Fifth Circuit Takes Limited View of Dodd-Frank Whistleblower Protections

Eric Paltell
Eric Paltell
07/18/2013

Over the past two years, several federal courts have wrestled with the scope of whistleblower protections under the Dodd-Frank Act (“DFA”), codified at 15 U.S.C. §78u-6(h).  To date, all of the district courts to address the issue have held that an employee claiming whistleblower retaliation in violation of DFA need not make a report to the Securities and Exchange Commission to be protected by DFA.  As a result, employees alleging that they were fired for activities protected by the Sarbanes-Oxley Act (“SOX”) could circumvent SOX’s 180 day limitations period, limited damages, and administrative exhaustion requirements.  Instead, employees claiming to have been fired for protesting employer misconduct in violation of SOX could bypass OSHA, file suit in federal court, and enjoy DFA’s 6 to 10 year limitations period and double back pay damages.

On July 17th, 2013, the United States Court of Appeals reversed this trend by holding that §78u-6(h) does not protect employees who have not first reported the suspected employer misconduct to the SEC.  Asadi v. GE Energy (USA) LLC.  In Asadi, the plaintiff filed a complaint alleging that GE Energy violated §78u-6(h) by terminating him following his internal reports of a possible Foreign Corrupt Practices Act violation. GE Energy moved to dismiss Asadi’s complaint because (1) Asadi did not meet DFA’s definition of “whistleblower,” and (2) the whistleblower-protection provision does not apply extraterritorially.  Significantly, four other district  courts have held that an employee making a claim under §78u-6(h)(iii) need not meet the definition of  “whistleblower” set forth in §78u-6(a), which defines a whistleblower as “any individual who provides, or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC]” (emphasis added).  The United States District Court for the Southern District of Texas sidestepped the issue of whether one need be a “whistleblower” to be protected and dismissed Asadi’s claim with prejudice, concluding that the whistleblower-protection provision “does not extend to or protect Asadi’s extraterritorial whistleblowing activity.” Asadi appealed to the U.S. Court of Appeals for the Fifth Circuit.

Asadi argued that the whistleblower-protection provision protects individuals who engage in conduct set forth in §78u-6(h)(iii), even if they do not provide information to the SEC. Following the reasoning of the other district courts to address the issue, Asadi argued that the definition of whistleblower conflicts with §78u-6(h)(iii) because persons engaged in conduct covered by that section need not report to the SEC. Asadi also argued that the Fifth Circuit should defer to the SEC’s regulation construing the Dodd-Frank whistleblower-protection provision, which provides that SEC reporting is not required to be covered by DFA’s whistleblower protections.

Affirming the District Court’s dismissal, the Fifth Circuit held that the definition of ‘whistleblower” in §78u-6(a) shows that Congress’s intent was clear and unambiguous and that employers must report a suspected securities law violation to the SEC to be protected. The Fifth Circuit noted that if they were to accept Asadi’s construction of the whistleblower-protection provision, the Sarbanes-Oxley Act’s anti-retaliation provision (with its more limited damages, shorter limitations period, and administrative exhaustion requirement) would, for practical purposes, be rendered moot.

It is highly unlikely that the Asadi decision is the last word on this issue. The stakes in these DFA/SOX claims are high, and the fact that the DFA might be used as a way to bypass SOX gives plaintiff’s counsel incentive to continue to litigate this issue.  Nevertheless – from the perspective of someone who represents employers – it’s good to see that the first appellate court to address this issue ruled for the good guys.

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