Fifth Circuit Narrows Definition of “Whistleblower” Under Dodd-Frank

By holding the Dodd-Frank  Act to a literal reading of its language — and rejecting any consideration of the statute’s goals — a federal appeals court has set up a battle over who may claim protection as a corporate “whistleblower” under the law.

“We start and end our analysis with the text of the relevant statute,” the U.S. Court of Appeals for the Fifth Circuit said in Asadi v. G.E. Energy (USA) L.L.C. — and indeed, the court parsed Dodd-Frank with the cold eye of a professional copy editor, concluding that the law protects employees against retaliation only if they have reported corporate wrongdoing to the Securities and Exchange Commission (SEC) via prescribed channels.

Otherwise, the court said, employees must rely on other laws to protect them from retaliation by their employers.

The holding conflicts directly with looser opinions from lower-level federal courts in other jurisdictions — and with rules set by the SEC itself, which allow Dodd-Frank coverage for employees who report wrongdoing in ways specified by other whistleblower protection laws, including the Sarbanes-Oxley Act.

The Dodd-Frank Act was passed in 2010 to tighten financial regulations in the wake of the 2008 fiscal crisis. Among other things, it offered new protections to encourage employees to report misdeeds at their companies.

Dodd-Frank is more generous to whistleblowers than Sarbanes-Oxley in a few respects: It offers higher damages, for instance, and a longer period to file a complaint about retaliation.

While it’s not binding outside the Fifth Circuit’s jurisdiction — Texas, Mississippi, and Louisiana­ — the new decision is the most authoritative so far on the issue of Dodd-Frank protection.  Because it contradicts SEC regulations and earlier cases such as Kramer v. Trans-Lux Corp., it will sow confusion among employers and employees alike: The “right” way to file a whistleblower complaint is no longer clear.

In particular, employees who suspect corporate wrongdoing now may be forced to choose between following their company’s rules (which generally favor internal reporting) and maximizing their own protection from retaliation, for which the Fifth Circuit demands a report to the SEC.

It’s unclear whether other federal appeals courts will follow Asadi. Viewed broadly, recent opinions point the other way: Both the Third and Tenth Circuits, for instance, have argued in Sarbanes Oxley cases that the overall intent of a whistleblower protection law should be honored—and that, in the words of the Third Circuit, a good-faith whistleblowing attempt shouldn’t be penalized just because it fails to “ring the bell” on each element of a law.

On the other hand, even whistleblower advocates concede that Dodd-Frank’s text is problematic: First it defines a “whistleblower” as someone who reports wrongdoing to the SEC, then it protects whistleblowing activities that go beyond that restrictive definition.

In Asadi, the putative whistleblower did not contact the SEC with his concerns that GE Energy, his employer, might have broken laws to secure Iraqi contracts. He claimed that he was fired for raising the issue internally, and that such retaliation was illegal under Dodd-Frank.

A lower court disagreed without ruling on Khalid Asadi’s whistleblower status: Because it happened outside the U.S., the court said, his report of wrongdoing wasn’t protected either way.

The Fifth Circuit tackled the question head-on, however, and its conclusion was forceful — “the whistleblower protection provision unambiguously requires individuals to provide information relating to a violation of the securities laws to the SEC to qualify for protection from retaliation.”

Faced with such unambiguous language from Congress, it said, neither courts nor the SEC has any latitude to protect anyone else under the law.

If other courts follow this narrow linguistic path, Dodd Frank will become less important to whistleblowers. Once another appeals court disagrees, however, the showdown between text and intent may shift to the U.S. Supreme Court

Tagged: Dodd-Frank Act, Enforcement Bodies, Sarbanes-Oxley Act (SOX), Securities and Exchange Commission (SEC), Whistleblower Laws (Federal)