Why Dodd-Frank's whistleblower provision blows: its failure to protect overseas whistleblowers.

• Author: Mileti, Blerta

1. INTRODUCTION II. BACKGROUND A. Who is a Whistleblower? B. Sarbanes-Oxley and Its Whistleblower Provision C. Dodd-Frank and Its Whistleblower Provision D. The Principles of Extraterritorial Application E. Extraterritorial Application of U.S. Employment Law 1. Extraterritorial Application of the Age Discrimination in Employment Act 2. Extraterritorial Application of Title VII 3. Extraterritorial Application of the Fair Labor Standards Act and the Equal Pay Act. 4. Extraterritorial Application of SOX's Whistleblower Provision 5. Extraterritorial Application of Dodd-Frank's Whistleblower Provision III. ANALYSIS A. The Presumption Against Extraterritoriality B. Asadi and Liu Relied on the Morrison v. National Australia Bank Analysis C. The Standard of Extraterritorial Application Under the ADEA and Title VII D. What Happens When U.S. Laws That Have Extraterritorial Application Conflict With Local Laws in the Foreign Territory 1. An Example of the Foreign Law Defense: The Mahoney v. RFE/RL, Inc. Case E. Why the FLSA Does Not Have Extraterritorial Application IV. RECOMMENDATION A. The Implications of Dodd-Frank's Whistleblower Provision Not Having Extraterritorial Application 1. Why Dodd-Frank Should Protect Overseas Whistleblowers 2. Extraterritorial Application of Bounty Awards. B. It Is Very Unlikely that the Courts Will Provide a Different Interpretation C. Congress Should Amend Dodd-Frank to Protect Overseas Whistleblowers 1. Applying the Proposed Dodd-Frank Amendment to the Facts of Asadi and Liu V. CONCLUSION I. INTRODUCTION

   In July 2010, President Barack Obama signed into law the Dodd-Frank Wall Street and Consumer Protection Act (Dodd-Frank). (1) Dodd-Frank's purpose was "[t]o promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices." (2) One way that Dodd-Frank aims to promote accountability and transparency in the financial system is to incentivize and protect whistleblowers that report violations of the securities laws. (3)

   As Congress debated the bill, Dodd-Frank's whistleblower provision received little notice. (4) Despite initial obscurity, the provision has gained a lot of attention particularly because it allows whistleblowers to receive monetary awards for tips they report to the Securities Exchange Commission (SEC). (5) In fiscal year 2012, the SEC received 3001 tips from whistleblowers. (6) In fiscal year 2013, the number of tips the SEC received increased to 3238. (7) These tips concerned corporate disclosures and financials, fraud, and manipulation. (8) In both 2012 and 2013, tips came from all 50 U.S. states. (9) In 2012, tips came from 49 countries outside the United States, and in 2013, tips came from 68 countries outside the United States. (10) This Note is concerned with the whistleblower tips that come from outside the United States, particularly the anti-retaliation protection Dodd-Frank offers to these overseas whistleblowers. In this Note, the term overseas whistleblowers describes U.S. citizens who work for American controlled companies in foreign countries and who disclose any violations of the securities laws by those companies to the SEC.

   This Note is organized as follows: Part II describes who is a whistleblower, as defined by the common law, the Sarbanes-Oxley Act of 2002 (SOX) and Dodd-Frank. It then addresses the theories that favor applying U.S. law extraterritorially and discusses extraterritorial application of U.S. federal employment law, focusing on the Age Discrimination in Employment Act of 1967 (ADEA), Title VII of the Civil Rights Act of 1964 (Title VII), the Fair Labor Standards Act of 1938 (FLSA), the Equal Pay Act of 1963 (EPA), and the whistleblower provisions in SOX and Dodd-Frank. Finally, Part II introduces cases interpreting the extraterritorial application of Dodd-Frank's whistleblower provision.

   Part III analyzes how U.S. courts use the presumption against extraterritoriality to determine whether U.S. law applies to conduct or people outside U.S. territory. It discusses Morrison v. National Australia Bank, the most recent Supreme Court case rejecting extraterritorial application of U.S. anti-fraud regulations. Part III then analyzes how the district courts used the Morrison opinion to evaluate the extraterritorial application of Dodd-Frank's anti-retaliation protection. It analyzes court reasoning in the cases that determined that the ADEA and Title VII did not have extraterritorial reach, and how, in response to these decisions, Congress amended the ADEA and Title VII to ensure their extraterritorial application. Finally, Part III analyzes why Congress decided that certain U.S. laws, such as the FLSA, should not have extraterritorial application.

   Part IV recommends that Congress pass an amendment to explicitly extend Dodd-Frank's anti-retaliation protection to overseas whistleblowers. It is up to Congress to change the law because the presumption against extraterritorial application of congressional legislation prevents the courts from reaching a different interpretation. Finally, Part IV argues that Congress should pass such an amendment because the protection against retaliation will encourage overseas whistleblowers to report employer securities misconduct to the SEC.

2. BACKGROUND

   1. Who is a Whistleblower?

      The general definition of a whistleblower in the employment context is "an employee [who] reports, exposes or protests, either publicly or within the organization, either the employer's or a fellow employee's criminal, immoral or otherwise improper activity." (11) In many common law jurisdictions, when an employer discharges a whistleblower employee in retaliation for reporting misconduct, the employee can sue his employer for wrongful discharge. (12) This right exists even in an at-will employment relationship. (13) It is contrary to public policy for an employer, even in an at-will relationship, to discharge a whistleblower employee. (14) A number of state and federal statutes, including SOX and Dodd-Frank, have codified the common law whistleblower protections. (15)

   2. Sarbanes-Oxley and Its Whistleblower Provision

      Corporate accounting fraud, exemplified by Enron's collapse, drove SOX's passage. (16) In passing SOX's whistleblower provision, Congress recognized that if whistleblowers were reassured they would be protected against termination or adverse treatment, they would come forward and expose unlawful activity, and therefore, play an important role in preventing unlawful activity like fraud. (17) SOX provides that no company which has registered securities pursuant to the Securities Exchange Act of 1934, including any subsidiary or affiliate whose information is included in the company's consolidated financial statements, may "discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee," if the employee provides information or assists in an investigation that the employee believes is a legal violation or fraud against shareholders. (18) Eligible investigations include those conducted by a federal agency, Congress, or internally by a person with supervisory authority within the company. (19) If the employer retaliates against the whistleblower employee, the employee can seek relief by first filing a complaint with the Department of Labor (DOL). (20) If the DOL does not provide a decision within a specified time-period, the employee may file a claim against the employer in federal district court. (21)

   3. Dodd-Frank and Its Whistleblower Provision

      Dodd-Frank's whistleblower provision departs from SOX's whistleblower provision in two ways. First, while SOX allows internal reporting, Dodd-Frank requires whistleblowers to report violations to the SEC, specifically defining a whistleblower as "any individual who provides ... information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission." (22) Second, Dodd-Frank departs from SOX by providing whistleblowers a monetary incentive. (23) Dodd-Frank entitles whistleblowers to bounties of at least 10% but not more than 30% of the funds the SEC obtains from sanctions it imposes on company violators. (24) Like SOX, Dodd-Frank prohibits employer retaliation against whistleblower employees. (25) An employer may not "discharge, demote, suspend, threaten, harass, directly or indirectly or in any manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower" when providing the SEC with information, testifying for an administrative action, or making disclosures required or protected under SOX, Dodd-Frank, or any other law that the Commission regulates. (26) If an employer retaliates against an employee, Dodd-Frank gives a whistleblower the right to bring a cause of action directly in federal district court, without having to first file a complaint with the DOL. (27)

   4. The Principles of Extraterritorial Application

      Two employees, who worked abroad, have sued their employers under Dodd-Frank's anti-retaliation provision in U.S. district courts, prompting the courts to determine if the provision applies extraterritorially. (28) Extraterritorial application means that a state is able "to hold a party accountable for conduct that has occurred beyond its borders." (29) The extension of a state's law outside its territory is based on four principles. (30) The most common is the territoriality principle, which is the right of a state to regulate people and occurrences within its borders. (31) An extension of this principle is regulating conduct, regardless of the location, if the conduct has an effect within the...