Today, the Second Circuit issued its highly anticipated decision in Berman v. Neo@Ogilvy, ruling (in a 2-1 decision) that Dodd-Frank’s whistleblower protection provision applies to internal complaints (i.e., complaints that are made by employees within the company and not to the SEC).  This creates a circuit split; it is directly at odds with the Fifth Circuit’s 2013 decision in Asadi v. G.E. Energy (USA), L.L.C.  As a result of the clear split, the question of whether purely internal complaints are protected by Dodd-Frank could ascend to the U.S. Supreme Court for resolution.

Background

Plaintiff-Appellant Daniel Berman (Berman) was the finance director of Defendant-Appellee Neo@Ogilvy (Company).  He was responsible for the Company’s financial reporting and compliance with GAAP, as well as internal accounting procedures of the Company and its parent.  He alleged that he discovered various practices that amounted to accounting fraud, and he reported them internally.  He claimed that a senior officer terminated his employment as a result of his whistleblowing activity.  Notably, he did not report the allegedly unlawful activity to the SEC until after his employment was terminated (and therefore cannot rely upon that report as the basis for a retaliation claim).  Berman filed suit in the Southern District of New York alleging that his employment was terminated based on his internal complaint in violation of Dodd-Frank.  The District Court dismissed his claim based on its view that Dodd-Frank provides protection only to those who claim to have been discharged as a result of reporting alleged violations to the SEC.

The Second Circuit’s Decision

In a 2-1 decision, the Second Circuit reversed the District Court’s decision, giving Chevron deference to the SEC’s interpretation that Dodd-Frank protects internal whistleblowers.  In doing so, the Second Circuit found that Dodd-Frank was ambiguous because the definition of “whistleblower” in Section 21F(a)(6) of the Exchange Act—which expressly requires a covered whistleblower to report a violation of securities laws to the SEC—was somewhat inconsistent with Section 21F(h)(1)(A)(iii)—which provides that Dodd-Frank protects individuals who make disclosures protected under SOX, as sections of SOX provide for and protect internal reporting.

The Second Circuit Majority did, however, recognize that “there is no absolute conflict” between the SEC notification requirement in the definition of “whistleblower” and the absence of such a requirement in Section 21F(h)(1)(A)(iii) because one could, as an example, simultaneously complain both to the employer and the SEC.  The court recognized that this was persuasive to the Fifth Circuit in Asadi.  But it nevertheless assumed that applying the Commission reporting requirement to employees seeking SOX remedies pursuant to subdivision (iii) would result in only “rare example[s]” of the statute’s application in this respect and “would [thus] leave that subdivision with an extremely limited scope.”  The court noted that two categories of whistleblowers, auditors and attorneys, could not report wrongdoing to the SEC until after the have reported to the employer based on statutory requirements and further postulated that “any retaliation would almost always precede Commission reporting.”

The Dissent attacked this decision from several angles.  The Dissent concluded that the Majority and the SEC altered Dodd-Frank by deleting “[report] to the Commission” from the definition of “whistleblower,” and essentially sought to expand the breadth of the statute.  The Dissent also pointedly said that the Majority engaged in a “bad misreading, tantamount to a misquotation,” in concluding that Dodd-Frank “purports to protect employees” from retaliation for making reports required or protected by SOX.  Dodd-Frank, the Dissent stressed, lists ways a “whistleblower” may engage in protected activity and—in contrast to Section 806 of SOX—it did not use the word “employee.”  The Dissent also questioned the Majority’s assumption that the Asadi court’s reading of the statute would somehow leave the statute with “extremely limited” effect and pointedly noted that, even if the majority’s questionable hypotheses in that respect happened to be true, that would still not provide any basis for concluding that the statute was “impaired or ambiguous” such that the SEC’s expansive interpretation would warrant deference.

Notably absent from the Majority’s opinion is any answer to one of the Asadi court’s primary reasons for rejecting the SEC’s expansive interpretation, i.e., that it “renders the SOX anti-retaliation provision, for practical purposes, moot.”  An interpretation of Dodd-Frank that in effect wipes out the SOX anti-retaliation provision (without Congress even hinting at any intent to do so) seems both far-fetched and unsupported.

Implications

There are several important implications of this decision.  First, it creates a clear circuit split that may ascend to the U.S. Supreme Court and may engender uncertainty in the meantime.  Second, employers can expect more federal complaints under Dodd-Frank from individuals who blow the whistle within the company but not to the SEC.  Third, whistleblowers may be more likely to invoke Dodd-Frank rather than SOX, thereby bypassing the U.S. Department of Labor’s adjudicative scheme, because Dodd-Frank offers substantially greater backpay and a much longer statute of limitations than SOX.  This third implication underscores the risk that this decision effectively eviscerates the SOX whistleblower protection provision.