On December 11, 2014, the SEC filed an amicus brief in support of Plaintiff-Appellant Mikael Safarian asking the Third Circuit to revive his Dodd-Frank whistleblower claim and endorse the agency’s definition of “whistleblower” as including individuals who only report internally.  If the Third Circuit addresses this issue—and it might not since it was not a basis for the district court’s ruling—and adopts the SEC’s position, that would create a circuit split, which could ultimately result in the U.S. Supreme Court issuing a final determination.

Background

Safarian filed a lawsuit in the District of New Jersey alleging, among other things, that American DG Energy, Inc. (the “Company”), a publicly-traded utility company, violated the Dodd-Frank anti-retaliation provision by terminating his employment because he internally objected to alleged overbilling, improper construction, and failure to obtain permits.  The district court granted the Company’s motion.   It did not squarely address whether Safarian was entitled to protection under the anti-retaliation provision.  The court concluded that it “need not weigh in on this issue and determine if Plaintiff’s failure to report to the SEC alone forestall his claim because Plaintiff fails to show that his disclosures fall under any of the four categories listed in Section 78-u6(h)(1)(A)(iii).”

The SEC’s Amicus Brief

Nevertheless, when Safarian appealed to the Third Circuit, the SEC took this opportunity to argue that the court should defer to its interpretation in Rule 21F-2(b)(1) that Dodd-Frank’s anti-retaliation provision protects all individuals who disclose activity specified in Dodd-Frank regardless of whether they report to the SEC.  The SEC portrays Rule 21F-2 as a “carefully calibrated” response to concerns that Dodd-Frank’s bounty program undermined internal corporate compliance programs by incentivizing external reporting to the SEC.  The SEC submits that “if the rule were invalidated, the Commission’s authority to pursue enforcement actions against employers that retaliate against individuals who report internally would be substantially weakened.”

The SEC asserts that there is “considerable tension” between the types of activity the statute protects, enumerated in Section 21F(h)(1)(A), and the definition of “whistleblower” in Section 21F(a)(6).  It notes that “Section 21F(h)(1)(A) prohibits an employer from retaliating against a whistleblower: (i) for ‘providing information to the Commission in accordance with this section’; (ii) for assisting in an investigation or action of the Commission ‘based upon or related to such information’; or (iii) for ‘making disclosures that are required or protected under’ Sarbanes-Oxley, the Exchange Act, 18 U.S.C. § 1513(e), ‘and any other law, rule, or regulation subject to the jurisdiction of the Commission.”  The SEC submits that it is clear that “clauses (i) and (ii), together, protect individuals who report to the Commission about securities law violations,” but that the anti-retaliation protection afforded by clause (iii) “reaches beyond just disclosures involving securities law violations and disclosures to the Commission.”

The SEC also asserts that the Fifth Circuit in Asadi erred in concluding that Rule 21F-2 “renders the SOX anti-retaliation provision, for practical purposes, moot” because Dodd-Frank enables recovery of potentially greater monetary damages (e.g., double backpay), provides a substantially longer statute of limitations, and enables plaintiffs to sue directly in federal court without exhausting administrative remedies.  The SEC contends that whistleblowers might still prefer to pursue a claim under Section 806 of SOX over Section 922 of Dodd-Frank because of the lower cost and burden associated with SOX’s administrative procedures and the possibility of recovering for “pain and suffering” under SOX.

Implications

It is unclear whether the Third Circuit will reach the issue of whether individuals who do not report to the SEC are protected by Dodd-Frank’s anti-retaliation provision because the district court did not base its decision on this issue.  That alone illustrates the SEC’s level of aggression.  Also, we previously addressed employers’ concerns with the SEC’s arguments here (e.g., the SEC’s position would essentially eviscerate the administrative exhaustion requirements in Section 806 of SOX, and SOX is arguably a more favorable whistleblower protection statute than Dodd-Frank).   In addition, as we explained last month, the Fifth Circuit remains the only circuit court to have ruled on whether internal reports are protected under Dodd-Frank—it ruled that reports must be made to the SEC—and district courts have come out both ways.   Thus, if Third Circuit determines that internal reporting is protected, that would create a circuit split that could ascend to the Supreme Court.  We will monitor this closely … stay tuned!

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Steven J. Pearlman Steven J. Pearlman

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular…

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular focus on defending companies against claims of employment discrimination, retaliation and harassment; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations. He has successfully tried cases in multiple jurisdictions, and defended one of the largest Illinois-only class actions in the history of the U.S. District Court for the Northern District of Illinois. He also secured one of only a few ex parte seizures orders that have been issued under the Defend Trade Secrets Act, and obtained a world-wide injunction in federal litigation against a high-level executive who jumped ship to a competitor.

Reporting to boards of directors, their audit committees, CEOs and in-house counsel, Steven conducts sensitive investigations and has testified in federal court. His investigations have involved complaints of sexual harassment involving C-suite officers; systemic violations of employment laws and company policies; and fraud, compliance failures and unethical conduct.

Steven was recognized as Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He is a Fellow of the College of Labor and Employment Lawyers.  Chambers describes Steven as an “outstanding lawyer” who is “very sharp and very responsive,” a “strong advocate,” and an “expert in his field.” Steven was 1 of 12 individuals selected by Compliance Week as a “Top Mind.” Earlier in his career, he was 1 of 5 U.S. lawyers selected by Law360 as a “Rising Star Under 40” in the area of employment law and 1 of “40 Illinois Attorneys Under Forty to Watch” selected by Law Bulletin Publishing Company. Steven is a Burton Award Winner (U.S. Library of Congress) for “Distinguished Legal Writing.”

Steven has served on Law360’s Employment Editorial Advisory Board and is a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is regularly quoted in leading publications such as The Wall Street Journal.

The U.S. Chamber of Commerce has engaged Steven to serve as lead counsel on amicus briefs to the U.S. Supreme Court and federal circuit courts of appeal. He was appointed to serve as a Special Assistant Attorney General for the State of Illinois in employment litigation matters. He has presented with the Solicitor of the DOL, the Acting Chair of the EEOC, an EEOC Commissioner, Legal Counsel to the EEOC and heads of the SEC, CFTC and OSHA whistleblower programs. He is also a member of the Sedona Conference, focusing on trade secret matters.

Photo of Noa Baddish Noa Baddish

Noa M. Baddish is a senior counsel in the Labor & Employment Law Department. She is a member of the Sports, Employment Litigation & Arbitration, Class and Collective Action, Wage & Hour and Whistleblower & Retaliation Practice Groups.

Noa’s practice concentrates on all…

Noa M. Baddish is a senior counsel in the Labor & Employment Law Department. She is a member of the Sports, Employment Litigation & Arbitration, Class and Collective Action, Wage & Hour and Whistleblower & Retaliation Practice Groups.

Noa’s practice concentrates on all aspects of labor and employment law. Her employment litigation practice in state and federal courts includes class and collective actions and defending claims of discrimination, harassment, breach of contract and violations of wage and hour laws. Noa represents Major League Baseball and its clubs in an ongoing litigation brought by current and former minor league players who allege minimum wage and overtime violations. In addition, Noa has represented clients in the media and entertainment and fashion industries in lawsuits brought by unpaid interns in wage and hour disputes.

Noa also provides significant assistance on counseling matters on a wide array of issues for clients in various industries, including, but not limited to, sports, law firms, financial institutions, media and fashion.

Noa has been recognized as a Rising Star by New York Super Lawyers since 2015. She has authored and contributed to several articles and newsletters on employment and labor topics, including “State Whistleblowing Laws Provide Whopping Verdicts,” New York Law Journal (January 2014). Noa is also a frequent contributor to the Firm’s Whistleblower Defense blog.

Previously served as Assistant General Counsel to the New York City Mayor’s Office of Labor Relations, Noa defended the Mayor and City agencies against both employee grievances at arbitration and improper practice petitions before the Board of Collective Bargaining. Prior to that, she was a Law Clerk to Judge Ellen L. Koblitz of the Appellate Division of the New Jersey Superior Court.

While in law school, Noa served on the Executive Board as notes and articles editor of the Fordham Urban Law Journal.