Appeals court restricts Dodd-Frank protection for whistle-blowers

By Alison Frankel
July 18, 2013

If Khaled Asadi, a former GE Energy executive who lost his job after alerting his boss to concerns that GE might have run afoul of the Foreign Corrupt Practices Act, had sued his old employer in New York or Connecticut, things might have worked out differently for him. Several federal trial judges in those jurisdictions have ruled that whistle-blowers who report corporate wrongdoing internally are protected by the Dodd-Frank Act of 2010, even though the statute defines whistle-blowers as employees who report securities violations to the Securities and Exchange Commission. But Asadi, who worked in GE Energy’s office in Amman, Jordan, filed a claim that the company had illegally retaliated against him in federal district court in Houston. And on Wednesday, the 5th Circuit Court of Appeals – with hardly a nod to contrary lower-court decisions in other circuits – ruled that Asadi is not a whistle-blower under Dodd-Frank because he talked to his boss and not the SEC.

The 5th Circuit opinion, written by Judge Jennifer Elrod for a panel that also included Judge Stephen Higginson and U.S. District Judge Brian Jackson (sitting by designation), highlights the tension between whistle-blower provisions in Dodd-Frank and the Sarbanes-Oxley Act of 2002. SOX, as you recall, directs employees to report possible wrongdoing up the corporate chain of command. SOX whistle-blowers must exhaust administrative remedies before they can sue and may only recover back pay. Dodd-Frank, on the other hand, directs whistle-blowers to bring their concerns to the SEC and permits them to sue for double the pay they lost through corporate retaliation. You can see why employees would rather bring claims under Dodd-Frank than SOX: They can get to court without clearing as many procedural obstacles and can recover twice as much money. You can also see why defendants argue that employees who went to their bosses instead of reporting to the SEC don’t qualify as Dodd-Frank whistle-blowers.

The SEC tried to solve this problem in 2011, when it implemented its final rule on Dodd-Frank whistle-blowers. In the provisions that dealt with anti-retaliation protection, the commission incorporated a reference to Sarbanes-Oxley, holding that Dodd-Frank gives employees a private cause of action against their employers if they have suffered retaliation for reporting violations to the SEC, cooperating with an SEC investigation or “making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.”

The first two federal district court rulings interpreting the scope of Dodd-Frank whistle-blower protection – Egan v. TradingScreen in Manhattan and Nollner v. Southern Baptist Convention in Nashville – agreed that the anti-retaliation provisions expanded the definition of whistle-blowers beyond the statutory language.(Those rulings dismissed Dodd-Frank claims for other reasons.) Two other federal judges in the 2nd Circuit have since held explicitly that when whistle-blowers first report internally, they can still sue under Dodd-Frank’s anti-retaliation provisions. In September 2012, U.S. District Judge Stefan Underhill permitted former Trans-Lux official Richard Kramer to proceed with Dodd-Frank claims against the company even though he first told the Trans-Lux board, and not the SEC, about possible tampering with the corporate pension plan. Then in May, U.S. District Judge Jesse Furman ruled in Murray v. UBS that the SEC’s interpretation of the scope of Dodd-Frank protection against retaliation must be accorded deference, despite arguments by UBS’s lawyers that the agency was not resolving statutory ambiguity. At the time of Furman’s ruling, Murray’s lawyer, Robert Stulberg of Broach & Stulberg, told me that there was an emerging consensus that Dodd-Frank protection extends to whistle-blowers who don’t report wrongdoing to the SEC and that the agency’s interpretation should guide judicial determinations.

The trial judge overseeing Asadi’s case, U.S. District Judge Nancy Atlas, avoided the issue of whether he qualified as a whistle-blower under the Dodd-Frank. Instead, she tossed Asadi’s Dodd-Frank claims in 2012 because she found that the anti-retaliation provisions did not apply outside of the bounds of the United States.

The 5th Circuit, however, was much more intrigued by the question of who qualifies as a Dodd-Frank whistle-blower. The panel conceded that “Asadi has some case law, as well as the SEC regulation on this issue, in his corner,” citing the TradingScreen, Trans-Lux and Southern Baptist decisions in a footnote that doesn’t mention the UBS case. Despite the analysis of other courts and the SEC, the appellate panel concluded that Dodd-Frank’s statutory language defining whistle-blowers as those who report securities violations to the SEC is unambiguous. The anti-retaliation provisions, it held, do not expand the definition of a Dodd-Frank whistle-blower but instead expand protection for those who report both to the SEC and internally.

Wednesday’s decision is the first appellate ruling on Dodd-Frank whistle-blowers, so “this will be the rule,” said Asadi counsel Ronald Dupree of the Dupree Law Firm. “Every other defense lawyer, wherever they have these cases, will cite to the 5th Circuit.” Dupree told me he believes the 5th Circuit is “largely in conflict” with the trial courts that have ruled on the scope of Dodd-Frank whistle-blower protection and with the SEC’s own interpretation. “Obviously, we’re going to re-evaluate, figure out our next step,” he said. At the moment, he added, Asadi remains unemployed.

GE Energy was represented by Norton Rose Fulbright. Norton partner Linda Addison was not immediately available for comment.

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