Featured on Employment Law This Week: Supreme Court: Dodd-Frank Protections Are Limited

Dodd-Frank whistleblower protections are limited – The Supreme Court has ruled that whistleblower protections under the Dodd-Frank Act apply only to those who report violations to the SEC. The Act protects whistleblowers from termination, demotion, and harassment. People who report to the SEC, other regulatory or law enforcement agencies, or to company management are still protected under the 2002 Sarbanes-Oxley Act. Dodd-Frank’s anti-retaliation provision permits whistleblowers to recover double back pay damages – Sarbanes Oxley does not.

Watch the segment below and read our recent post.

A featured story on Employment Law This Week is the new legislation proposed in Congress that aims to clarify whistleblower policies.

The Whistleblower Augmented Reward and Non-Retaliation Act would expand protections for those who blow the whistle on financial crimes. The bill would also resolve a circuit court split on the definition of “whistleblower,” expanding the scope of the term to specifically include employees who only report violations internally, without filing with the SEC or CFTC. The WARN Act aims to broaden monetary incentives for whistleblowers, and increase the scope of protected activities and prohibited retaliation. Whether or not this bill moves forward, we’re likely to see some movement soon on the circuit conflict it addresses, either by legislation or by the courts.

View the episode below or read more about this legislation in an earlier post on this blog.

Section 806 of SOX prohibits publicly traded companies, as well as their subsidiaries, contractors, subcontractors, and agents, from taking adverse personnel actions against employees for reporting activity that they reasonably believe constitutes mail fraud, wire fraud, bank fraud, securities fraud, or a violation of any Securities and Exchange Commission (“SEC”) rule or federal law relating to fraud against shareholders. In recognition of the legislative intent underlying SOX—to provide strong and broad-based protections for employees who report suspected securities violations and financial fraud—courts are increasingly applying lenient standards that favor employees in assessing the viability of a SOX retaliation claim in the face of a motion for pretrial dismissal. Fortunately for employers, however, recent decisions demonstrate that even in today’s whistleblower-friendly environment, courts will readily dismiss SOX retaliation claims that lack adequate evidentiary support.

For example, the U.S. Court of Appeals for the Second Circuit ruled in Nielson v. AECOM Tech Corp. that, in dismissing the plaintiff’s complaint, the district court incorrectly applied the “definitively and specifically” standard to find that the plaintiff had not engaged in activity protected by SOX. Under this originally well-accepted standard, an employee’s communications about a suspected violation are not protected unless they relate “definitively and specifically” to one of the categories of fraud or securities violations listed under Section 806 of SOX, and the employee must reasonably believe that each of the legally defined elements of a suspected violation occurred. Applying this standard, the district court held that the plaintiff’s complaints to his managers (that certain fire safety designs were not properly reviewed) were not protected.

On appeal, the Second Circuit deferred to evolving interpretations of SOX articulated by the Department of Labor’s (“DOL’s”) Administrative Review Board during the Obama administration. The Second Circuit jettisoned the “definitively and specifically” test in favor of the more relaxed “reasonable belief” standard, under which the plaintiff has engaged in protected activity as long as (i) he has a subjective belief that the reported conduct violates a law covered by SOX and (ii) his belief is objectively reasonable for a person in his position. Nevertheless, the Second Circuit affirmed the dismissal because, although the plaintiff alleged that he reported what he believed constituted, inter alia, shareholder fraud, he did “not plausibly allege, on the basis of assertions beyond the trivial and conclusory, that it was objectively reasonable for him to believe that there was such a violation[.]” As a result of the Nielson decision, district courts sitting in the Second Circuit now apply the more relaxed “reasonable belief” standard in determining whether a plaintiff has engaged in protected activity under SOX.

The U.S. Court of Appeals for the Third Circuit released a decision in Wiest v. Tyco Elecs. Corp. on February 2, 2016, that affirmed the dismissal of a plaintiff’s claim that he was unlawfully terminated in violation of SOX for reporting suspected securities fraud pertaining to improper accounting practices. Notably, the Third Circuit had previously reversed the district court’s prior dismissal of the plaintiff’s claim because the district court erred and applied the “definitively and specifically” standard to find that the plaintiff had not engaged in protected activity. On remand, the district court, affirmed by the Third Circuit, dismissed the plaintiff’s SOX claim on summary judgment because, regardless of whether the plaintiff had engaged in protected activity, there was no evidence that it was a factor contributing to his termination. The Third Circuit discussed the leniency of the contributing factor test, which requires only that the plaintiff show that his protected activity affected in any way the decision to terminate. Nevertheless, the Third Circuit found that the plaintiff failed to meet even this low threshold and that the defendant established that it would have terminated the plaintiff in the absence of any protected behavior.

On January 4, 2016, the U.S. District Court for the Southern District of New York in Yang v. Navigators Group, Inc., dismissed a plaintiff’s claim that she was terminated for complaining to her superiors about improper risk control procedures that she believed constituted shareholder fraud and violated securities regulations. The court initially denied a motion to dismiss the claim on the pleadings, rejecting the defendant’s contentions that the allegations were insufficient to show that the plaintiff had engaged in protected activity or reasonably believed that the complained-of conduct was unlawful. In reviewing the evidence subsequently proffered at the summary judgment stage, however, the district court found that some of plaintiff’s communications to her superiors were not protected because they failed to indicate in any way that she believed a violation under Section 806 of SOX had occurred, and, in any event, that the plaintiff was clearly fired for poor performance and there was no evidence that the concerns she raised contributed to the decision to terminate her.

In sum, the number of SOX whistleblower retaliation claims is on the rise, and relaxed legal standards have made it more difficult for employers to obtain pretrial dismissal of these claims. Yet, as the above rulings indicate, employers are not left defenseless. Armed with a properly mounted legal defense, they are frequently prevailing against whistleblower retaliation allegations in the very same cases that are applying more lenient pleading standards.

A version of this article originally appeared in the Take 5 newsletter “Five Employment Law Compliance Topics of Interest to Financial Services Industry Employers.”


On February 25, 2016, Congressman Elijah E. Cummings (D-MD) and Senator Tammy Baldwin (D-WI) introduced the Whistleblower Augmented Reward and Nonretaliation Act of 2016 (or WARN Act of 2016) (pdf). The bill proposes expanded protections for individuals who blow the whistle on financial fraud and securities violations and, if enacted, could have significant implications for financial services employees and employers alike.  Specifically, the WARN Act of 2016 aims to strengthen the protections and incentives available to financial crimes whistleblowers by amending the Financial Institutions Anti-Fraud Enforcement Act (“FIAFEA”), Federal Deposit Insurance Act (“FDIA”), Securities and Exchange Act (“SEA”), Commodity Exchange Act (“CEA”), and Sarbanes-Oxley Act (“SOX”).

Under the FIAFEA and FDIA, for example, individuals who report banking fraud can receive awards based on the amount of money recovered as a result of the information they provide. Currently, however, there are monetary caps on these incentive awards. The WARN Act of 2016 would eliminate those caps and permit FIAFEA and FDIA whistleblowers to receive 10 to 30 percent of the total amounts recovered—essentially amending these statutes to include whistleblower “bounty” programs mirroring those under the SEA and CEA created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).

The WARN Act of 2016 would expand the scope of employee activities protected by the FDIA’s existing anti-whistleblower retaliation provision. It would also add a whistleblower anti-retaliation provision to the FIAFEA entitling covered employees who suffer adverse personnel action for assisting with the prosecution of certain violations (e.g., mail fraud, wire fraud, or bank fraud) to recover full reinstatement, double back pay damages with interest, and litigation costs and attorneys’ fees in a civil lawsuit. The revised FIAFEA would further require the Attorney General to issue regulations compelling covered employers to educate, train, and notify employees, including by posting information on their website homepages, about employee rights and remedies under the statute.

The Act also bolsters the whistleblower anti-retaliation provisions created by the Dodd-Frank amendments to the SEA, CEA, and SOX. For example, the SEA and CEA define the term “whistleblower” to include only those who report suspected violations externally to the SEC or CFTC. Employers have relied on this to argue that the anti-retaliation protections of these statutes do not apply to employees who only report violations internally, and there is currently a circuit court split on the issue. The WARN Act of 2016 would resolve the dispute by eliminating the narrow definitions of “whistleblower” under these statutes, apparently establishing once and for all that employees who only report alleged violations internally, but not to the SEC or CFTC, are covered.

In addition, the proposed legislation would expand the scope of activities protected, and adverse personnel actions prohibited, by the SEA, CEA, and SOX anti-whistleblower retaliation provisions; amend the remedies available under the SEA and CEA  anti- retaliation provisions to include compensatory damages and punitive damages of up to $250,000, and those available under the SOX anti-retaliation provision to include double back pay and punitive damages of up to $250,000; and broaden the prohibitions against waiver of any whistleblower rights or remedies under the SEA and CEA (including waivers often contained in standard confidentiality and settlement agreements).

The bill has been referred to the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs for review, and whether it will garner any meaningful support remains to be seen. If it passes, employers will need to provide proper training on the revised regulations, ensure they have comprehensive programs in place for internal reporting and investigation of alleged financial and securities violations and employee retaliation claims, and revisit their confidentiality agreements, settlement agreements, and similar documents to ensure compliance with the Act’s enhanced prohibitions against the waiver of whistleblower rights.

As we mentioned before the holiday, I was recently interviewed on our firm’s new video program, Employment Law This Week.  The show has now released “bonus footage” from that episode – see below.

I elaborate on my recent post with Jason Kaufman, “2nd Circuit Expands Dodd-Frank Anti-Retaliation Protection to Cover Internal Whistleblowing.”

On September 10, 2015, the Second Circuit Court of Appeals ruled in Berman v. Neo@Ogilvy LLC that an employee who reports an alleged securities violation only to his or her employer, and not to the SEC, is nevertheless covered by the anti-retaliation protections afforded by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”).

Berman, a former finance director of Neo@Ogilvy, claimed that his employer and its corporate parent, WPP Group USA, Inc., violated the whistleblower protections of Dodd-Frank by wrongfully terminating him for raising concerns internally about business practices that allegedly constituted accounting fraud.  The companies moved to dismiss the claim, arguing that Berman was not a whistleblower subject to protection under Dodd-Frank because he did not report the alleged violations to the SEC.  The District Court agreed.

In a 2-1 decision, the Second Circuit reversed the District Court’s decision on appeal.  The Court found that the provisions of Dodd-Frank are ambiguous as to whether an employee who reports an alleged violation internally, but not to the SEC, qualifies as a whistleblower.  On the one hand, Section 21F(a)(6) of Dodd-Frank limits the definition of “whistleblower” to include only those individuals who provide information relating to an alleged securities violation to the SEC.  Yet, on the other hand, Section 21F(h)(1)(A) of Dodd-Frank’s retaliation protection provision prohibits retaliation against individuals who make disclosures that are, inter alia, required or protected under the Sarbanes-Oxley Act of 2002 (“SOX”), and SOX protects employees who make internal complaints of suspected securities laws violations without reporting them to outside agencies.

Finding that these were conflicting statutory provisions, the Court deferred to the SEC’s interpretation of the statute, under which an individual is a “whistleblower” if he or she provides information pursuant to Section 21F(h)(1)(A) of Dodd-Frank, which, as explained above, prohibits retaliation against employees for making internal complaints that would be protected by SOX.  Accordingly, the Court held that under SEC Rule 21F-2, “Berman is entitled to pursue Dodd-Frank remedies for alleged retaliation after his report of wrongdoing to his employer, despite not having reported to the Commission before his termination.”

Judge Dennis Jacobs, dissenting, opined that Dodd-Frank is “unambiguous”:  Section 21F(a)(6) is controlling because it defines who is a “whistleblower” under the relevant section of the statute and expressly provides that only those who report to the SEC can qualify.   Judge Jacobs pointed out that Dodd-Frank Section 21F(h)(1)(A), which the majority found creates ambiguity by incorporating protections provided by SOX, does not expand the statutory definition of whistleblower under Dodd-Frank, but instead identifies which acts done by whistleblowers are protected by Dodd-Frank.  In other words, according to Judge Jacobs, Section 21F(h)(1)(A) does not apply to protect a person unless he or she qualifies as a “whistleblower,” as the term is defined by Section 21F(a)(6).  Judge Jacobs criticized the majority for disregarding the plain text of Dodd-Frank’s definition of whistleblower and creating an ambiguity in the statute that does not exist solely to expand the reach of the anti-retaliation provisions of Dodd-Frank.

Notably, the Second Circuit’s decision creates a split in authority with the Fifth Circuit Court of Appeals, which came down the opposite way when faced with the same issue in 2013.  As a result, this issue is almost surely headed to the Supreme Court for resolution. Further, in holding that Dodd-Frank provides a private right of action for those who report violations only internally, the Second Circuit’s decision may lead to significantly more whistleblower retaliation claims in the future because, in comparison to the SOX whistleblower protections, Dodd-Frank offers a much longer statute of limitations, double back pay damages, and no administrative exhaustion requirement.

On August 4, 2015, the SEC issued an “Interpretation of the SEC’s Whistleblower Rules Under Section 21F of the Securities Exchange Act of 1934.” (pdf).  Unsurprisingly, and consistent with the position that it has been taking in amicus briefs on the issue, the SEC states that a whistleblower need not report suspected wrongdoing to the Commission in order to be protected by the anti-retaliation provisions of Dodd-Frank.  Rather, internal whistleblowing that is protected under the Sarbanes-Oxley Act is protected activity sufficient to state a claim under Dodd-Frank, according to the SEC.  We recently posted a video discussion of this very topic (here), noting that there is currently a sharp split of judicial authority on this critical question, and that the issue may well be headed to the Supreme Court for resolution.  The Fifth Circuit held in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), that a Dodd-Frank whistleblower must report wrongdoing to the Commission to be protected by that statute; a decision from the Second Circuit on the issue is pending in Berman v. Neo@Ogilvy LLC, 14-4626 (2d Cir.).  Ultimately, of course, it is the job of the courts to determine what Congress intended in the Dodd-Frank Act, but if the issue does indeed reach the Supreme Court – and in every federal district and appellate court case until that time – those favoring a broad interpretation of the definition of a “whistleblower” under the Dodd-Frank anti-retaliation provision will surely be citing the SEC’s new interpretation of its regulations.


In its May 28th, 2015 decision in Rhinehimer v. U.S. Bancorp Investments, Inc. (pdf), the Sixth Circuit Court of Appeals ruled that an employee who reports alleged unlawful conduct has engaged in protected activity for the purposes of a retaliation claim under the Sarbanes-Oxley Act (“SOX”), 18 U.S.C. § 1514A, as long as he or she has an objectively reasonable belief that the activity reported is prohibited under SOX.  The Sixth Circuit has joined the Second and Third Circuit Courts of Appeal in rejecting the previously adopted standard that an employee’s conduct must “definitively and specifically” relate to one of the enumerated categories of fraud by approximating the basic elements of the fraud claim.  The issue has not yet been revisited in the First, Fourth, Fifth, and Ninth Circuits since the Administrative Review Board rejected the “definitively and specifically” standard in Sylvester v. Parexel Int’l LLC, ARB Case No. 07-123 (May 25, 2011).

Rhinehimer was a certified financial planner at U.S. Bancorp who was terminated after he complained to his supervisor about questionable trades made by a coworker to the detriment of his elderly client – trades Rhinehimer claimed constituted unsuitability fraud.  He alleged that his termination constituted unlawful whistleblower retaliation in violation of SOX, which makes it illegal for companies to retaliate against an employee who reports alleged fraudulent activity.  Rhinehimer obtained a verdict at trial and U.S. Bancorp appealed.  On appeal, the Sixth Circuit was asked to determine whether a jury could reasonably find that Rhinehimer engaged in protected activity under SOX.

SOX requires that an employee reasonably believe that the activity reported is prohibited by law.  The defendants argued that Rhinehimer did not have a reasonable belief because he did not meet the “definitively and specifically” standard, which requires an employee to justifiably believe that each of the legally-defined elements of the suspected fraud occurred.  Acknowledging decisions by other Courts of Appeals, including the Second and Third Circuit Courts, the Sixth Circuit similarly rejected the “definitively and specifically” standard, finding that such an interpretation is inconsistent with the purpose of SOX, which was designed to provide broad protection for employees who provide information regarding “any” conduct reasonably believed to constitute a violation of relevant law. Instead, the Sixth Circuit held that a plaintiff need only have a reasonable belief, based on the totality of the circumstances of the case, that the conduct complained of was prohibited under SOX.  Ultimately, the Court held that a person in Rhinehimer’s position met this standard.

The trend is plainly in favor of rejecting the “definitively and specifically” standard of determining protected activity, but employers can still prevail by demonstrating that an employee lacked reasonable belief – a fact-specific inquiry that requires a showing of both subjective belief and objective reasonableness.

The authors gratefully acknowledge the assistance of summer associate Judah Rosenblatt in the preparation of this post.

The number of whistleblower complaints is on the rise, according to the 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program, and defending against them can be costly and disrupt business operations. Taking appropriate steps in response to internal complaints can go a long way toward minimizing the risk that the issue becomes an external dispute at OSHA or in court.

Understanding the Objectives A prompt investigation and an understanding of the objectives of the investigation are paramount. Employers should decide, for example, whether the goal is to create a factual record, prepare an investigative report addressing a particular inquiry or legal consideration, provide a basis for decision making, or serve as a defense in anticipated litigation—or any combination of these objectives. These considerations will determine whether the investigation should be undertaken by a non-attorney or by corporate counsel or outside counsel, or both. For example, if the goal is simply to correct a problem internally, perhaps corporate counsel is appropriate. If, on the other hand, there is a high likelihood that the employee’s complaint will lead to full-blown litigation, outside counsel may be more appropriate. In addition, employers must have a basic understanding of the privileges afforded to attorney work product and attorney-client communications. This is because the choice of investigator can impact whether, and to what extent, these privileges apply to the information adduced during the investigation, which, in turn, will determine whether such information will be protected from disclosure to third parties.

Whistleblowers in Compliance or Audit Functions Employers should also know how to respond to the challenge raised by complaints made by whistleblowers who work in compliance or audit functions or are otherwise responsible for receiving and investigating internal whistleblower complaints. These “trusted” whistleblowers are especially problematic because, while they should be working to investigate and correct the issue internally, they may also decide to blow the whistle themselves and report the matter to outside authorities. Further, while they are generally ineligible for financial awards under the Dodd-Frank whistleblower bounty program, these “trusted” whistleblowers can become eligible for an award if the business takes no corrective action within 120 days after they make an internal complaint. They are also protected by anti-retaliation provisions of Dodd-Frank and SOX.

Training Managers to Receive Complaints One of the most important considerations is making sure that supervisors and managers are trained and understand how to recognize and elevate a whistleblower complaint to the appropriate internal legal or compliance unit, and how to conduct themselves going forward to minimize the risk of a retaliation claim by an employee who blows the whistle. Issues are frequently first raised at the supervisory level, and the sooner that compliance and/or legal professionals receive information about a claim so that they can access the appropriate response, the sooner an internal investigation can commence, when necessary. Further, managing an employee who has made a whistleblower claim can present a host of challenges, particularly if the employee is under-performing and therefore has been or is becoming a candidate for corrective or even disciplinary action. If a current employee raises a whistleblower complaint, it is essential that the alleged wrongdoing is not compounded by retaliation against that employee (or by actions that give the appearance of retaliation). Thus, supervisors and managers should receive periodic training regarding the laws and company policies prohibiting retaliation. They should also understand the need to have any potentially adverse employment actions vetted by the legal department before taking action. Finally, supervisors and managers should be given appropriate support from the legal and/or human resources departments in terms of counseling and advice in dealing with the whistleblower on a day-to-day basis as issues arise, rather than trying to navigate these waters on their own.

On March 5, 2015, the Occupational Health and Safety Administration (“OSHA”) issued its “Final Rule” establishing the procedures for handling retaliation complaints brought under Section 806 of the Sarbanes-Oxley Act (“SOX”). Section 806, as amended by Dodd-Frank, protects employees of publicly traded companies, as well as employees of contractors, subcontractors, and agents of publicly traded companies, from being retaliated against for reporting fraudulent activity or other violations of SEC rules and regulations. The Final Rule addresses the comments that OSHA received in response to its interim rule, issued in 2011, and sets forth the final procedures for retaliation claims under SOX, including the procedures and timeframes applicable to employee complaints and OSHA investigations. While the Final Rule does not differ substantively from the interim rule, it crystalizes the SOX whistleblower complaint procedures and reflects an increasingly whistleblower-friendly landscape.

Verbal Complaints

One of the most important aspects of the Final Rule—and a subject of considerable concern to commenters—is its adherence to the interim rule provision permitting verbal SOX complaints. Prior to the interim rule, complaints had to be in writing and include a full statement of the alleged wrongful acts or omissions. The interim rule eliminated this requirement and permitted complaints to be made verbally and reduced to writing by an OSHA investigator. Commenters argued that this procedure transforms the investigator into an advocate for the complainant, lacks any standard for the investigator’s written complaint, and increases the risk that the complainant may attempt to change his or her allegations by contending that the claims were not accurately recorded by the investigator. OSHA rejected these arguments, concluding that allowing verbal complaints is “[c]onsistent with OSHA’s procedural rules under other whistleblower statues.”

Preliminary Reinstatement

The Final Rule also adopted the interim rule’s provision on preliminary reinstatement, i.e., reinstating the complainant to his or her former position during the pendency of a dispute. Commenters had suggested—without success—that OSHA include a provision that preliminary reinstatement should not be granted if the complainant is a security risk and that OSHA articulate specific circumstances under which preliminary reinstatement is appropriate. Instead, the Final Rule provides that, if there is a reasonable basis to believe that a SOX violation has occurred, a preliminary order will be issued that provides the relief necessary to make the complainant whole, including reinstatement to the position that he or she would have had but for the retaliation.

Moreover, as an alternative to actual reinstatement, the Final Rule permits OSHA to order preliminary “economic reinstatement” during the pendency of a dispute, which allows the complainant to collect his or her same pay and benefits without having to return to work. Significantly, OSHA intentionally omitted any mechanism for employers to recover the costs of preliminary economic reinstatement if the complainant is ultimately unsuccessful on his or her claim.

Notice to Respondents

One helpful development for employers is OSHA’s decision to clarify in its Final Rule the notice that respondents must receive when a complaint is filed, as well as respondents’ right to receive the information that the complainant submits to OSHA during an investigation. The Final Rule expressly provides that, when a complaint is filed, OSHA must notify the respondent of the filing of the complaint, the allegations made, and the substance of the supporting evidence. The Final Rule also notes that OSHA “generally provides the respondent with a copy of its memorandum memorializing the complaint” and that the respondent can “request that OSHA clarify the allegations in the complaint if necessary.” In addition, the Final Rule makes clear that, during an investigation, OSHA will ensure that each party receives a copy of all of the other parties’ submissions to OSHA and is given an adequate opportunity to respond to those submissions.

In the light of these generally supportive and encouraging procedures for whistleblowers, it is more important than ever for employers to correctly identify, investigate thoroughly, and take appropriate steps to address internal whistleblower complaints before they become costly, full-blown whistleblower disputes.