Federal Judge Rejects Asadi Limits on Whistleblower Protection

A federal judge ruled that the Dodd-Frank Act protects whistleblowers from retaliation even if they’re punished by an employer before bringing their concerns to the Securities and Exchange Commission (SEC).

The ruling is the first explicit repudiation of July’s high-profile Asadi decision by the U.S. Court of Appeals for the Fifth Circuit, which held that Dodd-Frank starts protecting employees only after they report corporate misdeeds to the SEC.

In fact, said U.S District Judge Richard G. Stearns, Congress wrote Dodd-Frank to protect whistleblowers “whether or not the employer wins the race to the SEC’s door with a termination notice.”

Judge Stearns weighed this summer’s Asadi precedent, but rejected it in favor of “more persuasive” regulations previously issued by the SEC itself — not to mention the employee-friendly rulings of “numerous other district courts.”

Although the New Orleans-based Fifth Circuit is the highest-ranking court yet to consider this aspect of Dodd-Frank protection, Judge Stearns wasn’t required to follow its logic: He sits on the U.S. District Court for the District of Massachusetts, which is part of the First Circuit.

The judge’s decision, in the case of Ellington v. Giacoumakis, highlights the legal divide over Dodd-Frank — and marks another skirmish in the ongoing battle over whistleblower protection laws.

On one side of the dispute, employees have asked courts to interpret such legislation based on its overarching purpose: To encourage workers to report wrongdoing by shielding them from reprisal.

On the other side, companies argue for narrow, legalistic examinations that allow them to get away with firing employees who expose possible lawbreaking.

Ellington is a case in point. New England Investment & Retirement Group (NEINV) claimed that it didn’t violate Dodd-Frank’s anti-retaliation rules by firing Richard Ellington, a whistleblower who aided the SEC in an investigation that ended in NEINV paying a $200,000 fine for securities violations.

Dodd-Frank doesn’t protect Mr. Ellington, NEINV argued, because the company fired him before he went to the SEC. Also, Mr. Ellington filed a 20-page internal report about the wrongdoing — one of the acts for which he claims was punished — a scant two days before Dodd-Frank was enacted. As a result, the company argued, it wasn’t illegal to fire him two weeks later, even though the law was in effect by then.

Judge Stearns bluntly disagreed and allowed Mr. Ellington’s claim to proceed. To follow the Asadi ruling as NEINV had urged, he said, “would effectively invalidate” a key part of the Dodd-Frank law.

Dodd-Frank 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.

Since Asadi threw doubt on the law’s interpretation, however, the “right” way to get Dodd-Frank protection is no longer clear. Many companies require internal reporting of problems — yet employees like Mr. Ellington risk forfeiting their own protection if they follow such rules instead of going straight to the SEC.

The ultimate outcome may be signaled by the U.S. Supreme Court, which on November 12 hears arguments on another fiercely contended aspect of whistleblower protection: Whether the Sarbanes-Oxley Act (SOX) forbids retaliation only against workers who are directly employed by a public company that’s suspected of wrongdoing — or whether it also shields whistleblowers who work for contractors of the suspected company.

Passed in 2002 after the Enron scandal, SOX sets strict standards for financial behavior by public companies and protects “employees” (a term that the Supreme Court must now interpret) against retaliation for blowing the whistle on a number of violations.

The Supreme Court’s SOX decision in  Lawson v. FMR LLC — a case that comes, interestingly, from the same Massachusetts federal court, albeit from a different judge — will likely set the tone for Ellington and similar cases. If the Supreme Court interprets the word “employees” broadly, emphasizing the remedial intent of SOX, judges will be more inclined to favor whistleblowers in such cases.

But if the Court conducts a highly technical parsing of SOX, employers will take heart: Regardless of the outcome, a narrow approach will bolster the type of hair-splitting that allows them to dodge liability for punishing whistleblowers.

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