Digital Realty’s Victory Is A Loss For Corporate Compliance
In Digital Realty Trust v. Somers,[1] the U.S. Supreme Court, with the silent endorsement of every major corporation, undermined Wall Street’s advocacy of internal corporate compliance programs as an alternative to whistleblower qui tam reward laws, such as those contained in the Dodd-Frank Act or the False Claims Act. In a stunning blow to internal corporate “hot lines” and compliance programs designed to encourage employees to report potential frauds to their managers or legal departments, the Supreme Court ruled that internal whistleblowing was not a protected activity under federal law. Unless a statute explicitly covered internal disclosures in its definition of whistleblowing, internal complaints were not protected.
Striking down a rule published by the U.S. Securities and Exchange Commission, the court held that employees who reported corporate fraud to their supervisors, via compliance programs and even to a corporate audit committee could be fired at will and have no protection whatsoever under the Dodd-Frank Act’s strong anti-retaliation provision.
The rule in question was approved by the SEC in response to the unanimous petitions of corporations and trade associations demanding that the commission encourage employees to report frauds internally. These companies feared that the newly enacted Dodd-Frank Act, which permitted employees to anonymously report frauds to the SEC and obtain a financial reward, would undercut internal compliance programs.
For example, comments filed to the commission on behalf of General Electric, Google, Honeywell, JPMorgan Chase, Microsoft and Northrop Grumman asked the SEC to protect compliance programs and require employees to “report any potential violation internally” before they reported their concerns to the SEC.[2] Numerous other corporations, including Alcoa, Apache Corp., Cardinal Health, Citigroup, Goodyear Tire, Hewlett-Packard, Intel, Johnson & Johnson, Merck, Microsoft, Newmont Mining, Pfizer, Prudential, Procter & Gamble, TRW Automotive Holdings and United Technologies all echoed these same concerns, urging the SEC to establish rules enhancing internal compliance programs.[3] Adding to this chorus of corporate advocacy, the Business Roundtable Institute for Corporate Ethics — an association of chief executive officers of “leading U.S. companies with nearly $6 trillion in annual revenues” — asked the commission to “encourage employees and other potential whistleblowers to first utilize the well-developed internal compliance elements of leading companies” before reporting directly to the SEC.[4]
Corporate attorneys also urged the SEC to encourage employees to use internal compliance programs. The Association of Corporate Counsel, the 26,000-member “bar association” for the “legal departments of corporations” explained that “some employees will fear retaliation for blowing the whistle. The solution to that problem is not, however, a scheme to undermine important and effective internal compliance and reporting systems; rather, employees who fear retaliation may rely on the anti-retaliation provision contemporaneously enacted by Congress [in the Dodd-Frank Act].”
The SEC responded to the corporate lobby. Its final whistleblower rules both encouraged employees to report allegations of fraud internally and also ensured that such internal disclosures would be covered under the DFA’s anti-retaliation provisions. The SEC wanted its whistleblower rules to “avoid undermining internal compliance programs” and “promote” a harmonious “working relationship between the Commission and companies.”[5]
The pro-internal reporting rules enacted by the SEC were a major victory for Wall Street.
Three years after the SEC rules were approved, Digital Realty Trust fired Paul Somers, its vice president for portfolio management. Somers had internally complained to “senior management” that Digital was hiding “millions in cost overruns” and committing other securities violations.[6] Somers never went to the SEC, but instead trusted in Digital’s internal reporting procedures. Instead of trying to prove that there was “good cause” to fire Somers, Digital attacked the SEC rules themselves, and argued that they could fire Somers, even if he was a whistleblower.
Digital argued that Somers could be lawfully fired under the Dodd-Frank Act because he only raised internal concerns and never filed with the SEC. Digital maintained that SEC rules protecting internal whistleblowers were illegal. Because the Dodd-Frank Act did not include internal disclosures in its definition of a “whistleblower,” Digital argued that whistleblowing to a company’s legal department, compliance program, senior managers, or even its SEC-required audit committee were not protected.
Digital ignored every argument as to why internal compliance programs should be supported, and claimed that to be a “whistleblower” under the Dodd-Frank Act, employees were required to bypass compliance programs and first contact the SEC.
The Supreme Court agreed to hear Digital’s arguments. Incredibly, every corporation that had urged the SEC to protect or encourage internal whistleblowing remained silent. Every compliance-related trade association remained silent. The corporate lawyers who so eloquently advocated for internal whistleblowing during the SEC’s rulemaking proceeding remained silent.
In a unanimous decision issued by Justice Ruth Bader Ginsburg, the Supreme Court rule in favor of Digital. The fallout will be dramatic.
First, the Dodd-Frank Act is not the only federal statute that does not explicitly define protected whistleblowing as to include internal disclosures. The Dodd-Frank Act’s language is mirrored in numerous other federal whistleblower laws, including all of the major environmental whistleblower laws covering clean air, water and toxic substances, all of the banking whistleblower laws, and the Occupational Safety and Health Act, among others. Digital’s victory is a loss for internal compliance programs under numerous laws.
Second, thousands of employees will be at risk for termination if they fail to heed the advice of the Supreme Court and report their concerns directly to the government. Under the SEC rules, and long-standing precedents issued by other federal agencies, the overwhelming majority of employees report potential violations internally to their managers or compliance departments before they ever go to the government. All of these employees are now at heightened risk for termination if they follow these now-questionable precedents.
Third, the failure of any corporation to brief the Supreme Court as to the destructive nature of Digital’s arguments, or even explain why corporations supported the SEC’s efforts to encourage compliance during the Dodd-Frank Act rulemaking proceeding, was devastating to the future of internal compliance programs. This deafening silence discredited all of the arguments that encouraged employees to report concerns internally, and not to the government. By remaining silent while the Supreme Court weighed creating a rule of law threatening internal whistleblowing, corporations undermined their own programs, and exposed an underlying animus to all whistleblowing, internal and external.
However, the adverse impact of Digital’s Supreme Court victory can and should be mitigated. Employees must take their cue from the Supreme Court and report securities frauds directly to the government. The SEC has strong and effective mechanisms permitting employees to file allegations anonymously and confidentially. Why expose yourself to retaliation when you can safely report the problems to the government?
The new whistleblower reward laws further mitigate the harm caused by Digital. The reward laws incentivize whistleblowers for taking the risk of reporting violations to the government. Compensation for whistleblowers is not predicated on being retaliated against and obtaining damages for wrongful discharge. You do not have to suffer or have your career destroyed to obtain a whistleblower reward.
Instead, the reward laws compensate employees whose allegations are truthful and result in a successful enforcement action. Thus, employees are rewarded for the quality of their disclosures, not for their suffering. The reward law places a premium on protecting employees whose information serves the public interest and holds fraudsters accountable.
Additionally, because the reward laws are predicated on demonstrating an actual violation of law, they send an important message to employees. Seek out confidential legal assistance before you blow the whistle. Don’t risk your jobs and careers over minor or unprovable violations. Learn how to take advantage of the Dodd-Frank Act’s protections.
Digital’s victory before the Supreme Court should act as a reminder to every employee that raising allegations of fraud to your employer is serious business, and it is imperative to know your rights before you place your career on the line. Digital’s argument that it can fire internal whistleblowers without any accountability under the Dodd-Frank Act is a reminder that the “shoot the messenger” culture is alive and well.
Employees now must listen carefully to the message of the unanimous Supreme Court. If you want the best legal protections, you must report your corporate fraud concerns to the SEC before you ever disclose them to a company’s audit committee, law department or compliance program. Laws protecting and rewarding whistleblowers are on the books. They must be used.
In discussing the potential impact of a Digital victory in the Supreme Court, the director of the SEC’s whistleblower office warned Wall Street: “be careful what you wish for.” Wall Street got its wish. It is now incumbent upon employees to respond in kind and effectively use the legal tools Congress created in the Dodd-Frank Act and other qui tam laws to file confidential complaints with the government, obtain the strongest possible legal protections against retaliation, and qualify for compensation for taking the risk of blowing the whistle and serving the public interest.
If anyone were to ask why an employee should report directly to the government, and not his or her employer, tell them to ask the Supreme Court.
Stephen M. Kohn is a partner at Kohn Kohn & Colapinto LLP in Washington, D.C., and the author of “The New Whistleblower’s Handbook: A Step-by-Step to Doing What’s Right and Protecting Yourself” (Lyons Press, 2017). He has represented whistleblowers since 1984.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Digital Realty Trust v. Somers, No. 16-1276 (Feb. 21, 2018).
[2] Comments on Proposed Rules for Implementing Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, Gen. Elec. Co., et al. at 1 (Dec. 17, 2010), https://www.sec.gov/comments/s7-33-10/s73310-179.pdf.
[3] Comments on Proposed Rules for Implementing Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, Alcoa et al. at 11 (Dec. 17, 2010), https://www.sec.gov/comments/s7-33-10/s73310-182.pdf; Covington & Burling LLP (Feb. 18, 2011), https://www.sec.gov/comments/s7-33-10/s73310-283.pdf.
[4] Comments on Proposed Rules for Implementing Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, Bus. Roundtable Inst. at 3 (Dec. 17, 2010), https://www.sec.gov/comments/s7-33-10/s73310-186.pdf.
[5] U.S. Securities and Exchange Commission, Whistleblower Incentives and Protections, 76 Fed. Reg. 34,300, 34,324 (June 13, 2011).
[6] Somers v. Digital Trust, 119 F.Supp.3d 1088 (2015).
This article first appeared in Law360: https://www.law360.com/articles/1018379
