The whistleblower provision of the Dodd-Frank Wall Street and Consumer Protection Act has been a hot topic in corporate law circles from the outset. So it’s no surprise that the 5th Circuit ruling in Asadi v G.E. Energy has attracted the attention of inside counsel and their outside law firms.
Under a Dodd-Frank provision, which took effect in August 2011, whistleblowers that give the government original information about possible violations of federal securities laws can garner awards ranging from 10 to 30 percent of the penalty if their information leads to an enforcement action and monetary sanctions exceeding $1 million. That powerful incentive arguably boosted an already growing trend of worker whistleblowing, and encouraged employees to bypass internal reporting procedures and go directly to the government. That prevents employers from conducting their own investigations and, if necessary, taking remedial action prior to an SEC probe.
The law provides protection against retaliation to employees who report corporate misconduct. Five federal district courts have found that whistleblowers are protected, whether the employee reports the wrongdoing internally or goes directly to the SEC. That’s how the SEC interprets the law too (see “Contrary Views,” page 50).
But the 5th Circuit in July took the opposite tack. It ruled that Dodd-Frank’s protections against whistleblower retaliation, and the right to file a lawsuit claiming retaliation, apply only to individuals who have provided information to the SEC.
On the one hand, this is bad news for employers, providing yet another incentive for employees to bypass internal reporting. On the other hand, it is good news because it narrowly defines which employees qualify for whistleblower protection under the law and therefore have standing to file a retaliation lawsuit if they are subject to an adverse employment action.
“It’s a mixed bag for employers,” says Richard Cino, a Jackson Lewis partner. “It heightens the burden for someone to be a whistleblower under Dodd-Frank, but it does encourage individuals to report to the SEC.”
The case began when Khaled Asadi, a former GE Energy executive, claimed he was fired for reporting a possible securities law violation to his supervisor and the company’s regional ombudsman. Asadi said he was pro- tected by the anti-retaliation provisions of Dodd-Frank, even though he did not provide any information to the SEC and, therefore, did not meet the statutory definition of the term “whistleblower.” Instead, he argued that his internal reports were protected by conflicting language in Dodd-Frank’s anti-retaliation provision, which protects those who make disclosures that are protected under the Sarbanes-Oxley Act, even if they do not report a violation to the SEC.
But the court said that to be protected from retaliation under Dodd-Frank, an individual must be a “whistleblower,” which is defined by the statute as an individual who has made a report to the SEC. It concluded that the plain language of the statute compelled the conclusion that employees who only reported internally were not protected, not with standing the conflicting language.
Reaction to the decision from corporate attorneys has been split between glass-half-empty and glass-half-full interpretations.
“Employers have been trying to avoid having employees go to the SEC with a problem until they have a chance to get their arms around it,” says John Carney, a partner at BakerHostetler and former senior counsel at the SEC. “The last thing you want is a subpoena from the SEC for something you could have fixed yourself.”
Carney adds that a significant number of whistleblower cases are “false positives”—situations where an employee perceives a problem but no corporate wrongdoing has occurred. He views the Asadi decision as a setback for companies because it makes it less likely they will have the opportunity to explain the issue and avoid an SEC complaint.
On the other hand, Gregory Keating, a Littler Mendelson shareholder, points out that the decision may stem the tide of Dodd-Frank retaliation claims because very few people will qualify as whistleblowers entitled to protection.
“There is a raft of cases where we have filed motions to dismiss in the wake of Asadi,” he says. “If it is adopted by other courts, there will be a lot of cases dismissed because the employee did not go to the SEC.”
Regardless, the employment attorneys agree that the decision underscores the need for companies to have robust compliance programs with strong anti-retaliation provisions for employees who report wrongdoing internally.
“Asadi emphasizes the critical need for employers to implement new measures to ensure they have state-of-the-art, effective protocols,” Keating says. He points to new technologies that expand channels for internal reporting beyond the traditional anonymous hotline.
Carney believes companies should provide the same protections for internal reporters that Dodd-Frank provides for those who report wrongdoing to the government.
“If the anti-retaliation provisions of your company policy mirror those in the statute, employees and their counsel will feel more comfortable going to the company first,” he says.