Supreme Court Clarification of Dodd-Frank Whistleblower Protections Carries Mixed Bag of Implication

Corporate Governance

This week, the U.S. Supreme Court held that an individual must take allegations of corporate wrong-doing directly to the Securities and Exchange Commission—not just internally—in order to qualify for expanded whistleblower protections under the Dodd-Frank Act.  The decision could encourage would-be whistleblowers to go straight to federal regulators in lieu of internal reporting mechanisms.  At issue in the case was a claim against Digital Reality Trust Incorporated that the company had violated the anti-retaliation laws set forth in Dodd-Frank when employee Paul Somers was fired after reporting to upper management—not to the SEC—that a senior vice president had violated Sarbanes-Oxley by eliminating specific internal corporate controls.  The Supreme Court's decision reconciled a split in the circuit courts on the issue.  The decision on its face was a victory for the employer Digital Reality Trust and was heavily supported by various business groups.  However, in the wake of the ruling, commentary quickly began to emerge that eventually employers may come to regret the ruling.  It could serve as a disincentive for employees to report issues internally, thus allowing a company to utilize internal compliance systems to address allegations before federal involvement.  The SEC has found that 83 percent of whistleblowers first report an issue internally.  Other commentary characterized the ruling as narrow, only applying to individuals who try to claim whistleblower status after the fact.  Time will tell.