a whistleblower. (15) Upon defendants' objection, the district court declined to adopt the whistleblower aspect of the magistrate judge's report; the district court granted the motion to dismiss because it held that Berman was not a whistleblower. (16) The United States Court of Appeals for the Second Circuit reversed, deferring to the SEC's broader definition of whistleblower, which encompasses internal whistleblowers. (17)

Prior to Congress's enactment of the Dodd-Frank Act, the Sarbanes-Oxley Act of 2002 (18) (SOX) provided anti-retaliation protection to employees of publicly traded companies. (19) The SOX protection encompasses internal whistleblowers and does not require these whistleblowers to report violations to the SEC. (20) The Dodd-Frank Act added a section titled "Securities Whistleblower Incentives and Protection" (section 21F) to the Securities Exchange Act of 1934. (21) In contrast to the SOX's anti-retaliation provisions, the Dodd-Frank Act provides whistleblowers alleging discrimination with more monetary damages, allows them to file claims in district court without first filing with a federal agency, and provides them with a substantially longer statute of limitations. (22) Courts, however, are divided as to whether internal whistleblowers are protected under the Dodd-Frank Act. (23)

The courts are split regarding protection of internal whistleblowers because of a perceived inconsistency between two provisions of the Dodd-Frank Act. (24) Specifically, section 21F(a)(6) defines the term "whistleblower" to require reporting information relating to violations of securities laws to the SEC. (25) Section 21F(h)(1)(A), however, provides anti-retaliation protection to "a whistleblower ... because of any lawful act done by the whistleblower--(i) in providing information to the [SEC] ... or (iii) in making disclosures that are required or protected under the [SOX]" (subsection (i) and subsection (iii), respectively). (26) Thus, because subsection (iii) references the SOX that provides protection for internal reporting within the organization, it apparently conflicts with the SEC reporting requirement outlined in the whistleblower definition contained in section 21F(a)(6). (27) Additionally, the SEC has established regulations implementing the Dodd-Frank Act, construing the whistleblower definition to include internal whistleblowers and extending anti-retaliation protection to them. (28) While many district courts have deferred to the SEC's interpretation under Chevron, some courts have deemed the statute to be unambiguous, rejecting the SEC's interpretation and thereby excluding protection of internal whistleblowers. (29)

In Asadi v. G.E. Energy (USA), L.L.C., (30) the Court of Appeals for the Fifth Circuit held that the statutory definition of whistleblower in the Dodd-Frank Act unambiguously requires reporting to the SEC. (31) The Fifth Circuit resolved any apparent conflict by distinguishing between who is protected based on the definition of "whistleblower," and which actions constitute protected activity pursuant to the anti-retaliation provision of section 21F(h)(1)(A). (32) Moreover, the court rejected the argument that the whistleblower definition's requirement to report to the SEC renders subsection (iii) superfluous in view of subsection (i), which also requires reporting to the SEC. (33) For example, the court explained that subsection (iii) is the only provision that can protect an employee who reports a violation internally on the same day as reporting to the SEC when the employer, who is not yet aware of the SEC reporting, fires the employee. (34)

In Berman v. Neo@Ogilvy LLC, the Court of Appeals for the Second Circuit found a sufficiently ambiguous tension between section 21F's whistleblower definition and subsection (iii) of the anti-retaliation provision of the Dodd-Frank Act, thereby warranting Chevron deference to the SEC's broad interpretation. (35) The court agreed with the Fifth Circuit that there is "no absolute conflict" within section 21F, citing the Asadi example of "simultaneous" reporting to both the employer and the SEC. (36) The court argued, however, that application of the narrow construction of the whistleblower definition to subsection (iii) would leave that provision with an "extremely limited...

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