In a 9-0 opinion issued on Wednesday, February 21, in Digital Realty Trust v. Somers (2018), the Supreme Court resolved a circuit split by holding that Dodd-Frank’s anti-retaliation provision does not apply to an individual, like Somers, who reported a violation of the securities law internally at his company but did not report the violation to the SEC.

As we have previously written, this case came to the Supreme Court from the Ninth Circuit, affirming the District Court’s holding that Section 78u-6(h), Dodd-Frank’s anti-retaliation provision, did not necessitate reporting a potential violation to the SEC before gaining “whistleblower” status. Somers v. Digital Realty Trust Inc., 850 F.3d 1045 (9th Cir. 2016). The Fifth Circuit had previously come to the opposite holding. Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013). The Supreme Court decided this circuit split and reversed the Ninth Circuit’s holding—taking a narrow view of the “whistleblower” definition and statutory construction.

Dodd-Frank defines a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. § 78u-6(a)(6) (emphasis added). Somers and the Solicitor General argued that the “whistleblower” definition applies only to Dodd-Frank’s monetary reward program for whistleblowers and does not apply to its anti-retaliation provision. Further, the SEC itself advanced this view in its Rules. See 17 C.F.R. § 240.21F-2. The rule, as well as interpretative guidance released in 2015, explained that there were two definitions of “whistleblower”: one for the reward program, which required reporting to the SEC, and one only for the anti-retaliation provision, as long as the information is provided “in a manner described in Section 21F(h)(1)(A) of the Exchange Act,” which includes internal reporting. See id.; SEC Rel. No. 34-75592. The Rule further qualified that “[t]he anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.” 17 C.F.R. § 240.21F-2(b)(1)(iii).

The Supreme Court, however, found this argument to be at odds with the “plain” language of the statute and the purpose of this portion of Dodd-Frank—to encourage individuals to report violations to the SEC. The Supreme Court reasoned that the SEC Rule should not be accorded deference because “Congress has directly spoken” on this issue in its unambiguous language in Dodd-Frank, and concluded that the language in Dodd-Frank was explicit in its exclusive inclusion of only those individuals who report securities complaints to the SEC.

While the Supreme Court’s decision limits the scope of potential “whistleblowers” who could seek the protection of the Dodd-Frank anti-retaliation provision, the decision may have another, less positive, collateral consequence. When the SEC promulgated the whistleblower rules, it received dozens of comments suggesting that the SEC require employees to report internally before reporting potential violations to the SEC. The SEC rejected that approach, but attempted to encourage internal reporting by including as a factor in deciding the amount of an award whether the whistleblower first reported the potential violation internally. In light of the Supreme Court’s decision, it is more likely that employees will forego reporting any potential violations internally and instead go straight to the SEC so as to not only qualify for an award, but also to seek the protection of the anti-retaliation provision.