Victory in Whistleblower Case Could Prove Pyrrhic for Corporations

Victory in Whistleblower Case Could Prove Pyrrhic for Corporations

In a 9-0 ruling last week, the Supreme Court gave the U.S. Chamber of Commerce everything it could have wanted in a case over the scope of corporate whistleblower protections under the Dodd-Frank Act. The only question now is whether the Chamber will come to regret it.

The court’s opinion declares that the anti-retaliation protections of the Dodd-Frank legislation apply only to whistleblowers who report suspected fraud to the SEC. It doesn’t, therefore, protect people like Paul Somers, the former vice president at Digital Realty Trust, who reported suspicions that his company was violating federal securities laws only to higher-ups within the company. Somers’s reward for his internal report was a pink slip, and his ensuing lawsuit eventually reached the Supreme Court.

There, Justice Ginsburg found that the statute’s definition of “whistleblower” clearly requires whistleblowers to go to the SEC, and, citing a Senate report, added that Congress’s intent was “to motivate people who know of securities law violations to report them to the SEC.” This led Justice Thomas, who preferred to stick to the words of the statute, to write an amusing concurring opinion. He quotes a former Senate staffer as saying that drafting legislative history was “like being a teenager at home while your parents are away for the weekend: there was no supervision.”

The ruling does not leave corporate whistleblowers out in the cold entirely. The Sarbanes-Oxley Act offers some anti-retaliation protections to those who report suspected problems internally, although the statute of limitations is far shorter (180 days, versus six years under Dodd-Frank), the administrative obstacles higher, and the monetary rewards lesser under that legislation.

As amicus, the U.S. Chamber of Commerce argued vigorously in favor of the prevailing view. It said, among other things, that a finding for internal whistleblowers would “open the door to countless suits that Congress never intended Dodd-Frank to cover.” But the Chamber’s apparent victory has some wondering whether it might face its own unintended consequences. Could the ruling, in encouraging employees to report wrongdoing to the SEC, work a little too well for corporate America’s comfort?

Whistleblower lawyers, for their part, say that the opinion will “drive employees to the SEC.” It would be hard to blame them, given that is now where the legal and financial motivation lies.

Corporations face not only the prospect of more behavior being reported to the SEC, but also losing the cover of self-reporting their misdeeds. If whistleblowers take a direct line to the agency, companies will no longer have the opportunity to make the confessional reporting to the SEC that frequently earns them leniency. As the first chief of the SEC’s Whistleblower Office said, it’s possible that corporations may have “litigated themselves into a box” on this one.

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