Digital Realty Trust Decision Increases Incentive to Bypass Internal Reporting

March 15, 2018

In-house compliance programs suffered a blow by the U.S. Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers. A unanimous Court found that the Dodd-Frank Act’s anti-retaliation provision only protects individuals who report to the SEC, not those who report internally—a finding that would seem to disincentivize internal reporting.

The whistleblower, Somers, sought protection under Dodd-Frank rather than under the Sarbanes-Oxley Act because of Dodd-Frank’s stronger protections. Sarbanes-Oxley has a shorter window for anti-retaliation protection (180 days versus six years under Dodd-Frank) and lower compensation (back pay plus interest versus double pay plus interest under Dodd-Frank)—not to mention the possible Dodd-Frank bounty from a successful SEC award.

As noted in a previous Ticker report, Dodd-Frank’s language is ambiguous. It defines a “whistleblower” narrowly as only an SEC reporter, but its anti-retaliation provisions seem to apply to internal reporters as well. Given this ambiguity, previous decisions have been split, with the Fifth Circuit dismissing a claim by an internal whistleblower in 2013, and the Second Circuit upholding such a claim in 2015. In Digital Realty Trust, the Ninth Circuit had sided with the Second Circuit and denied Digital Realty Trust’s motion to dismiss its former employee’s complaint but was ultimately overturned by the Supreme Court. The Court’s opinion, delivered by Justice Ruth Ginsberg on February 21, citing a Senate report recommending Dodd-Frank’s passage in 2010, and adding emphasis, notes that the “core objective of Dodd-Frank’s whistleblower program is to aid the Commission’s enforcement efforts by ‘motivat[ing] people who know of securities law violations to tell the SEC.’”

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