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No. 15-1729
____________________________________________________________________________________
UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
____________________________________________________________________________________
VINCENT A. BEACOM,
Plaintiff-Appellant,
v.
ORACLE AMERICA, INC.,
Defendant-Appellee.
____________________________________________________________________________________
On Appeal from the United States District Court
for the District of Minnesota
____________________________________________________________________________________
BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION,
AMICUS CURIAE IN SUPPORT OF THE APPELLANT
____________________________________________________________________________________
ANNE K. SMALL
General Counsel
MICHAEL A. CONLEY
Deputy General Counsel
WILLIAM K. SHIREY
Assistant General Counsel
STEPHEN G. YODER
Senior Litigation Counsel
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-9040
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TABLE OF CONTENTS
TABLE OF AUTHORITIES ....................................................................................iv
STATEMENT OF THE ISSUE ................................................................................. 1
INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION
AND SUMMARY OF ITS POSITION .......................................................... 2
STATEMENT OF THE CASE .................................................................................. 4
A.
The securities laws recognize that internal company reporting by
employees and others is important for deterring, detecting, and
stopping unlawful conduct that may harm investors. ...................................... 4
B.
By providing new incentives and protections for individuals to
engage in whistleblowing activity, the Dodd-Frank whistleblower
program enhances the existing securities-law enforcement scheme,
including internal company reporting. ............................................................ 8
1.
The Commission carefully calibrated the rules implementing
the monetary award component of the whistleblower program
to ensure that individuals were not disincentivized from first
reporting internally. ............................................................................... 9
2.
Using its broad rulemaking authority, the Commission
adopted a rule clarifying that employment retaliation is
prohibited against individuals who engage in any of the
whistleblowing activity described in Section
21F(h)(1)(A)(iii)—including making internal reports at public
companies of securities fraud violations. ............................................13
STANDARD OF REVIEW .....................................................................................17
ARGUMENT ...........................................................................................................18
I.
Section 21F does not unambiguously demonstrate a Congressional
intent to restrict employment anti-retaliation protection to only those
individuals who provide the Commission with information relating
to a violation of the securities laws. ..............................................................18
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II.
In light of the ambiguity here, the Commission adopted a reasonable
interpretation in Rule 21F-2(b)(1) that warrants judicial deference. ............ 27
III.
Failure to defer to Rule 21F-2(b)(1) could arbitrarily and irrationally
deny the employment retaliation protections afforded by DoddFrank to individuals who, before coming to the Commission, first
report potential securities law violations to the U.S. Department of
Justice or Self-Regulatory Organizations such as FINRA. ...........................31
CONCLUSION ........................................................................................................37
CERTIFICATIONS
CERTIFICATE OF SERVICE
ADDENDUM
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TABLE OF AUTHORITIES
CASES
Page
Ahmad v. Morgan Stanley & Co., 2 F. Supp. 3d 491
(S.D.N.Y. 2014) .............................................................................................27
In re Air Cargo Shipping Servs. Antitrust Litig., 697 F.3d 154
(2d Cir. 2012).................................................................................................21
Ark. AFL-CIO v. FCC, 11 F.3d 1430 (8th Cir. 1993) (en banc) .............................17
Asadi v. G.E. Energy (U.S.A.), L.L.C., 720 F.3d 620
(5th Cir. 2013) ..................................................................... 22, 23, 24, passim
Auer v. Robbins, 519 U.S. 452 (1997) .....................................................................29
Azim v. Tortoise Capital Advisors, LLC, No. 13-2267,
2014 WL 707235 (D. Kans. Feb. 24, 2014), objections
overruled, 2014 WL 4352069 (D. Kans. Sept. 2, 2014) ...............................28
Banko v. Apple, Inc., No. 13-02977, 2013 WL 7394596
(N.D. Cal. Sept. 27, 2013) .............................................................................28
Berman v. Neo@Ogilvy LLC, 72 F. Supp. 3d 404 (S.D.N.Y.
2014), appeal docketed, No. 14-4626 (2d Cir. Dec. 16,
2014) ..............................................................................................................28
Bussing v. COR Clearing, LLC, No. 8:12-cv-238,
2014 WL 2111207 (D. Neb. May 21, 2014) ...........................................28, 35
Career College Ass’n v. Riley, 74 F.3d 1265 (D.C. Cir. 1996) ...............................17
Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
467 U.S. 837 (1984).............................................................................1, 17, 18
Connolly v. Remkes, No. 5:14-CV-01344, 2014 WL 5473144
(N.D. Cal. Oct. 28, 2014) ..............................................................................27
iv
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CASES (continued)
Page
Culton v. Missouri Dep’t of Corrections, 515 F.3d 828 (8th Cir.
2008) ........................................................................................................ 23-24
Egan v. TradingScreen, Inc., No. 10 Civ. 8202,
2011 WL 1672066 (S.D.N.Y. May 4, 2011) .................................................27
Ellington v. Giacoumakis, 977 F. Supp. 2d 42 (D. Mass. 2013) .............................27
Englehart v. Career Educ. Corp., No. 8:14-cv-444,
2014 WL 2619501 (M.D. Fla. May 12, 2014) ..............................................28
Free Enter. Fund v. Pub. Co. Accounting Oversight Bd.,
561 U.S. 477 (2010).........................................................................................6
Genberg v. Porter, 935 F. Supp. 2d 1094 (D. Colo. 2013),
appeal dismissed in relevant part, 566 Fed. App’x 719
(10th Cir. 2014) ....................................................................................... 27-28
Good Samaritan Hosp. v. Shalala, 508 U.S. 402 (1993).........................................17
Halliburton, Inc. v. Admin. Review Bd., 771 F.3d 254 (5th Cir.
2014) (per curiam), reh’g en banc denied,
596 Fed. App’x 340 (5th Cir. 2015) ..............................................................26
Jones v. SouthPeak Interactive Corp., 777 F.3d 658 (4th Cir.
2015) ..............................................................................................................26
Khazin v. TD Ameritrade Holding Corp., No. 13-4149,
2014 WL 940703 (D.N.J. Mar. 11, 2014), aff’d on other
grounds, 773 F.3d 488 (3d Cir. 2014) ...........................................................27
Kramer v. Trans-Lux Corp., No. 11 Civ. 1424,
2012 WL 4444820 (D. Conn. Sept. 25, 2012)...............................................28
Lawson v. Suwannee First & S.S. Co., 336 U.S. 198 (1949) ............................21, 28
Liu v. Siemens, A.G., 978 F. Supp. 2d 325 (S.D.N.Y. 2013),
aff’d on other grounds, 763 F.3d 175 (2d Cir. 2014) ....................................23
v
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CASES (continued)
Page
Lutzeier v. Citigroup, Inc., 305 F.R.D. 107 (E.D. Mo. 2015) .................................28
Microsoft Corp. v. i4i Ltd. P’ship, 131 S. Ct. 2238 (2011) .....................................27
Murray v. UBS Sec., LLC, No. 12 Civ. 5914,
2013 WL 2190084 (S.D.N.Y. May 21, 2013) ...............................................27
Nat’l Ass’n of Home Builders v. Defenders of Wildlife,
551 U.S. 644 (2007).......................................................................................17
Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986
(M.D. Tenn. 2012) .........................................................................................28
Nw. Austin Mun. Util. Dist. No. One v. Holder,
557 U.S. 193 (2009)................................................................................. 27-28
N.Y. Pub. Interest Research Group v. Whitman, 321 F.3d 316
(2d Cir. 2003).................................................................................................17
Peters v. LifeLock Inc., No. 2:14-cv-00576, Dkt. 47
(D. Ariz. Sept. 19, 2014) ...............................................................................27
Philko Aviation, Inc. v. Shacket, 462 U.S. 406 (1985) ............................................28
Rosenblum v. Thomson Reuters (Markets) LLC,
984 F. Supp. 2d 141 (S.D.N.Y. 2013) ...........................................................27
Sabella v. Bank of Nova Scotia, No. 1:14-cv-0934, Dkt. 30
(S.D.N.Y. Mar. 24, 2015) ..............................................................................27
Sierra Club v. EPA, 252 F.3d 932 (8th Cir. 2001) ............................................17, 18
Smith v. Riceland Foods, Inc., 151 F.3d 813 (8th Cir. 1998) ..................................24
Somers v. Digital Realty Trust, Inc., No. C-14-5180, 2015 WL
4483955 (N.D. Cal. July 22, 2015), interlocutory appeal
certified, 2015 WL 4481987 (N.D. Cal. July 22, 2015),
and docketed, No. 15-80136 (9th Cir. July 31, 2015) ...................................27
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CASES (continued)
Page
Sullivan v. Everhart, 494 U.S. 83 (1990).................................................................18
United States v. Mead Corp., 533 U.S. 218 (2001) .................................................17
United States v. Wilson, 503 U.S. 329 (1992) .........................................................35
Util. Air Regulatory Grp. v. EPA, 134 S. Ct. 2427 (2014) ......................................21
Verfuerth v. Orion Energy Sys., Inc., No. 14-C-352,
2014 WL 5682514 (E.D. Wisc. Nov. 4, 2014) ..............................................28
Wagner v. Bank of Am. Corp., No. 12-cv-00381,
2013 WL 3786643 (D. Colo. July 19, 2013), aff’d on
other grounds, 571 Fed. App’x 698 (10th Cir. 2014) ...................................28
Wiggins v. ING U.S., Inc., No. 3:14-CV-1089, 2015 WL
3771646 (D. Conn. June 17, 2015), appeal on other
grounds docketed, No. 15-2262 (2d Cir. July 16, 2015) ...............................28
Yang v. Navigators Group, Inc., No. 13-cv-2073,
2014 WL 1870802 (S.D.N.Y. May 8, 2014) .................................................27
STATUTES
Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. No. 111-203, 124 Stat. 1376 (2010) (“Dodd-Frank”)
Dodd-Frank .............................................................................. 2, 8, 19, passim
Dodd-Frank §748, 124 Stat. at 1743-44 ........................................................20
Dodd-Frank §922, 124 Stat. at 1841-49 .......................................................... 2
Dodd-Frank §924(a), 124 Stat. at 1850 ........................................................... 2
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STATUTES (continued)
Page
Sarbanes-Oxley Act of 2002, Pub. L. No. 107, 116 Stat. 745
(“Sarbanes-Oxley”)
Sarbanes-Oxley ........................................................................ 6, 7, 14, passim
Sarbanes-Oxley §301, 116 Stat. at 775-77 ...................................................... 7
Sarbanes-Oxley §307, 15 U.S.C. §7245 ............................. 6-7, 15, 19, passim
Sarbanes-Oxley §404, 15 U.S.C. §7262 .......................................................... 6
Sarbanes-Oxley §806, 18 U.S.C. §1514A .......................... 7-8, 16, 25, passim
Securities Exchange Act of 1934, 15 U.S.C. 78a, et seq.
Section 10A, 15 U.S.C. §78j-1 ........................................................................ 6
Section 10A(b), 15 U.S.C. §78j-1(b) ............................................................... 5
Section 10A(m), 15 U.S.C. §78j-1(m) ....................................................14, 15
Section 10A(m)(4), 15 U.S.C. §78j-1(m)(4) .............................................7, 19
Section 12, 15 U.S.C. §78l .............................................................................. 5
Section 15(d), 15 U.S.C. §78o ......................................................................... 5
Section 21F, 15 U.S.C. §78u-6 .................................................. 2, 4, 8, passim
Section 21F(a), 15 U.S.C. §78u-6(a) ............................................................... 9
Section 21F(a)(6), 15 U.S.C. §78u-6(a)(6).......................... 18, 19, 20, passim
Section 21F(b), 15 U.S.C. §78u-6(b) ..................................................9, 30, 31
Section 21F(c), 15 U.S.C. §78u-6(c) ...................................................9, 30, 31
Section 21F(d)(2)(A), 15 U.S.C. §78u-6(d)(2)(A) ........................................24
Section 21F(h)(1), 15 U.S.C. §78u-6(h)(1) ........................... 1, 13, 15, passim
Section 21F(h)(1)(A), 15 U.S.C. §78u-6(h)(1)(A) ........... 1, 13-14, 15, passim
Section 21F(h)(1)(A)(i),
15 U.S.C. §78u-6(h)(1)(A)(i) .................................... 15, 19, 22, passim
Section 21F(h)(1)(A)(ii),
15 U.S.C. §78u-6(h)(1)(A)(ii) ................................... 15, 19, 22, passim
Section 21F(h)(1)(A)(iii),
15 U.S.C. §78u-6(h)(1)(A)(iii) .................................. 13, 14, 15, passim
Section 21F(h)(1)(B), 15 U.S.C. §78u-6(h)(1)(B) ..................................14, 23
Section 21F(h)(1)(B)(i),
15 U.S.C. §78u-6(h)(1)(B)(i) ..............................................................14
Section 21F(h)(1)(C), 15 U.S.C. §78u-6(h)(1)(C) ........................................14
Section 21F(h)(2), 15 U.S.C. §78u-6(h)(2) ...................................................24
Section 21F(j), 15 U.S.C. §78u-6(j) ..........................................................9, 14
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STATUTES (continued)
Page
Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67,
§301, 109 Stat. 737, 762-64............................................................................. 5
Section 23(h)(1) of the Commodity Exchange Act,
7 U.S.C. §26(h)(1) .........................................................................................20
18 U.S.C. §1341 .........................................................................................................8
18 U.S.C. §1343 .........................................................................................................8
18 U.S.C. §1344 .........................................................................................................8
18 U.S.C. §1348 .........................................................................................................8
18 U.S.C. §1513(e) ......................................................................................13, 14, 19
18 U.S.C. §1514A(a)..................................................................................................8
18 U.S.C. §1514A(a)(1)(A) ...............................................................................33, 34
18 U.S.C. §1514A(a)(1)(C) .......................................................................................8
18 U.S.C. §1514A(c)(1) ...........................................................................................26
18 U.S.C. §1514A(c)(2)(C) .....................................................................................26
RULES
Rules under the Securities Exchange Act of 1934, 17 C.F.R. Part 240
Rule 10A-3(b)(3), 17 C.F.R. §240.10A-3(b)(3) .............................................. 7
Rule 17a-5(h)(2), 17 C.F.R. §240.17a-5(h)(2) ................................................ 8
Rule 21F-2(b)(1), 17 C.F.R. §240.21F-2(b)(1) ..................... 3, 14, 16, passim
Rule 21F-2(b)(1)(ii), 17 C.F.R. §240.21F-2(b)(1)(ii) ...................................15
Rule 21F-2(b)(2), 17 C.F.R. §240.21F-2(b)(2) .............................................14
Rule 21F-4(b)(4), 17 C.F.R. §240.21F-4(b)(4) ....................................... 12-13
Rule 21F-4(b)(7), 17 C.F.R. §240.21F-4(b)(7) .................................12, 30, 32
Rule 21F-4(c)(3), 17 C.F.R. §240.21F-4(c)(3)..............................................11
Rule 21F-6(a)(4), 17 C.F.R. §240.21F-6(a)(4)..............................................12
Rule 21F-6(b)(3), 17 C.F.R. §240.21F-6(b)(3) .............................................12
Rules under the Investment Advisers Act of 1940, 17 C.F.R. Part 275
Rule 204A-1(a)(4), 17 C.F.R. §275.204A-1(a)(4) .......................................... 8
Rule 206(4)-2(a)(6)(ii), 17 C.F.R. §275.206(4)-2(a)(6)(ii) ............................. 8
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RULES (continued)
Page
Rule 38a-1 under the Investment Company Act of 1940,
17 C.F.R. §270.38a-1(a)(4) ............................................................................. 8
Rule 3(d)(2), Standards of Professional Conduct for Attorneys
Appearing and Practicing Before the Commission in the
Representation of an Issuer, 17 C.F.R. §205.3(d)(2) ...................................... 7
Procedures for Handling Retaliation Complaints under Section 806 of
the Sarbanes-Oxley Act of 2002, 29 C.F.R. Part 1980
29 C.F.R. §1980 .............................................................................................26
29 C.F.R. §1980.105 ......................................................................................26
29 C.F.R. §1980.106-110 ..............................................................................26
Fed. R. App. P. 29(a) .................................................................................................2
LEGISLATIVE MATERIALS
H.R. 4173, 111th Cong. §7203(a) (as passed by House Dec. 11, 2009) ................. 19
H.R. 4173, 111th Cong. §922(a) (as passed by Senate May 20, 2010) ................... 20
H.R. 4173, 111th Cong. §922(a) (conference base text) .........................................20
SEC and Corporate Audits (Part 6): Hearings on Detecting and
Disclosing Financial Fraud Before Subcomm. on Oversight and
Investigations of the Comm. on Energy and Commerce,
99th Cong. 345 (1986) (testimony of John Shad, Chairman) ........................ 6
ADMINISTRATIVE MATERIALS
Interpretation of the SEC’s Whistleblower Rules Under Section 21F
of the Securities Exchange Act of 1934, Exchange Act Release
No. 34-75592, 80 Fed. Reg. 47,829 (Aug. 10, 2015) ....................................29
Proposed Rules for Implementing the Whistleblower Provisions of
Section 21F of the Securities Exchange Act of 1934,
75 Fed. Reg. 70,488 (Nov. 17, 2010) ...................................... 3, 4, 10, passim
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ADMINISTRATIVE MATERIALS (continued)
Page
Report of Investigation Pursuant to Section 21(A) of the Securities
Exchange Act of 1934 and Commission Statement on the
Relationship of Cooperation to Agency Enforcement Decisions,
2001 WL 1301408 (Oct. 23, 2001).............................................................. 4-5
Request for Comment on NASDAQ Petition, 68 Fed. Reg. 27,722
(May 20, 2003) ..............................................................................................36
Securities Whistleblower Incentives and Protections,
76 Fed. Reg. 34,300 (June 13, 2011) ......................................... 3, 4, 5, passim
MISCELLANEOUS
Orly Lobel, Lawyering Loyalties: Speech Rights and Duties Within
Twenty-First-Century New Governance, 77 Fordham L. Rev.
1245 (2009) ....................................................................................................16
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No. 15-1729
____________________________________________________________________________________
UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
____________________________________________________________________________________
VINCENT A. BEACOM,
Plaintiff-Appellant,
v.
ORACLE AMERICA, INC.,
Defendant-Appellee.
____________________________________________________________________________________
On Appeal from the United States District Court
for the District of Minnesota
____________________________________________________________________________________
BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION,
AMICUS CURIAE IN SUPPORT OF THE APPELLANT
____________________________________________________________________________________
STATEMENT OF THE ISSUE
The Securities and Exchange Commission (“Commission”), after noticeand-comment rulemaking, issued a rule to clarify an ambiguity in the
whistleblower employment anti-retaliation provisions in Section 21F(h)(1) of the
Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §78u-6(h)(1). The
Commission’s rule interpreted the anti-retaliation protections to extend to any
individual who engages in the whistleblowing activities described in Section
21F(h)(1)(A), irrespective of whether the individual makes a separate report to the
Commission. Is the Commission’s rule entitled to deference under Chevron,
U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)?
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INTEREST OF THE SECURITIES AND EXCHANGE COMMISSION
AND SUMMARY OF ITS POSITION
The Commission—the agency principally responsible for the administration
of the federal securities laws—submits this brief as amicus curiae pursuant to Fed.
R. App. P. 29(a) to address an important securities law issue presented in this
appeal.
Congress, in Section 922 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank”), Pub. L. No. 111-203, 124 Stat. 1376,
1841-49 (2010), amended the Exchange Act to add Section 21F, entitled
“Securities Whistleblower Incentives and Protection” and codified at 15 U.S.C.
§78u-6. Section 21F directs the Commission to pay awards to individuals whose
reports to the Commission about violations of the securities laws result in
successful Commission enforcement actions, and prohibits employers from
retaliating against individuals in the terms and conditions of their employment
when they engage in certain specified whistleblowing activities. (The award
program and anti-retaliation protections are referred to collectively herein as “the
whistleblower program.”)
In May 2011, at Congress’s direction, the Commission issued final rules
“implementing the provisions of Section 21F.” See Dodd-Frank §924(a), 124 Stat.
at 1850. Throughout the rulemaking process, the Commission considered the
“significant issue” of how to ensure that the whistleblower program does not
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undermine the willingness of individuals to make whistleblower reports internally
at their companies before they make reports to the Commission. Securities
Whistleblower Incentives and Protections (“Adopting Release”), 76 Fed. Reg.
34,300, 34,300, 34,323 (June 13, 2011); Proposed Rules for Implementing the
Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934
(“Proposing Release”), 75 Fed. Reg. 70,488, 70,488 (Nov. 17, 2010). The
Commission’s final rules were carefully calibrated to achieve this objective by
providing “strong incentives” for individuals in appropriate circumstances to report
internally in the first instance. Adopting Release at 34301, 34322. 1
One of those rules—Exchange Act Rule 21F-2(b)(1), 17 C.F.R. §240.21F2(b)(1)—is at issue in this litigation. 2 The Commission has a strong programmatic
interest in demonstrating that the rule’s reasonable interpretation of certain
1
The Commission recognized that internal reporting is not always
appropriate, and the decision whether to do so (either prior to reporting to the
Commission or at all) is best left for whistleblowers to determine based on the
particular facts and circumstances. See Adopting Release at 34327. Among the
considerations a whistleblower would likely consider are: (i) whether the
employer has an anonymous reporting system; (ii) whether the potential
misconduct involves upper-level management; (iii) whether the misconduct is still
ongoing and poses a risk of sufficiently significant harm to investors that
immediate reporting to the Commission is more appropriate; and (iv) whether the
employer may be prone to bad faith conduct such as the destruction of evidence.
Id. at 34326.
2
Each rule designated in this brief as Exchange Act Rule 21F-___ is codified
at 17 C.F.R. §240.21F-___.
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ambiguous statutory language was a valid exercise of the Commission’s broad
rulemaking authority under Section 21F. This interest arises for two related
reasons. First, the rule helps protect individuals who choose to report potential
violations internally in the first instance (i.e., before reporting to the Commission),
and thus is an important component of the overall design of the whistleblower
program. Second, if the rule were invalidated, the Commission’s authority to
pursue enforcement actions against employers that retaliate against individuals
who report internally would be substantially weakened.
STATEMENT OF THE CASE
A.
The securities laws recognize that internal company reporting by
employees and others is important for deterring, detecting, and
stopping unlawful conduct that may harm investors.
Companies’ processes for the internal reporting of violations of law and
other misconduct “play an important role in achieving compliance with the
securities laws.” Adopting Release at 34325; accord id. at 34324. Among other
things, these internal reporting processes can help companies to promptly identify,
correct, and self-report unlawful conduct by officers, employees, or others
connected to the company. See generally Proposing Release at 70496. In this
way, “reporting through internal compliance procedures can complement or
otherwise appreciably enhance [the Commission’s] enforcement efforts … .”
Adopting Release at 34359 n.450; see also Report of Investigation Pursuant to
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Section 21(A) of the Securities Exchange Act of 1934 and Commission Statement
on the Relationship of Cooperation to Agency Enforcement Decisions, 2001 WL
1301408, at *1 (Oct. 23, 2001) (“When businesses seek out, self-report and rectify
illegal conduct, and otherwise cooperate with Commission staff, large expenditures
of government and shareholder resources can be avoided and investors can benefit
more promptly.”). 3
Recognizing the significant role that internal company reporting can play,
Congress for nearly two decades has enacted a series of amendments to the
securities laws to encourage, and in some instances to require, internal reporting of
potential misconduct. In 1995, Congress amended the Exchange Act to add
Section 10A(b), entitled “Required Response to Audit Discoveries.” See Private
Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, §301, 109 Stat. 737,
762-64. Section 10A(b) imposes a series of internal company disclosure
obligations on a registered public accounting firm that, during the course of
conducting an audit of a public company required by the Exchange Act, discovers
that an illegal act connected to the company has occurred. 4 Section 10A(b)
3
To be clear, as the Commission has advised, “while internal compliance
programs are valuable, they are not substitutes for strong law enforcement.”
Adopting Release at 34326 (emphasis added).
4
This brief uses the term “public company” to refer to a company with a class
of securities registered under Section 12 of the Exchange Act and those required to
file reports under Section 15(d) of that Act.
5
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describes a process of disclosure by the auditor to the Commission after the
auditor’s internal disclosures occur and certain other conditions are met, including
a failure on the company’s part to take an appropriate response.5
In 2002, Congress enacted the Sarbanes-Oxley Act of 2002 (“SarbanesOxley”), Pub. L. No. 107-204, 116 Stat. 745, in response to “a series of celebrated
accounting debacles” 6 involving companies such as Enron and WorldCom. As
part of Sarbanes-Oxley, Congress enacted several additional provisions related to
the internal company reporting of wrongdoing. 7 In Section 307, for example,
Congress directed the Commission to issue rules requiring attorneys appearing and
practicing before the Commission in the representation of public companies “to
report evidence of a material violation” of the securities laws or any “breach of
5
An early version of the legislative proposal that became Section 10A would
have required auditors to report immediately to the Commission. SEC Chairman
John Shad testified before Congress at the time in opposition to such a reporting
requirement. See SEC and Corporate Audits (Part 6): Hearings on Detecting and
Disclosing Financial Fraud Before Subcomm. on Oversight and Investigations of
the Comm. on Energy and Commerce, 99th Cong. 345 (1986) (“[W]hy not give
management an opportunity to respond to suspicions and take corrective action?”).
6
Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 484
(2010).
7
A principal aim of Sarbanes-Oxley was to promote the establishment of
robust internal corporate governance mechanisms and processes that could
promptly identify and remedy violations. See, e.g., Sarbanes-Oxley §404, 15
U.S.C. §7262 (requiring internal compliance systems and an annual audit by
outside auditors).
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fiduciary duty or similar violation by the company or any agent thereof” to
specified company officials. Sarbanes-Oxley §307, 15 U.S.C. §7245. These
attorneys are not required to make reports to the Commission and, indeed, may
often be precluded from doing so as a result of their ethical obligations to their
clients.8 Similarly, Sarbanes-Oxley added Exchange Act Section 10A(m)(4),
which required the Commission, by rule, to direct that national securities
exchanges and national securities associations require that audit committees of
listed companies establish internal company procedures allowing employees and
others to submit complaints “regarding accounting, internal accounting controls, or
auditing matters,” and to report anonymously “concerns regarding questionable
accounting or auditing matters.” See Sarbanes-Oxley §301, 116 Stat. at 775-77; 17
C.F.R. §240.10A-3(b)(3).
Further, Section 806 of Sarbanes-Oxley (as later amended by Dodd-Frank)
prohibited public companies, certain related persons or entities, and nationally
recognized statistical rating organizations from engaging in employment retaliation
8
Only in limited situations—where an attorney reasonably believes it is
“necessary” to report to the Commission to prevent a securities law violation that
will cause substantial financial injury, or to correct past violations of similar
severity where the attorney’s services were used—may attorneys report evidence
of a material violation to the Commission. 17 C.F.R. §205.3(d)(2). But even when
such disclosure to the Commission is permitted, an attorney will typically need to
report internally first in order to satisfy the requirement that disclosure to the
Commission may be necessary.
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against an employee who makes certain whistleblower disclosures concerning,
among other things, securities fraud (18 U.S.C. §1348), bank fraud (id. §1344),
mail fraud (id. §1341), wire fraud (id. §1343), or any violation of a Commission
rule or regulation. 18 U.S.C. §1514A(a). The whistleblower disclosures are
protected if they are made to “a person with supervisory authority over the
employee (or such other person working for the employer who has the authority to
investigate, discover, or terminate misconduct),” or to Congress or certain
governmental agencies (including the Commission). Id. §1514A(a)(1)(C).9
B.
By providing new incentives and protections for individuals to engage in
whistleblowing activity, the Dodd-Frank whistleblower program
enhances the existing securities-law enforcement scheme, including
internal company reporting.
As noted above, Dodd-Frank established the Commission’s new
whistleblower program in 2010 by adding Section 21F to the Exchange Act.
Section 21F expressly authorized the Commission “to issue such rules and
9
The Commission has periodically adopted rules and regulations requiring
internal reporting in certain circumstances either within or among regulated
entities. See, e.g., 17 C.F.R. §270.38a-1(a)(4) (requiring the chief compliance
officer of a mutual fund to report the details of any material compliance matters to
the fund’s board); 17 C.F.R. §240.17a-5(h)(2) (requiring the auditor of a brokerdealer to report material inadequacies to the chief financial officer);17 C.F.R.
§275.204A-1(a)(4) (requiring each investment adviser to establish a code of ethics
requiring supervised persons to report any violations thereof to the chief
compliance officer); 17 C.F.R. §275.206(4)-2(a)(6)(ii) (requiring each investment
adviser to obtain an internal control report with respect to custody of client assets
maintained by the investment adviser or an affiliate).
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regulations as may be necessary or appropriate to implement the provisions of this
section consistent with the purposes of this section.” Exchange Act §21F(j). In
May 2011, the Commission used that broad authority to adopt final rules
implementing both the monetary award and employment anti-retaliation aspects of
the whistleblower program.
1.
The Commission carefully calibrated the rules implementing the
monetary award component of the whistleblower program to
ensure that individuals were not disincentivized from first
reporting internally.
Section 21F directs the Commission to pay awards, subject to certain
limitations and conditions, to individuals who voluntarily provide the Commission
with original information about a violation of the securities laws that leads to the
successful enforcement of an action brought by the Commission resulting in
monetary sanctions exceeding $1,000,000. 10 See Exchange Act §21F(a)-(c).
Further, Section 21F affords the Commission discretion to set the amount of each
award within a range of 10 percent to 30 percent of the total monetary sanctions
collected. Id.
10
As discussed infra Argument Part III, Section 21F also provides for awards
where the same original information that led to a successful Commission
enforcement action also led to a successful enforcement action by certain other
statutorily specified law enforcement and regulatory authorities, including the U.S.
Department of Justice and the various self-regulatory organizations that are under
the Commission’s supervision (e.g., FINRA).
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A principal challenge the Commission faced in crafting rules to implement
the award program was ensuring that employees and others were not dissuaded
from reporting internally due to the possibility of a monetary award. See
Proposing Release at 70488 (expressing the Commission’s desire “not to
discourage whistleblowers who work for companies that have robust compliance
programs [from] first report[ing] the violation to appropriate company personnel”)
(emphasis added). Were this to happen, the Commission recognized, the result
could be a reduction in the “effectiveness of a company’s existing compliance,
legal, audit and similar internal processes for investigating and responding to
potential violations of the Federal securities laws,” which in turn could weaken
corporate compliance with the securities laws. Id. at 70488.11 The Commission
also recognized that “reporting through internal compliance procedures can
complement or otherwise appreciably enhance [its] enforcement efforts in
appropriate circumstances.” Adopting Release at 34359 n.450.
For instance, the subject company may at times be better able to
distinguish between meritorious and frivolous claims, and may make
such findings available for the Commission. This would be
particularly true in instances where the reported matter entails a high
11
Cf. Proposing Release at 70516 (explaining that “allow[ing] a company a
reasonable period of time to investigate and respond to potential securities laws
violations (or at least begin an investigation) prior to [an individual making a
report] to the Commission” is “consistent with the Commission’s efforts to
encourage companies to create and implement strong corporate compliance
programs”).
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level of institutional or company-specific knowledge and/or the
company has a well-functioning internal compliance program in
place. Screening allegations through internal compliance programs
may limit false or frivolous claims, provide the entity an opportunity
to resolve the violation and report the result to the Commission, and
allow the Commission to use its resources more efficiently.
Id. 12
Accordingly, the Commission “tailored the final rules to provide
whistleblowers who are otherwise pre-disposed to report internally, but who may
also be affected by financial incentives, with additional economic incentives to
continue to report internally” in the first instance.13 Id. at 34360. The final rules
seek to do this in three principal ways:
An individual “who reports internally can collect a whistleblower
award from the Commission if his internal report to the company or
entity results in a successful covered action.” Id. (discussing
Exchange Act Rule 21F-4(c)(3)).
An individual “who first reports [pursuant] to an entity’s internal
whistleblower, legal, or compliance procedures for reporting
allegations of possible violations of law and within 120 days reports
12
See also Proposing Release at 70516 (explaining that allowing individuals to
first report internally “provides a mechanism by which some of th[e] erroneous
[tips] may be eliminated before reaching the Commission,” and that otherwise “a
large number of tips of varying quality [could] caus[e] the Commission to incur
costs to process and validate the information”).
13
Many commenters during the rulemaking, particularly industry-affiliated
commenters, urged the Commission to encourage or require individuals to report
internally before reporting to the Commission. See, e.g., Adopting Release at
34326 n.230 (citing comment letters from, among others, the Business Roundtable
and the U.S. Chamber of Commerce).
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to the Commission” will be treated for purposes of an award as “if
[the submission to the Commission] had been made at the earlier
internal reporting date.” Id. at 34322 (emphasis added) (discussing
Exchange Act Rule 21F-4(b)(7)). “This means that even if, in the
interim, another whistleblower has made a submission that caused the
[Commission’s] staff to begin an investigation into the same matter,
the [individual] who had first reported internally will be considered
the first whistleblower who came to the Commission … .” Id.
“In addition, the final rules provide that when determining the amount
of an award, the Commission will consider as a plus-factor the
whistleblower’s participation in an entity’s internal compliance
procedures.” Id. at 34360 (discussing Exchange Act Rule 21F6(a)(4)).14 The ability to adjust an award upward based on internal
reporting, the Commission explained, would “allow [the Commission]
to account for a reduced monetary sanction … where the internal
reporting potentially resulted in a lower monetary sanction” because
the company responded to the internal report by engaging in
remediation, self-reporting and cooperating with the Commission. Id.
at 34360 n.455.
Beyond the tailored financial incentives that the Commission crafted
to encourage individuals to report internally in appropriate situations, the
final rules also require that officers, directors, trustees, and partners, as well
as other specified personnel having internal audit or compliance
responsibilities, must in certain instances first internally disclose the
information about potential securities law violations and then wait 120 days
before reporting the information to the Commission. See Exchange Act
14
Relatedly, the Commission’s rules also provide that “a whistleblower’s
interference with internal compliance and reporting is a factor that can decrease the
amount of an award.” Adopting Release at 34301, 34331 (discussing Exchange
Act Rule 21F-6(b)(3)).
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Rule 21F-4(b)(4). The Commission determined that this restriction was
necessary to discourage “whistleblower submission[s] [that] might
undermine the proper operation of internal compliance systems” that
companies have established for responding to violations of law. Adopting
Release at 34317.
2.
Using its broad rulemaking authority, the Commission adopted a
rule clarifying that employment retaliation is prohibited against
individuals who engage in any of the whistleblowing activity
described in Section 21F(h)(1)(A)(iii)—including making internal
reports at public companies of securities fraud violations.
Section 21F(h)(1) is designed to protect employees who engage in certain
specified whistleblowing activities. It does this in two significant ways.
First, subparagraph (A) seeks to prevent employment retaliation by placing
employers on notice that they may not retaliate against employees who engage in
certain whistleblowing activity. This is clear from the express terms of the
subparagraph, which is drafted as a prohibition directed to employers:
(A)
In General. No employer may discharge, demote, suspend,
threaten, harass, directly or indirectly, or in any other manner
discriminate against, a whistleblower in the terms and
conditions of employment because of any lawful act done by
the whistleblower—
(i)
in providing information to the Commission in
accordance with this section;
(ii)
in initiating, testifying in, or assisting in any investigation
or judicial or administrative action of the Commission
based upon or related to such information; or
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(iii)
in making disclosures that are required or protected under
the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.),
this chapter [i.e., the Exchange Act], including section
78j-1(m) of this title [i.e., Section 10A(m) of the
Exchange Act], section 1513(e) of Title 18, and any other
law, rule, or regulation subject to the jurisdiction of the
Commission.15
Second, subparagraphs (B) and (C) address the legal remedies that employees can
pursue against employers who have failed to heed subparagraph (A)’s
prohibition.16
The Commission, employing its broad rulemaking authority under Section
21F(j), adopted two clarifying rules related to the prohibition in subparagraph (A).
The first rule expressly stated that the Commission possesses authority to bring
civil enforcement actions and proceedings against employers who violate the
retaliation prohibition. See Exchange Act Rule 21F-2(b)(2).
The second rule, Exchange Act Rule 21F-2(b)(1), clarified that the
retaliation prohibition in subparagraph (A) protects any employee who engages in
15
As discussed infra 18-19, the disclosures listed in clause (iii) include the
internal company reporting disclosures described above in Part A.
16
Subparagraph (B) provides a cause of action in federal district court for any
“individual who alleges discharge or other discrimination in violation of
subparagraph (A).” Exchange Act §21F(h)(1)(B)(i). Subparagraph (C) provides
that relief in a successful action shall include reinstatement, two times back pay,
compensation for litigation costs, expert witness fees, and reasonable attorneys’
fees. Id. §21F(h)(1)(C).
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any of the whistleblowing activities specified in clauses (i)-(iii) above, irrespective
of whether the employee separately reports the information to the Commission. It
provides in pertinent part:
For purposes of the anti-retaliation protections afforded by Section
21F(h)(1) of the Exchange Act (15 U.S.C. 78u-6(h)(1)), you are a
whistleblower if:
(ii)
You provide that information in a manner described in Section
21F(h)(1)(A) of the Exchange Act (15 U.S.C. 78u-6(h)(1)(A)).
17 C.F.R. §240.21F-2(b)(1)(ii).
As the Commission explained in the adopting release, this rule reflects the
fact that clause (iii) prohibits employers from retaliating against “individuals who
report to persons or governmental authorities other than the Commission.”
Adopting Release at 34304 (emphasis in original). In particular, clause (iii)
prohibits employers from retaliating against employees who make the “disclosures
that are required or protected under the Sarbanes-Oxley Act” or the other securities
laws, including the internal company disclosures described above in Part A. For
example:
Disclosures that Sarbanes-Oxley Section 307 requires attorneys for
the public company to make to the company’s general counsel
regarding potential evidence of a material violation of the securities
laws or a breach of fiduciary duty by a corporate director;
Disclosures to an audit committee pursuant to Section 10A(m) of the
Exchange Act concerning “questionable accounting or auditing
matters” at a public company; and
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Disclosures protected under Sarbanes-Oxley Section 806 to a
supervisor or compliance official at a public company concerning
possible securities fraud, wire fraud, bank fraud, or mail fraud.
Significantly, by clarifying that the prohibition on employment
retaliation extends to individuals who report internally in instances such as
these (irrespective of whether they have reported to the Commission), Rule
21F-2(b)(1) complements the overall goal of the whistleblower program
rulemaking to maintain incentives for individuals to first report internally in
appropriate circumstances. In the adopting release, the Commission
recognized that the prohibition on employment retaliation would help
preserve these incentives for internal reporting, since “[e]mployees who
report internally in this manner will have anti-retaliation employment
protection to the extent provided for by [Section 21F(h)(1)(A)(iii)], which
incorporates the broad anti-retaliation protections of Sarbanes-Oxley Section
806.” Adopting Release at 34325 n.223. See generally Orly Lobel,
Lawyering Loyalties: Speech Rights and Duties Within Twenty-FirstCentury New Governance, 77 FORDHAM L. REV. 1245, 1250 (2009)
(“[I]nternal protections are particularly crucial in view of research findings
that … employees are more likely to choose internal reporting systems.”).
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STANDARD OF REVIEW
“Chevron requires that a reviewing court defer to the agency’s interpretation
of an ambiguous statute if that interpretation is ‘permissible.’” Ark. AFL-CIO v.
FCC, 11 F.3d 1430, 1441 (8th Cir. 1993) (en banc) (quoting Good Samaritan
Hosp. v. Shalala, 508 U.S. 402, 414 (1993)). See also United States v. Mead
Corp., 533 U.S. 218, 226-27 (2001) (“administrative implementation of a
particular statutory provision qualifies for Chevron deference when it appears that
Congress delegated authority to the agency generally to make rules carrying the
force of law, and that the agency interpretation claiming deference was
promulgated in the exercise of that authority”). Consideration of whether an
agency interpretation is permissible involves two steps. First, this Court considers
“whether the Congress has directly spoken to the precise question at issue.” Sierra
Club v. EPA, 252 F.3d 943, 947 (8th Cir. 2001) (citing Chevron, 467 U.S. at 842).
A “fundamental ambiguity” arises where two statutory provisions present
“seemingly categorical—and, at first glance, irreconcilable—legislative
commands,” thereby affording the agency discretion to “harmonize[]” the
provisions. Nat’l Ass’n of Home Builders v. Defenders of Wildlife, 551 U.S. 644,
661-73 (2007); accord N.Y. Pub. Interest Research Group v. Whitman, 321 F.3d
316, 327-29 (2d Cir. 2003); Career College Ass’n v. Riley, 74 F.3d 1265, 1271-72
(D.C. Cir. 1996).
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Second, if the statute is silent or ambiguous with respect to the specific issue,
this Court determines whether the agency’s interpretation is reasonable, which
means the interpretation is rational and not inconsistent with the statute. See, e.g.,
Sullivan v. Everhart, 494 U.S. 83, 89 (1990). To find an agency’s interpretation
rational, this Court “‘need not conclude that the agency construction was the only
one it permissibly could have adopted’” or “‘even the reading [this Court] would
have reached if the question initially had arisen in a judicial proceeding.’” Sierra
Club, 252 F.3d at 947 (quoting Chevron, 467 U.S. at 843 n.11).
ARGUMENT
I.
Section 21F does not unambiguously demonstrate a Congressional
intent to restrict employment anti-retaliation protection to only those
individuals who provide the Commission with information relating to a
violation of the securities laws.
Congress did not unambiguously limit the employment anti-retaliation
protections in Section 21F(h)(1) to only those individuals who provide the
Commission with information relating to a securities law violation. Rather, there
is ambiguity on this issue given the considerable tension between clause (iii) of
Section 21F(h)(1)(A), which as discussed above lists a broad array of
whistleblowing activity to entities and persons other than just the Commission, and
Section 21F(a)(6), which defines “whistleblower.”
To appreciate the significant tension between these two provisions, it is
useful to first examine the language and structure of Section 21F(h)(1)(A). As
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quoted in full supra 13-14, Section 21F(h)(1)(A) prohibits an employer from
retaliating against a whistleblower: (i) for “providing information to the
Commission in accordance with this section”; (ii) for assisting in an investigation
or action of the Commission “based upon or related to such information”; or (iii)
for “making disclosures that are required or protected under” Sarbanes-Oxley, the
Exchange Act, 18 U.S.C. §1513(e), “and any other law, rule, or regulation subject
to the jurisdiction of the Commission.”
As the quoted language makes evident, clauses (i) and (ii), together, protect
individuals for whistleblowing to the Commission about securities law violations.
But the anti-retaliation protection that clause (iii) affords reaches beyond just
disclosures involving securities law violations and disclosures to the Commission.
It covers, among other things, an employee’s submission to a public company’s
audit committee about questionable accounting practices (including those
questionable practices that do not rise to the level of a securities law violation)
under Section 10A(m)(4) of the Exchange Act, or an in-house counsel’s disclosure
under Section 307 of Sarbanes-Oxley about a potential breach of the CEO’s
fiduciary duty. 17
17
The legislative history adds no clarity concerning Congress’s intention in
adding clause (iii) to Section 21F(h)(1)(A). Indeed, the provision was added
relatively late in the Dodd-Frank legislative process; it was not included either in
the original version of the bill that passed the House, see H.R. 4173, 111th Cong.
§7203(a) (as passed Dec. 11, 2009), or in the version that initially passed the
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Yet, the interplay of Section 21F(h)(1)(A) with the definition of
“whistleblower” in Section 21F(a)(6) may suggest a different result. Section
21F(h)(1)(A) protects “a whistleblower in the terms and conditions of
employment,” and Section 21F(a)(6) in turn defines a “whistleblower” as “any
individual who provides … information relating to a violation of the securities law
to the Commission.” If Section 21F(a)(6)’s narrow whistleblower definition is
read as a limitation on the overall scope of Section 21F(h)(1)(A), the disclosures
protected under clause (iii) would be significantly restricted. Specifically, an
individual would be protected for making one of the whistleblower disclosures
identified in clause (iii) only if two preconditions are met:
(1)
the individual has separately submitted that same information to
Commission, and
(2)
that information involves a securities law violation.
But this reading raises an immediate question: If Congress had actually
intended to protect only those “required or protected” disclosures that satisfy these
Senate, see H.R. 4173, 111th Cong. §922(a) (as passed May 20, 2010). The
language first appeared in the base conference committee draft that the Senate in
May 2010 approved for use in the Dodd-Frank conference committee, see H.R.
4173, 111th Cong. §922(a) (conference base text), and it remained in the final
version of the committee bill that the House and Senate subsequently approved.
Notably, the nearly identical statutory provision of Dodd-Frank that authorized a
whistleblower program for the Commodity Futures Trading Commission does not
include language comparable to clause (iii). See Dodd-Frank §748, 124 Stat. at
1743-44 (enacting employment anti-retaliation protections as new Section 23(h)(1)
to the Commodity Exchange Act, codified at 7 U.S.C. §26(h)(1)).
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two conditions, why would Congress craft clause (iii) to unnecessarily suggest that
it protects a much broader class of disclosures than it actually does? Surely
Congress could have been more explicit and more direct if it in fact intended to
protect only those disclosures that involve securities law violations, and only if the
employee has made a separate disclosure to the Commission. See Util. Air
Regulatory Grp. v. EPA, 134 S. Ct. 2427, 2441 (2014) (“[T]he presumption of
consistent usage readily yields to context, and a statutory term—even one defined
in the statute—may take on distinct characters from association with distinct
statutory objects calling for different implementation strategies.”) (quotations
omitted). See also Lawson v. Suwanee Fruit & Steamship Co., 336 U.S. 198, 201
(1949) (rejecting mechanical use of a statutory definition that would “destroy one
of the major purposes of” enacting the provision); accord In re Air Cargo Shipping
Servs. Antitrust Litig., 697 F.3d 154, 163 (2d Cir. 2012).
That Congress did not unambiguously intend such a result becomes apparent
by considering the bizarre consequences that such a narrow reading produces.
With one possible exception, clause (iii) becomes superfluous. If an employer
knows that an individual has made a disclosure listed in clause (iii), such as an
internal report about a potential securities fraud violation, and the employer is also
aware that the individual has provided the same information to the Commission,
then as a practical matter the individual will be protected from retaliation under
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clauses (i) and (ii). An employer will not be able to disaggregate the
whistleblowing to the Commission from the internal whistleblowing so as
persuasively to claim that any retaliation was solely in connection with the latter.
Thus, where an employer knows that an individual has reported to the
Commission, clauses (i) and (ii) would already sufficiently protect the individual
from retaliation should the individual also wish to make the disclosures specified
in clause (iii).
That leaves only one situation where clause (iii) might conceivably have
independent utility—where the employer, unaware that the individual had already
reported to the Commission, takes an adverse employment action against the
employee for a disclosure listed in clause (iii). Although the Fifth Circuit has
reasoned that this potential scenario saves clause (iii) from being superfluous under
the narrow reading of Section 21F(h)(1)’s employment anti-retaliation protection,
Asadi v. G.E. Energy (U.S.A.), L.L.C., 720 F.3d 620, 627-28 (5th Cir. 2013), that is
far from clear for two reasons. First, as discussed above, subparagraph (A)
principally operates as a prohibition directed to employers; it seeks to prevent
retaliation by placing employers on notice that they may not take adverse
employment action against employees who engage in certain whistleblowing
activity. But under the scenario posited by the Asadi court, clause (iii) would be
utterly ineffective as a preventive measure. Put simply, because in this scenario
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employers would not know that a report was made to the Commission, clause (iii)
would have no appreciable effect in deterring employers from taking adverse
employment action for internal reports or the other disclosures listed in clause (iii).
Second, it is unlikely that an employee who suffers an adverse employment
action in this situation could even rely on clause (iii) to successfully pursue a
private action against the employer under Section 21F(h)(1)(B). Whether an
individual’s disclosures constitute a “protected activity” under the Fifth Circuit’s
narrow reading of clause (iii) would turn on whether the individual has made a
separate disclosure to the Commission. But if an employer is genuinely unaware
that the employee has separately disclosed to the Commission, any adverse
employment action that the employer takes would appear to lack the requisite
retaliatory intent—i.e., the intent to punish the employee for engaging in a
protected activity. 18 Cf. Culton v. Missouri Dep’t of Corrections, 515 F.3d 828,
831 (8th Cir. 2008) (in the context of an employment retaliation claim, “a causal
link between statutorily protected activity and an adverse employment action ‘does
not exist if the employer is not aware of the employee’s statutorily protected
18
As at least one district court has recognized, the alternative would be to
construe the anti-retaliation provision to impose strict liability on an employer (i.e.,
intent would not be an element of a retaliation claim). See Liu v. Siemens, A.G.,
978 F. Supp. 2d 325, 332 (S.D.N.Y. 2013), aff’d on other grounds, 763 F.3d 175
(2d Cir. 2014). But we are aware of no precedent for treating an employment antiretaliation provision as a strict liability scheme.
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activity’”) (quoting Smith v. Riceland Foods, Inc., 151 F.3d 813, 818 (8th Cir.
1998)).19
This examination of the relevant statutory language demonstrates, at a
minimum, considerable tension and inconsistency within the text, thus revealing
that Congress did not unambiguously express an intent to limit the employment
anti-retaliation protections under Section 21F(h)(1) to only those individuals who
report securities law violations to the Commission.
Although the Fifth Circuit reached a contrary conclusion in Asadi, the
court’s holding that the statutory language compels the narrow reading described
above is based on a flawed understanding of the statutory scheme. The court
approached Section 21F as though its sole purpose is “to require individuals to
report information to the SEC to qualify as a whistleblower.” Asadi, 720 F.3d at
630. But this fails to consider the role that Section 21F occupies within the
broader securities-law framework, particularly the internal reporting processes that
Congress has previously established. As discussed infra Part II, the Commission
reasonably chose to interpret clause (iii) of Section 21F(h)(1)(A) against that
19
A further anomaly resulting from this interpretation is that the individual, in
order to successfully maintain a retaliation claim, would be required to “out”
himself as someone who reported information to the Commission. This conflicts
with Congress’s strong desire to shield a whistleblower’s identity from public
disclosure to the fullest extent possible. See Exchange Act §21F(h)(2)
(confidentiality provisions); see also id. §21F(d)(2)(A) (permitting anonymous
disclosures to the Commission).
24
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broader framework, construing the statute to afford the same employment antiretaliation protections for individuals regardless of whether they report to the
Commission under the new procedures established by Section 21F or instead make
the disclosures “required or protected” under the other provisions of the securities
laws.
The Fifth Circuit also erroneously believed that its interpretation was
necessary to avoid rendering the private cause of action under Sarbanes-Oxley
Section 806, “for practical purposes, moot.” Asadi, 720 F.3d at 628. The court,
after observing that clause (iii) covers the disclosures protected by Section 806,
reasoned that “[i]t is unlikely … that an individual would choose to raise a
[Sarbanes-Oxley] anti-retaliation claim instead of a Dodd-Frank whistleblowerprotection claim” because: (i) Section 21F provides “for greater monetary
damages because it allows for recovery of two times back pay, whereas [Section
806] provides for only back pay,” and (ii) “the applicable statute of limitations is
substantially longer for Dodd-Frank whistleblower-protection claims.” Id. at 62829.
But the Fifth Circuit ignored at least two countervailing advantages of a
Sarbanes-Oxley Section 806 claim over a Dodd-Frank Section 21F claim:
For individuals who want to avoid the burdens of pursuing the claim in
court, including potential high litigation costs that they might bear if they
do not prevail, actions under Section 806 may be attractive because the
claims are heard (at least in the first instance) in an administrative forum
25
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at the Department of Labor (“DOL”). Moreover, DOL assumes
responsibility for investigating the retaliation claim and preparing the
evidence for an administrative law judge’s review. 20
Depending on the nature of the injury, a claim under Section 806 may
afford a greater recovery. Unlike Section 21F, Section 806 provides for
“all relief necessary to make the employee whole” and for “compensation
for any special damages.” 18 U.S.C. §1514A(c)(1) & (c)(2)(C). This
language has been held to authorize compensation for emotional distress
and reputational harm. 21 Thus, individuals who have experienced
minimal pay loss, but significant emotional injuries, may find Section
806 actions more attractive.
Finally, the Fifth Circuit expressed concern that any other reading of Section
21F “would read the words ‘to the Commission’ out of the definition of
‘whistleblower’ for purposes of the whistleblower-protection provision.” Asadi,
720 F.3d at 628. But applying the Section 21F(a)(6) definition of whistleblower to
Section 21F(h)(1)(A) makes the phrase “to the Commission” in clause (i) and the
similar reference in clause (ii) superfluous. That either of two competing
interpretations yields superfluous statutory language confirms that Congress did
20
DOL has delegated to its sub-agency the Occupational Safety and Health
Administration (“OSHA”) responsibility for receiving and investigating claims
under Section 806. See generally 29 C.F.R. §1980. If OSHA finds the employee
suffered retaliation, it may order immediate reinstatement. Id. §1980.105.
OSHA’s findings are subject to a de novo hearing before an administrative law
judge and review by DOL’s Administrative Review Board. Id. §§1980.106-110.
21
See Jones v. SouthPeak Interactive Corp., 777 F.3d 658, 663 (4th Cir. 2015)
(“emotional distress damages are available” under Section 806); Halliburton, Inc.
v. Admin. Review Bd., 771 F.3d 254, 266 (5th Cir. 2014) (per curiam) (Section 806
“affords noneconomic compensatory damages”), reh’g en banc denied, 596 Fed.
App’x 340 (5th Cir. 2015).
26
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not speak unambiguously on the issue. See Microsoft Corp. v. i4i Ltd. P’ship, 131
S. Ct. 2238, 2248 (2011) (“[T]he canon against superfluity assists only where a
competing interpretation gives effect to every clause and word of a statute.”)
(quotation omitted).
II.
In light of the ambiguity here, the Commission adopted a reasonable
interpretation in Rule 21F-2(b)(1) that warrants judicial deference.
By adopting Exchange Act Rule 21F-2(b)(1) to specify what persons are
whistleblowers for purposes of the anti-retaliation provisions, the Commission
revealed its view that Section 21F(h)(1)(A) is best read as an implied exception to
the definition of whistleblower in Section 21F(a)(6). See, e.g., Egan v.
TradingScreen, Inc., No. 10 Civ. 8202, 2011 WL 1672066, at *5 (S.D.N.Y. May 4,
2011). 22 See generally Nw. Austin Mun. Util. Dist. No. One v. Holder, 557 U.S.
22
Several other district courts have also shared the Commission’s reading of
Section 21F(h)(1)(A). Somers v. Digital Realty Trust, Inc., No. C-14-5180, 2015
WL 4483955, at *3-12 (N.D. Cal. July 22, 2015), interlocutory appeal certified,
2015 WL 4481987 (N.D. Cal. July 22, 2015), and docketed, No. 15-80136 (9th
Cir. July 31, 2015); Sabella v. Bank of Nova Scotia, No. 1:14-cv-0934, Dkt. 30
(S.D.N.Y. Mar. 24, 2015); Connolly v. Remkes, No. 5:14-CV-01344, 2014 WL
5473144, at *4-6 (N.D. Cal. Oct. 28, 2014); Peters v. LifeLock Inc., No. 2:14-cv00576, Dkt. 47, slip op. 6-13 (D. Ariz. Sept. 19, 2014); Yang v. Navigators Group,
Inc., No. 13-cv-2073, 2014 WL 1870802, at *10-13 (S.D.N.Y. May 8, 2014);
Khazin v. TD Ameritrade Holding Corp., No. 13-4149, 2014 WL 940703, at *3-6
(D.N.J. Mar. 11, 2014), aff’d on other grounds, 773 F.3d 488 (3d Cir. 2014);
Ahmad v. Morgan Stanley & Co., 2 F. Supp. 3d 491, 496 n.5 (S.D.N.Y. 2014);
Rosenblum v. Thomson Reuters (Markets) LLC, 984 F. Supp. 2d 141, 146-48
(S.D.N.Y. 2013); Ellington v. Giacoumakis, 977 F. Supp. 2d 42, 44-46 (D. Mass.
2013); Murray v. UBS Secs., LLC, No. 12 Civ. 5914, 2013 WL 2190084, at *3-7
(S.D.N.Y. May 21, 2013); Genberg v. Porter, 935 F. Supp. 2d 1094, 1106-07 (D.
27
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193, 206-207 (2009) (“‘Statutory definitions control the meaning of statutory
words, of course, in the usual case. But this is not the usual case.”) (quoting
Lawson, 336 U.S. at 201); Philko Aviation, Inc. v. Shacket, 462 U.S. 406, 411-12
(1985) (similar). The Commission thus promulgated Exchange Act Rule 21F2(b)(1) to clarify that, “[f]or purposes of the anti-retaliation protections afforded by
Section 21F(h)(1) of the Exchange Act, you are a whistleblower if … [y]ou
provide that information in a manner described in Section 21F(h)(1)(A).”
In doing so, the Commission concluded “that the statutory anti-retaliation
protections apply to three different categories of whistleblowers, and the third
category [i.e., clause (iii)] includes individuals who report to persons or
governmental authorities other than the Commission.” Adopting Release at 34304.
Colo. 2013), appeal dismissed in relevant part, 566 Fed. App’x 719 (10th Cir.
2014); Kramer v. Trans-Lux Corp., No. 11 Civ. 1424, 2012 WL 4444820, at *3-5
(D. Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d
986, 993-95 (M.D. Tenn. 2012). See also Bussing v. COR Clearing, LLC, 20 F.
Supp. 3d 719, 727-35 (D. Neb. 2014); Azim v. Tortoise Capital Advisors, LLC, No.
13-2267, 2014 WL 707235, at *1-3 (D. Kans. Feb. 24, 2014), objections overruled,
2014 WL 4352069 (D. Kans. Sept. 2, 2014). But see Wiggins v. ING U.S., Inc.,
No. 3:14-CV-1089, 2015 WL 3771646, at *8-11 (D. Conn. June 17, 2015), appeal
on other grounds docketed, No. 15-2262 (2d Cir. July 16, 2015); Lutzeier v.
Citigroup, Inc., 305 F.R.D. 107, 109-10 (E.D. Mo. 2015); Berman v. Neo@Ogilvy
LLC, 72 F. Supp. 3d 404, 407-10 (S.D.N.Y. 2014), appeal docketed, No. 14-4626
(2d Cir. Dec. 16, 2014); Verfuerth v. Orion Energy Sys., Inc., 65 F. Supp. 3d 640,
643-46 (E.D. Wisc. 2014); Englehart v. Career Educ. Corp., No. 8:14-cv-444,
2014 WL 2619501, at *3-9 (M.D. Fla. May 12, 2014); Banko v. Apple, Inc., 20 F.
Supp. 3d 749, 755-57 (N.D. Cal. 2013); Wagner v. Bank of Am. Corp., No. 12-cv00381, 2013 WL 3786643, at *4-6 (D. Colo. July 19, 2013), aff’d on other
grounds, 571 Fed. App’x 698 (10th Cir. 2014).
28
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The Commission explained that, accordingly, the anti-retaliation protections will
extend to, among others, employees of public companies who make certain
disclosures internally to “a person with supervisory authority over the employee or
such other person working for the employer who has authority to investigate,
discover, or terminate misconduct.” Id.23
The Commission’s interpretation is reasonable because it resolves the
statutory ambiguity in a manner that effectuates the broad employment antiretaliation protections that clause (iii) contemplates. The Commission’s
interpretation is also reasonable because, by ensuring that individuals who report
internally first will not be potentially disadvantaged by losing employment antiretaliation protection under Section 21F, it better supports a core overall objective
of the whistleblower rulemaking—avoiding disincentivizing individuals from
reporting internally first in appropriate circumstances. By establishing parity
between individuals who first report to the Commission and those who first report
23
The Fifth Circuit in Asadi questioned whether under the Commission’s
whistleblower rules Rule 21F-2(b)(1) actually governs the reporting methods that
qualify an individual as a whistleblower for the purpose of receiving employment
retaliation protections. 720 F.3d at 629-30. Although the Commission disagrees
that there was any ambiguity or inconsistency, the Commission has recently issued
an interpretive rule to provide absolute clarity on the issue. Interpretation of the
SEC’s Whistleblower Rules Under Section 21F of the Securities Exchange Act of
1934, Exchange Act Release No. 34-75592, 80 Fed. Reg. 47,829, 47,829-30 (Aug.
10, 2015). That interpretation is “controlling.” Auer v. Robbins, 519 U.S. 452,
461 (1997).
29
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internally, the Commission’s rule avoids a two-tiered structure of anti-retaliation
protections that might discourage some individuals from first reporting internally
in appropriate circumstances and, thus, jeopardize the benefits that can result from
internal reporting, supra 4-5, 14-16. The Commission’s decision to adopt this
interpretation was reasonable in light of its view, based on its experience and
expertise, that if internal compliance and reporting procedures “are not utilized or
working, our system of securities regulation will be less effective.” Proposing
Release at 70500.24
Lastly, the Commission’s interpretation was reasonable because it enhances
the Commission’s ability to bring enforcement actions when employers take
adverse employment actions against employees for reporting securities law
violations internally. A contrary result that narrowly cabined this enforcement
authority to only those situations where the employee has separately reported to the
24
Rule 21F-2(b)(1) also supports the whistleblower program by extending
anti-retaliation protection to individuals who first report to designated authorities
other than the Commission. Section 21F(b) & (c) authorize awards to such
individuals under certain circumstances when their information leads to successful
“related actions” by the other designated authorities. To facilitate this reporting,
the Commission adopted Rule 21F-4(b)(7), under which individuals who first
provide information to a designated authority and then within 120 days submit the
same information to the Commission will be treated as though they reported to the
Commission as of the date of the original report to the designated authority. Rule
21F-2(b)(1) ensures that individuals who follow this reporting approach will not
lose anti-retaliation protection during the period prior to their report to the
Commission.
30
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Commission would significantly weaken the deterrence effect on employers who
might otherwise consider taking an adverse employment action. 25
III.
Failure to defer to Rule 21F-2(b)(1) could arbitrarily and irrationally
deny the employment retaliation protections afforded by Dodd-Frank to
individuals who, before coming to the Commission, first report potential
securities law violations to the U.S. Department of Justice or SelfRegulatory Organizations such as FINRA.
Important law enforcement interests beyond the considerations connected to
internal company reporting counsel in favor of deference to the interpretation in
Rule 21F-2(b)(1). Congress in Section 21F sought to encourage individuals to
make reports of misconduct not just to the Commission, but also to certain other
law enforcement and regulatory authorities. As demonstrated below, this
congressional purpose is revealed through both the award program and the
employment retaliation protections.
Section 21F directs that, for any individual who is a meritorious
whistleblower in a Commission enforcement action, the Commission shall pay a
monetary award of 10 percent to 30 percent of the monetary sanctions collected in
any “related action” if the same information that led to the successful prosecution
of the Commission action also led to the successful prosecution of the related
action. See Exchange Act §21F(b) & (c). A related action is “any judicial or
administrative action brought by,” among other entities, the U.S. Department of
25
The Commission lacks such authority under Sarbanes-Oxley Section 806.
31
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Justice (“DOJ”), the federal banking regulators (including the Board of Governors
of the Federal Reserve System and the Comptroller of the Currency), and the
various self-regulatory organizations (“SROs”) that are subject to the jurisdiction
and oversight of the Commission (such as FINRA and NYSE). Significantly,
nothing in the provisions that establish the award program requires that an
individual report to the Commission before or at the same time as reporting to any
of these other authorities. So, for example, an individual who provides the FBI
with original information about a potential securities law violation before reporting
that same information to the Commission can recover a monetary award based on
resulting successful Commission and related actions no differently than if he or she
had reported the information to the Commission before going to the FBI. 26
The employment retaliation protections afforded by clause (iii) of Section
21F(h)(1)(A), in turn, complement the related action component of the award
program. Clause (iii) does this by prohibiting employment retaliation against
individuals who make various types of disclosure to either the DOJ or the other
26
Under the 120-day look-back established by Exchange Act Rule 21F4(b)(7), an individual who first makes the disclosure to the FBI or any of the other
law enforcement or regulatory authorities that can pursue a related action, and
within 120 days submits the same information to the Commission, will be treated
for purposes of an award determination as if the submission to the Commission had
been made on the date of the submission to the other authority.
32
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federal government agencies that can bring related actions, as well as the SROs. 27
In this way, the employment retaliation protections of Section 21F(h)(1)(A) are
generally co-extensive with the award program: clauses (i) and (ii) provide
employment retaliation protection for providing information to the Commission,
which may lead to a successful Commission action for which an award may be
paid, while clause (iii) affords employment retaliation protection for providing
information to a law enforcement or regulatory authority other than the
Commission, which may lead to a successful related action for which an award
may be paid. 28
Significantly, under the interpretation provided by the Commission’s rule,
individuals who report first to one of these other authorities before coming to the
Commission are protected from employment retaliation under Section
21F(h)(1)(A) to the same degree as an individual who reports first to the
27
Clause (iii) provides employment retaliation protection based on disclosures
to DOJ and the other federal agencies by expressly incorporating the “disclosures
that are required or protected under the Sarbanes-Oxley Act,” which includes
Sarbanes-Oxley Section 806. Section 806, in turn, prohibits employment
retaliation based on certain disclosures of securities law violations to a “Federal
regulatory or law enforcement agency.” 18 U.S.C. §1514A(a)(1)(A).
28
We note that there is one exception to the general symmetry that exists
within Section 21F between the related-action award provisions and the
employment retaliation protections afforded by clause (iii). While the Commission
may make an award for a related action that is a criminal matter brought by a state
attorney general, clause (iii) does not cover disclosures made directly to state
attorney generals.
33
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Commission. In other words, Rule 21F-2(b)(1) represents a policy judgment that
is fully consistent with the policy judgment that Congress established in writing the
statutory award provisions. The award provisions express no preference in how
individuals sequence their reporting as between the Commission and the other
authorities. So too Rule 21F-2(b)(1) ensures that individuals receive the same
employment retaliation protections regardless of whether they report to the
Commission before or after reporting to the other authorities.
But were this Court to reject the Commission’s interpretation and instead
follow the Fifth Circuit’s Asadi decision, an individual who decides to report first
to one of the other authorities could be significantly more exposed to the risks of
employment retaliation. For example, if an individual makes a report of securities
fraud first to the FBI and is promptly fired before making a similar report to the
Commission, he will be unable to invoke the enhanced employment retaliation
protections of Section 21F and will have only the protections afforded by
Sarbanes-Oxley Section 806 (assuming the individual is within the categories of
employees covered by that provision). 29 Yet had this individual reported to the
Commission first, he would have the protections of both Section 21F and
29
As noted in footnote 27, supra, Sarbanes-Oxley Section 806—in addition to
protecting individuals against employment retaliation when they make internal
reports of securities fraud and certain other violations—protects against
employment retaliation when an individual makes a report to “a Federal regulatory
or law enforcement agency.” 18 U.S.C. §1514A(a)(1)(A).
34
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Sarbanes-Oxley Section 806. There is no basis to believe that Congress would
have intended this disparate treatment based purely on the happenstance of which
agency the individual reported to first given the dual responsibility that the
Commission and DOJ have for the enforcement of the securities laws.30 See
generally United States v. Wilson, 503 U.S. 329, 334 (1992) (an interpretation that
produces an “arbitrary” or “absurd” result should be avoided).
And the consequences of the Asadi decision are potentially even more severe
for an individual who first reports to an SRO and is fired before being able to make
a similar report to the Commission. Reports to SROs fall within the scope of
clause (iii) of Section 21F(h)(1)(A) to the extent that such disclosures are “required
or protected” by a Commission or SRO rule (“covered disclosure”). 31 See Bussing,
20 F. Supp. 3d at 734-35 (disclosures required or protected by SRO rules are
covered by clause (iii)). But Sarbanes-Oxley Section 806, by contrast, does not
30
Generally speaking, the Commission has responsibility for pursuing civil
actions for violations of the federal securities laws while DOJ possesses criminal
enforcement authority.
31
Section 21F(h)(1)(A)(iii) provides protection for any disclosure “required or
protected” by a “rule or regulation subject to the jurisdiction of the Commission.”
Exchange Act §21F(h)(1)(A)(iii) (emphasis added). As explained in Bussing, 20
F. Supp. 3d at 732, 734-35, SRO rules are “subject to the jurisdiction of the
Commission” for purposes of the employment retaliation protections of Section
21F(h)(1) because the Commission has statutory authority to approve or
disapprove such rules. The Commission also possesses jurisdiction to review SRO
disciplinary proceedings in which such rules are enforced.
35
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provide any employment retaliation protection for any disclosures made to SROs.
Thus, if an individual makes a covered disclosure to an SRO and is fired before
making the same disclosure to the Commission, that individual will not only have
no legal recourse under Section 21F, but he will also have no recourse under
Sarbanes-Oxley Section 806 (unlike the individual who first reports to DOJ). This
result is deeply problematic because SROs by congressional design have long been
“a vital element in the regulation of the securities industry,” helping “enforce
compliance by its members, and persons associated with its members, with the
federal securities laws.” Request for Comment on NASDAQ Petition, 68 Fed.
Reg. 27,722, 27,722 (May 20, 2003). Given this vital SRO role, individuals
frequently report violations of the securities laws to them in the first instance rather
than coming directly to the Commission; so were this Court to adopt the Asadi
approach, there is a real risk that individuals could expose themselves to retaliation
without the benefit of the protections of Section 21F(h)(1)(A).
The interpretation that the Commission has advanced in Rule 21F-2(b)(1)
prevents the arbitrary and irrational results identified above by ensuring that
individuals experience no diminution in the employment retaliation protections
afforded to them as a result of the sequence of their reporting. Accordingly,
deference to the Commission’s interpretation is warranted for this additional
reason.
36
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CONCLUSION
For the foregoing reasons, this Court should defer to the Commission’s rule
and hold that individuals are entitled to employment anti-retaliation protection if
they make any of the disclosures identified in Section 21F(h)(1)(A)(iii) of the
Exchange Act, irrespective of whether they separately report the information to the
Commission.
Respectfully submitted,
ANNE K. SMALL
General Counsel
MICHAEL A. CONLEY
Deputy General Counsel
WILLIAM K. SHIREY
Assistant General Counsel
/s/ Stephen G. Yoder
STEPHEN G. YODER
Senior Litigation Counsel
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-9040
August 2015
37
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CERTIFICATE OF COMPLIANCE
I certify that this brief complies with the word-count limitation that this
Court established in its August 12, 2015 order in this appeal (Entry ID 4305151)
because it contains 8,887 words, excluding the parts exempted by Fed. R. App. P.
32(a)(7)(B)(iii).
I also certify that this brief complies with the requirements of Fed. R. App.
P. 32(a)(5) & (6) and Eighth Circuit Rule 28A because it has been prepared in a
proportionally spaced typeface using Microsoft Office Word in 14-Point Times
New Roman.
I further certify pursuant to Eighth Circuit Rule 28A(h)(2) that this brief has
been scanned for viruses and is virus-free.
/s/ Stephen G. Yoder
Stephen G. Yoder
Senior Litigation Counsel
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-9040
August 19, 2015
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CERTIFICATE OF SERVICE
I hereby certify that I electronically filed the foregoing document with the
Clerk of Court for the United States Court of Appeals for the Eighth Circuit by
using the appellate CM/ECF system on August 19, 2015.
I certify that all participants in the case are registered CM/ECF users and
that service will be accomplished by the appellate CM/ECF system.
/s/ Stephen G. Yoder
Stephen G. Yoder
Senior Litigation Counsel
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-9040
August 19, 2015
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Date Filed: 08/19/2015 Entry ID: 4307752
No. 15-1729
____________________________________________________________________________________
UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
____________________________________________________________________________________
VINCENT A. BEACOM,
Plaintiff-Appellant,
v.
ORACLE AMERICA, INC.,
Defendant-Appellee.
____________________________________________________________________________________
On Appeal from the United States District Court
for the District of Minnesota
____________________________________________________________________________________
ADDENDUM OF THE SECURITIES AND EXCHANGE COMMISSION,
AMICUS CURIAE IN SUPPORT OF THE APPELLANT
____________________________________________________________________________________
ANNE K. SMALL
General Counsel
MICHAEL A. CONLEY
Deputy General Counsel
WILLIAM K. SHIREY
Assistant General Counsel
STEPHEN G. YODER
Senior Litigation Counsel
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-9040
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Page: 1
Date Filed: 08/19/2015 Entry ID: 4307753
STATUTORY ADDENDUM:
SECTION 21F(a)-(d), (h), (j)
OF THE SECURITIES EXCHANGE ACT OF 1934,
15 U.S.C. §78u-6(a)-(d), (h), (j)
(a) Definitions. In this section the following definitions shall apply:
(1) Covered judicial or administrative action. The term “covered judicial or
administrative action” means any judicial or administrative action brought
by the Commission under the securities laws that results in monetary
sanctions exceeding $1,000,000.
(2) Fund. The term “Fund” means the Securities and Exchange Commission
Investor Protection Fund.
(3) Original information. The term “original information” means
information that-(A) is derived from the independent knowledge or analysis of a
whistleblower;
(B) is not known to the Commission from any other source, unless the
whistleblower is the original source of the information; and
(C) is not exclusively derived from an allegation made in a judicial or
administrative hearing, in a governmental report, hearing, audit, or
investigation, or from the news media, unless the whistleblower is a
source of the information.
(4) Monetary sanctions. The term “monetary sanctions”, when used with
respect to any judicial or administrative action, means-(A) any monies, including penalties, disgorgement, and interest,
ordered to be paid; and
(B) any monies deposited into a disgorgement fund or other fund
pursuant to section 308(b) of the Sarbanes-Oxley Act of 2002 (15
U.S.C. 7246(b)), as a result of such action or any settlement of such
action.
(5) Related action. The term “related action”, when used with respect to any
judicial or administrative action brought by the Commission under the
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securities laws, means any judicial or administrative action brought by an
entity described in subclauses (I) through (IV) of subsection (h)(2)(D)(i) that
is based upon the original information provided by a whistleblower pursuant
to subsection (a) that led to the successful enforcement of the Commission
action.
(6) Whistleblower. The term “whistleblower” means any individual who
provides, or 2 or more individuals acting jointly who provide, information
relating to a violation of the securities laws to the Commission, in a manner
established, by rule or regulation, by the Commission.
(b) Awards
(1) In general. In any covered judicial or administrative action, or related
action, the Commission, under regulations prescribed by the Commission
and subject to subsection (c), shall pay an award or awards to 1 or more
whistleblowers who voluntarily provided original information to the
Commission that led to the successful enforcement of the covered judicial or
administrative action, or related action, in an aggregate amount equal to-(A) not less than 10 percent, in total, of what has been collected of the
monetary sanctions imposed in the action or related actions; and
(B) not more than 30 percent, in total, of what has been collected of
the monetary sanctions imposed in the action or related actions.
(2) Payment of awards. Any amount paid under paragraph (1) shall be paid
from the Fund.
(c) Determination of amount of award; denial of award
(1) Determination of amount of award
(A) Discretion. The determination of the amount of an award made
under subsection (b) shall be in the discretion of the Commission.
(B) Criteria. In determining the amount of an award made under
subsection (b), the Commission-(i) shall take into consideration--
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(I) the significance of the information provided by the
whistleblower to the success of the covered judicial or
administrative action;
(II) the degree of assistance provided by the
whistleblower and any legal representative of the
whistleblower in a covered judicial or administrative
action;
(III) the programmatic interest of the Commission in
deterring violations of the securities laws by making
awards to whistleblowers who provide information that
lead to the successful enforcement of such laws; and
(IV) such additional relevant factors as the Commission
may establish by rule or regulation; and
(ii) shall not take into consideration the balance of the Fund.
(2) Denial of award. No award under subsection (b) shall be made-(A) to any whistleblower who is, or was at the time the whistleblower
acquired the original information submitted to the commission, a
member, officer, or employee of-(i) an appropriate regulatory agency;
(ii) the Department of Justice;
(iii) a self-regulatory organization;
(iv) the Public Company Accounting Oversight Board; or
(v) a law enforcement organization;
(B) to any whistleblower who is convicted of a criminal violation
related to the judicial or administrative action for which the
whistleblower otherwise could receive an award under this section;
(C) to any whistleblower who gains the information through the
performance of an audit of financial statements required under the
securities laws and for whom such submission would be contrary to
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the requirements of section 10A of the Securities Exchange Act of
1934 (15 U.S.C. 78j-1); or
(D) to any whistleblower who fails to submit information to the
Commission in such form as the Commission may, by rule, require.
(d) Representation
(1) Permitted representation. Any whistleblower who makes a claim for an
award under subsection (b) may be represented by counsel.
(2) Required representation
(A) In general. Any whistleblower who anonymously makes a claim
for an award under subsection (b) shall be represented by counsel if
the whistleblower anonymously submits the information upon which
the claim is based.
(B) Disclosure of identity. Prior to the payment of an award, a
whistleblower shall disclose the identity of the whistleblower and
provide such other information as the Commission may require,
directly or through counsel for the whistleblower.
...
(h) Protection of whistleblowers
(1) Prohibition against retaliation
(A) In general. No employer may discharge, demote, suspend,
threaten, harass, directly or indirectly, or in any other manner
discriminate against, a whistleblower in the terms and conditions of
employment because of any lawful act done by the whistleblower-(i) in providing information to the Commission in accordance
with this section;
(ii) in initiating, testifying in, or assisting in any investigation or
judicial or administrative action of the Commission based upon
or related to such information; or
(iii) in making disclosures that are required or protected under
the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this
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chapter, including section 78j-1(m) of this title, section 1513(e)
of Title 18, and any other law, rule, or regulation subject to the
jurisdiction of the Commission.
(B) Enforcement
(i) Cause of action. An individual who alleges discharge or
other discrimination in violation of subparagraph (A) may bring
an action under this subsection in the appropriate district court
of the United States for the relief provided in subparagraph (C).
(ii) Subpoenas. A subpoena requiring the attendance of a
witness at a trial or hearing conducted under this section may be
served at any place in the United States.
(iii) Statute of limitations
(I) In general. An action under this subsection may not
be brought-(aa) more than 6 years after the date on which the
violation of subparagraph (A) occurred; or
(bb) more than 3 years after the date when facts
material to the right of action are known or
reasonably should have been known by the
employee alleging a violation of subparagraph (A).
(II) Required action within 10 years. Notwithstanding
subclause (I), an action under this subsection may not in
any circumstance be brought more than 10 years after the
date on which the violation occurs.
(C) Relief. Relief for an individual prevailing in an action brought
under subparagraph (B) shall include-(i) reinstatement with the same seniority status that the
individual would have had, but for the discrimination;
(ii) 2 times the amount of back pay otherwise owed to the
individual, with interest; and
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(iii) compensation for litigation costs, expert witness fees, and
reasonable attorneys’ fees.
(2) Confidentiality
(A) In general. Except as provided in subparagraphs (B) and (C), the
Commission and any officer or employee of the Commission shall not
disclose any information, including information provided by a
whistleblower to the Commission, which could reasonably be
expected to reveal the identity of a whistleblower, except in
accordance with the provisions of section 552a of Title 5, unless and
until required to be disclosed to a defendant or respondent in
connection with a public proceeding instituted by the Commission or
any entity described in subparagraph (C). For purposes of section 552
of Title 5, this paragraph shall be considered a statute described in
subsection (b)(3)(B) of such section.
(B) Exempted statute. For purposes of section 552 of Title 5, this
paragraph shall be considered a statute described in subsection
(b)(3)(B) of such section 552.
(C) Rule of construction. Nothing in this section is intended to limit,
or shall be construed to limit, the ability of the Attorney General to
present such evidence to a grand jury or to share such evidence with
potential witnesses or defendants in the course of an ongoing criminal
investigation.
(D) Availability to Government agencies
(i) In general. Without the loss of its status as confidential in
the hands of the Commission, all information referred to in
subparagraph (A) may, in the discretion of the Commission,
when determined by the Commission to be necessary to
accomplish the purposes of this chapter and to protect investors,
be made available to-(I) the Attorney General of the United States;
(II) an appropriate regulatory authority;
(III) a self-regulatory organization;
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(IV) a State attorney general in connection with any
criminal investigation;
(V) any appropriate State regulatory authority;
(VI) the Public Company Accounting Oversight Board;
(VII) a foreign securities authority; and
(VIII) a foreign law enforcement authority.
(ii) Confidentiality
(I) In general. Each of the entities described in
subclauses (I) through (VI) of clause (i) shall maintain
such information as confidential in accordance with the
requirements established under subparagraph (A).
(II) Foreign authorities. Each of the entities described in
subclauses (VII) and (VIII) of clause (i) shall maintain
such information in accordance with such assurances of
confidentiality as the Commission determines
appropriate.
(3) Rights retained. Nothing in this section shall be deemed to diminish the
rights, privileges, or remedies of any whistleblower under any Federal or
State law, or under any collective bargaining agreement.
...
(j) Rulemaking authority. The Commission shall have the authority to issue such
rules and regulations as may be necessary or appropriate to implement the
provisions of this section consistent with the purposes of this section.
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DECISIONAL ADDENDUM:
Peters v. LifeLock Inc.,
No. 2:14-cv-00576, Dkt. 47 (D. Ariz. Sept. 19, 2014)
Sabella v. Bank of Nova Scotia,
No. 1:14-cv-0934, Dkt. 30 (S.D.N.Y. Mar. 24, 2015)
(Both decisions are unavailable on either Westlaw or Lexis and are
reproduced here consistent with Fed. R. App. P. 32.1(b).)
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Case 2:14-cv-00576-ROS Document 47 Filed 09/19/14 Page 1 of 15
1
2
3
4
5
6
IN THE UNITED STATES DISTRICT COURT
7
FOR THE DISTRICT OF ARIZONA
8
9
Michael D. Peters,
No. CV-14-00576-PHX-ROS
Plaintiff,
10
11
v.
12
LifeLock Incorporated, et al.,
13
ORDER
Defendants.
14
15
Plaintiff Michael D. Peters has sued his former employer, Defendant LifeLock,
16
Inc. (“LifeLock”), for violating the whistleblower provisions of the Sarbanes-Oxley Act
17
and the Dodd-Frank Act. Peters has also sued Cristy Schaan (“Schaan”), a former
18
coworker, for defamation. LifeLock moves to dismiss the claim brought under the Dodd-
19
Frank Act and Schaan moves to dismiss the defamation claim. Peters has also moved for
20
judgment on the pleadings regarding one of the counterclaims brought against him by
21
LifeLock. As set out below, Schaan will be dismissed but the Dodd-Frank Act claim and
22
the counterclaim against Peters will be allowed to proceed.
23
BACKGROUND
24
According to his complaint, “Peters is an internationally recognized authority on
25
information technology security.” (Doc. 1 at 2). Sometime prior to 2013, Peters worked
26
at a company now known as Vantiv.
27
circumstances involving Peters and Vantiv entering into a “separation agreement.” (Doc.
28
1 at 6). Peters subsequently obtained a different job in Georgia.
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Peters left that position under disputed
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1
In 2013, Peters was working in Georgia when he was contacted by a recruiter
2
regarding a position at LifeLock.
Peters pursued the position by submitting an
3
application. In his application, Peters stated he had resigned from Vantiv. (Doc. 1 at 6).
4
After a lengthy interview process, LifeLock offered Peters the position of Chief
5
Information Security Officer (“CISO”). Peters moved to Arizona and started work at
6
LifeLock on July 1, 2013.
7
Upon starting work, Peters displaced Schaan who had been serving as the interim
8
CISO. Schaan had applied for the CISO position but she was passed over in favor of
9
Peters. Schaan allegedly was upset about being passed over and, the same day Peters
10
started work, Schaan decided to conduct “her own private investigation of Peters’ prior
11
employment.” (Doc. 1 at 8). Schaan emailed Kim Jones, an acquaintance who worked at
12
Vantiv, and asked Jones “if he knew anything about Peters.” Jones responded via email
13
the next day. In that email, Jones stated:
14
“Peters was fired from [Vantiv] and that he was walked out of the building
15
without being allowed to return to his office to retrieve his personal belongings.”
16
“Peters’s relationship building skills [are] virtually non-existent.”
17
“Peters has a reputation for being disingenuous in his promotional activities by
18
overstating his accomplishments.”
19
“Peters engaged in inappropriate actions.”
20
Schaan took no action with Jones’ email at that time.
21
Shortly after starting work at LifeLock, Peters “began an initial risk assessment.”
22
(Doc. 1 at 3). During that assessment, Peters discovered “many instances of illegal and
23
incompetent practices that constituted fraud against LifeLock’s shareholders.” Those
24
instances of fraud included evidence that audits were not done, despite LifeLock
25
representing otherwise, as well as LifeLock “manipulat[ing] the customer alerts sent to its
26
elderly customers.” (Doc. 1 at 4).
27
On July 9, 2013, Peters met with LifeLock’s CFO Chris Power and discussed the
28
initial assessment findings and the areas Peters found concerning. Power took no action.
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1
A few days later, Peters met with his direct supervisor, LifeLock’s chief information
2
officer, Rich Stebbins. Again Peters expressed his concerns yet Stebbins did nothing.
3
After these meetings, LifeLock’s “upper management” decided to fire Peters. To do so,
4
the “upper management directed Michelle Deutsch, LifeLock’s in-house special counsel
5
for labor and employment, to try and find grounds to terminate Peters’s employment.”
6
(Doc. 1 at 6). Deutsch contacted Vantiv and “she was incorrectly told that Peters had
7
been fired.” Around this same time, Schaan “discovered that LifeLock was about to fire
8
Peters.” In an attempt to “seal Peters’s fate,” Schaan forwarded Stebbins the email she
9
had received from Jones on July 2, 2013.
10
On July 29, 2013, LifeLock fired Peters. According to LifeLock, Peters was fired
11
because he had “provided false information on his employment application” by claiming
12
he resigned from Vantiv when, in fact, he had been fired. LifeLock also claimed Peters
13
had engaged in inappropriate behavior by “‘hit[ting] upon’ a female employee.” (Doc. 1
14
at 9). Peters alleges these reasons were false and “the real reason for his termination”
15
was that he had “reported to his supervisors about the illegal, fraudulent, and incompetent
16
business practices relating to fraud against shareholders that were occurring at LifeLock.”
17
(Doc. 1 at 9).
18
A few weeks after he was fired, Peters filed complaints against LifeLock with the
19
Federal Trade Commission and the Securities and Exchange Commission. Peters also
20
filed a “whistleblower complaint with the U.S. Department of Labor under the Sarbanes-
21
Oxley Act.” (Doc. 1 at 6). The Sarbanes-Oxley complaint remained pending for 180
22
days and, in early 2014, Peters filed this suit. The complaint alleges a whistleblower
23
claim under the Sarbanes-Oxley Act as well as a whistleblower claim under the Dodd-
24
Frank Act. The complaint also alleges a defamation claim against Schaan for forwarding
25
the email she received from Jones.
26
Schaan responded to the complaint by seeking dismissal of the defamation claim.
27
LifeLock answered the whistleblower claim under the Sarbanes-Oxley Act but seeks
28
dismissal of the whistleblower claim under the Dodd-Frank Act.
When answering
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1
Peters’ complaint, LifeLock asserted five counterclaims, including counterclaims for
2
breach of contract and unjust enrichment. According to LifeLock, Peters made “material
3
misrepresentations and omissions regarding his employment history” when he applied for
4
the position with LifeLock. (Doc. 36 at 4). LifeLock relied on those misstatements and
5
omissions when it made him an offer of employment. That offer included a signing
6
bonus of $15,000 that would have to be repaid if Peters was terminated for cause during
7
his first year. Peters received the signing bonus and has refused to repay it despite being
8
terminated after only one month. LifeLock’s breach of contract claim seeks to recover
9
the signing bonus while the unjust enrichment claim “seeks full restitution of all salary
10
and benefits LifeLock paid to Peters prior to the termination of his employment.” (Doc.
11
36 at 3). Peters answered all the counterclaims but now moves for judgment on the
12
pleadings regarding the unjust enrichment claim.
ANALYSIS
13
14
I. Standard for Motion to Dismiss and Judgment on the Pleadings
15
LifeLock and Schaan have filed motions to dismiss and Peters has filed a motion
16
for judgment on the pleadings. The standard for evaluating these motions is the same.
17
United States ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 n.4
18
(9th Cir. 2011). Under that standard, a claim must either be dismissed or judgment on the
19
pleadings granted if it is not supported by “sufficient factual matter, accepted as true” to
20
state a “plausible” claim for relief.
21
(quotation omitted). “A claim has facial plausibility when the plaintiff pleads factual
22
content that allows the court to draw the reasonable inference that the defendant is liable
23
for the misconduct alleged.” Id. This does not require “detailed factual allegations” but
24
it does require “more than an unadorned, the-defendant-unlawfully-harmed-me
25
accusation.” Iqbal, 556 U.S. at 678. This is not a “probability requirement,” but a
26
requirement that the factual allegations show “more than a sheer possibility that a
27
defendant has acted unlawfully.” Id.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
28
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1
II. Defamation Claim Must be Dismissed
2
The sole basis for Peters’ defamation claim against Schaan is her forwarding of
3
Jones’ email. Schaan argues the Communications Decency Act (“CDA”), 47 U.S.C. §
4
230, prevents her from being held liable for forwarding that email. Schaan is correct.
5
Passed in 1996, the CDA has “been widely and consistently interpreted to confer
6
broad immunity against defamation liability for those who use the Internet to publish
7
information that originated from another source.” Barrett v. Rosenthal, 146 P.3d 510,
8
513 (Cal. 2006). The portion of the CDA conferring that immunity provides “[n]o . . .
9
user of an interactive computer service shall be treated as the publisher or speaker of any
10
information provided by another information content provider.” 47 U.S.C. § 230(c)(1).
11
Based on the definition in the CDA, there is no question Jones qualified as an
12
“information content provider.” 47 U.S.C. § 23(f)(3) (defining “information content
13
provider” as “any person . . . that is responsible . . . for the creation or development of
14
information”). And while “user” is not defined in the CDA, it “plainly refers to someone
15
who uses something, and the statutory context makes it clear that Congress simply meant
16
someone who uses an interactive computer service.” Barrett, 146 P.3d at 526. In light of
17
this, Schaan was a “user” of an “interactive computer service” when she forwarded
18
Jones’ email. See 47 U.S.C. § 230(f)(2) (defining “interactive computer service”). Put
19
together, these definitions mean Schaan cannot “be treated as the publisher or speaker” of
20
the information contained in Jones’ email. 47 U.S.C. § 230(c)(1). And that means
21
Schaan cannot be liable for defamation based on forwarding Jones’ email. See Peagler v.
22
Phoenix Newspapers, Inc., 560 P.2d 1216, 1222 (Ariz. 1977) (individual liable for
23
defamation if she “publishes a false and defamatory communication”) (emphasis added);
24
47 U.S.C. § 230(e)(3) (preempting state law inconsistent with CDA).
25
Peters attempts to avoid this straightforward conclusion by arguing it would
26
frustrate a central purpose of the CDA to read its immunity provision as protecting
27
individuals. (Doc. 28 at 7). But the CDA’s immunity provision explicitly covers any
28
“user of an interactive computer system.” 47 U.S.C. § 230(c)(1) (emphasis added).
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1
Peters offers no argument that Schaan does not qualify as a “user” as that term is used in
2
the CDA. Therefore, his policy arguments are unconvincing. See United States v.
3
Aerojet Gen. Corp., 606 F.3d 1142, 1151 (9th Cir. 2010) (rejecting policy argument in
4
light of unambiguous statutory language).
5
Peters also argues the CDA immunity provision should not apply because Schaan
6
“instigat[ed]” the defamation and committed a “targeted move” by forwarding the email
7
“to the one person she thought could cause the most harm to Peters.” (Doc. 28 at 9).
8
Peters does not explain how, assuming Schaan’s behavior can be described in these
9
terms, that behavior takes her outside the CDA’s immunity. The CDA’s immunity
10
provision does not carve out exceptions for content “instigat[ed]” by another or content
11
that is forwarded in a “targeted move.” To be clear, under the facts alleged in the
12
complaint, Schaan did not generate any defamatory statements herself when she first
13
contacted Jones. Rather, she solicited an email from Jones and then forwarded that email
14
without adding any defamatory statements of her own. If Schaan had added her own
15
defamatory comments, the situation would be different.1 But she did not. Thus, the CDA
16
immunity provision applies and the defamation claim against Schaan must be dismissed.2
17
III. Dodd-Frank Act Claim is Plausible
18
LifeLock argues Peters cannot pursue a whistleblower claim under the Dodd-
19
Frank Act because he was fired before he made any report to the Securities and Exchange
20
Commission (the “Commission”). LifeLock has Fifth Circuit authority in its favor but
21
many courts have criticized that opinion as adopting an overly restrictive view of the
22
statutory language. Under the reading of the statute adopted by the vast majority of
23
courts, Peters’ internal complaints were sufficient to protect him from retaliatory
24
25
26
27
1
As noted in Barrett, “[a]t some point, active involvement in the creation of a
defamatory Internet posting would expose a defendant to liability as an original source.”
146 P.3d at 527 n.19. But Peters has not alleged Schaan had “active involvement” in
Jones’ email such that she could be deemed the original source of the email.
2
28
Peters asks for leave to amend his complaint against Schaan. (Doc. 28 at 12). If
Peters wishes to amend, he must file a motion to amend accompanied by his proposed
amended pleading establishing a factual basis for avoiding the broad immunity provision.
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1
discharge.
2
A. Chevron Analysis
3
Peters has asserted a claim under 15 U.S.C. § 78u-6(h), the provision of the Dodd-
4
Frank Act protecting an employee from adverse employment actions when that employee
5
engages in certain activities. Congress granted the Commission “authority to issue such
6
rules and regulations as may be necessary or appropriate to implement” this provision.
7
15 U.S.C. § 78u-6(j).
8
providing broad whistleblower protections to employees. 17 C.F.R. § 240.21F-2(b).
9
Importantly, that rule states an employee may assert a retaliation claim under the Dodd-
10
Frank Act even if the employee did not make a report to the Commission prior to the
11
adverse employment action. LifeLock argues this rule is contrary to the plain language
12
of the Dodd-Frank Act and the Court should not defer to it.
Pursuant to that authority, the Commission adopted a rule
13
LifeLock’s argument requires application of the familiar two-step framework
14
contained in Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837
15
(1984). That framework requires the Court determine, using “the ordinary tools of
16
statutory construction . . . whether Congress has directly spoken to the precise question at
17
issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well
18
as the agency, must give effect to the unambiguously expressed intent of Congress.” City
19
of Arlington, Tex. V. FCC, 133 S. Ct. 1863, 1868 (2013) (quotation omitted). Only when
20
the statute can be deemed ambiguous must the Court proceed to the second step of
21
determining whether the agency’s interpretation “is based on a permissible construction
22
of the statute.” Id.
23
B. Statute is Ambiguous
24
Determining whether the statute is ambiguous requires the text of the statute be set
25
out in some detail. The Dodd-Frank Act whistleblower provision begins by defining
26
“whistleblower.”
27
28
The term “whistleblower” means any individual who provides
. . . information relating to a violation of the securities laws to
the Commission, in a manner established, by rule or
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1
regulation, by the Commission.
2
15 U.S.C. § 78u-6(a)(6). The scope of protection provided to a “whisteblower” is then
3
set forth in subsection (h):
4
(h) Protection of whistleblowers
(1) Prohibition against retaliation
5
6
(A) In general
7
No employer may discharge,
demote, suspend, threaten, harass,
directly or indirectly, or in any
other manner discriminate against,
a whistleblower in the terms and
conditions
of
employment
because of any lawful act done by
the whistleblower—
8
9
10
11
12
(i) in providing information to
the Commission in accordance
with this section;
13
14
(ii) in initiating, testifying in,
or assisting in any investigation
or judicial or administrative
action of the Commission
based upon or related to such
information; or
15
16
17
18
(iii) in making disclosures that
are required or protected under
the Sarbanes-Oxley Act of
2002 (15 U.S.C. 7201 et seq.),
this chapter, including section
78j-1(m) of this title, section
1513(e) of Title 18, and any
other law, rule, or regulation
subject to the jurisdiction of the
Commission.
19
20
21
22
23
24
25
26
27
28
Upon first reading, there is an oddity when the statutory definition in subsection (a) is
plugged into subsection (h). The statute defines a “whistleblower” as an individual who
directly makes a report to the Commission. But subsection (h)(1)(A) then appears to
ignore the definition in setting out the types of protected activity. Subsection (h)(1)(A)(i)
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1
first protects “providing information to the Commission” even though the very definition
2
of “whistleblower” requires the individual provide information to the Commission.
3
Subsection (h)(1)(A)(ii) then broadly protects “initiating, testifying in, or assisting in”
4
Commission-related actions. Again, however, the definition itself would seem to protect
5
such activities. Finally, subsection (h)(1)(A)(iii) protects a “whistleblower” when that
6
individual makes “disclosures that are required or protected under the Sarbanes-Oxley
7
Act of 2002.”
8
statutory definition, but it raises its own set of problems because the Sarbanes-Oxley Act
9
requires and protects a wide variety of disclosures other than reports to the Commission.
10
Thus, an individual can make a disclosure “required or protected under the Sarbanes-
11
Oxley Act” without ever contacting the Commission. The problem, therefore, is how to
12
reconcile the statutory definition of “whistleblower” seemingly requiring a direct report
13
to the Commission with the broader substantive protection set out in (h)(1)(A)(iii).
This last provision does not duplicate the coverage inherent in the
14
This problem has generated conflicting views of the statute. The Fifth Circuit is
15
the only court of appeals to address the issue. In Asadi v. G.E. Engergy (USA), LLC, 720
16
F.3d 620, 626 (5th Cir. 2013), the court held the statutory definition of “whistleblower”
17
and the protection provided in (h)(1)(A)(iii) “do not conflict.” In the Fifth Circuit’s view,
18
the statute’s repeated use of the term “whistleblower,” instead of “individual” or
19
“employee,” is significant.
20
describing the substantive protections, Congress was stressing that only whistleblowers,
21
as defined by the statute, were protected. And under that definition, a report to the
22
Commission before the adverse action is taken is an absolute prerequisite.
Id.
That is, by using the term “whistleblower” when
23
The Fifth Circuit acknowledged its reading raised the possibility that (h)(1)(A)(iii)
24
was “superfluous” in that it would seem to duplicate the protection afforded in
25
(h)(1)(A)(i) and (h)(1)(A)(ii). Id. at 627. But the Fifth Circuit concluded its reading of
26
the statute did not render (h)(1)(A)(iii) superfluous because that section will provide
27
protection “where the employer, unaware that the individual had already reported to the
28
Commission, takes an adverse employment action against the employee for” a disclosure
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1
required or protected under the Sarbanes-Oxley Act. (Doc. 27 at 32) (amicus brief from
2
SEC). In other words, (h)(1)(A)(i) protects an employee who reports to the Commission
3
and the employer knows of that activity; (h)(1)(A)(ii) protects an employee who aids the
4
Commission and the employer knows of that activity; and (h)(1)(A)(iii) protects an
5
employee who makes an internal report and makes a report to the Commission, but the
6
employer is not aware of the report to the Commission.
7
convincing for multiple reasons not addressed by the Fifth Circuit.
This construction is not
8
To start, the Fifth Circuit stressed its reading was necessary to avoid “read[ing] the
9
words ‘to the Commission’ out of the definition of ‘whistleblower’ for purposes” of
10
subsection (h). Id. at 628. In the Fifth Circuit’s view, its reading was the only way to
11
avoid violating the “surplusage canon [requiring] that every word is to be given effect.”
12
Id. The Fifth Circuit did not explain, however, how its reading does not independently
13
violate the surplusage canon.
14
abundantly clear the statutory definition must be plugged into subsection (h). But doing
15
so makes (h)(1)(A)(i) meaningless. That is, combining the statutory definition with
16
(h)(1)(A)(i) results in an employee being protected from adverse employment actions
17
when he “provides . . . information relating to a violation of the securities laws to the
18
Commission,” provided he then “provid[es] information to the Commission.” The Fifth
19
Circuit offered no explanation how this reading was sensible. In fact, the Fifth Circuit
20
simply ignored the surplusage problem its reading created in its attempt to avoid that very
21
problem.
According to the Fifth Circuit, Congress made it
22
The Fifth Circuit’s approach also makes the Dodd-Frank’s anti-retaliation
23
provision unique from other anti-retaliation provisions by imposing something
24
approaching strict liability for certain adverse employment actions. Under the Fifth
25
Circuit’s approach, an employee engages in “protected activity” under (h)(1)(A)(iii) by
26
doing two things: making a report to the Commission and making another disclosure
27
required or protected by Sarbanes-Oxley. An employee must engage in both activities to
28
qualify for protection under (h)(1)(A)(iii). But an employer will not always know an
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1
employee has made a report to the Commission. Thus, an employer’s retaliation liability
2
under (h)(1)(A)(iii) will not depend on the employer’s knowledge of protected activity.
3
Instead, it will depend on whether the employee, unbeknownst to the employer, has made
4
a report to the Commission. This would be contrary to other anti-retaliation provisions
5
that require a causal link between the protected activity and the adverse employment
6
action.3 Cf. Thomas v. City of Beaverton, 379 F.3d 802, 812 n.4 (9th Cir. 2004) (“The
7
employer’s awareness of the protected activity is also important in establishing a causal
8
link.”). It is not sensible to conclude there would be a causal link between an employee’s
9
protected activity and an adverse employment action when the employer is not even
10
aware protected activity occurred.
11
2111207, at *11 (D. Neb. May 21, 2014) (Fifth Circuit’s interpretation “creates a peculiar
12
standard of liability, in which liability for retaliation only attaches if certain
13
preconditions—of which they are unaware—are satisfied”). At the very least, lowering
14
the standard for retaliation liability in this way would represent a unique approach by
15
Congress and would be contrary to the generally accepted deterrent purpose of anti-
16
retaliation provisions. Stiltner v. Beretta U.S.A. Corp., 74 F.3d 1473, 1491 (4th Cir.
17
1996) (Phillips, J., concurring in part and dissenting in part) (noting “fundamental
18
purpose” of anti-retaliation provisions is “to impose a general deterrence upon the
19
impulse of employers to retaliate for the exercise of statutory rights.”).
See Bussing v. COR Clearing, LLC, 2014 WL
20
Based on these problems, and others, the majority of district courts to address the
21
issue have rejected the Fifth Circuit’s reasoning. For the most part, those courts have not
22
concluded the Dodd-Frank Act is clear. But see Bussing, 2014 WL 2111207, at *11
23
(finding statute unambiguously protects disclosures even absent reporting to the
24
Commission).
Rather, they have simply “concluded that the Dodd-Frank Act’s
25
3
26
27
28
LifeLock attempts to avoid this conclusion by arguing it is a “red herring.”
(Doc. 29 at 7). According to LifeLock, the “protected conduct” is the employee’s
internal report, provided he has already made a report to the Commission. But that does
not address the issue. The problem remains that, according to the Fifth Circuit, an
employer may be held liable under the anti-retaliation provision even though it does not
know the employee has engaged in the conduct actually protected by the statute (i.e.,
reporting to the Commission).
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Appellate Case: 15-1729
Addendum 19
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Case 2:14-cv-00576-ROS Document 47 Filed 09/19/14 Page 12 of 15
1
whistleblower provision is ambiguous on its face.” Khazin v. TD Ameritrade Holding
2
Corp., 2014 WL 940703, at *5 (D.N.J. March 11, 2014). That facial ambiguity is based
3
on (h)(1)(A)(iii) being “in direct conflict” with the statutory definition because
4
(h)(1)(A)(iii) “provides protection to persons who have not disclosed information to the
5
[Commission].”
6
persuasive.
Id. (quotation omitted).
The Court concludes this approach is
7
Trying to plug the statutory definition of whistleblower into the substantive
8
provisions creates a conflict. And that conflict creates serious “uncertainty of meaning or
9
intention” regarding the reach of the statute. Republic of Ecuador v. Mackay, 742 F.3d
10
860, 865 (9th Cir. 2014) (quotation omitted).
11
ambiguous.
12
analysis.
That is enough to deem the statute
Therefore, the Court must proceed to the second step of the Chevron
13
C. The Commission’s Interpretation is Permissible
14
The second step requires the Court determine whether the Commission’s
15
interpretation represents “a permissible construction of the statute.” Chevron, U.S.A.,
16
Inc. v. Nat. Resources Defense Council, Inc., 467 U.S. 837, 843 (1984). This step
17
requires the Court determine “whether Congress has explicitly instructed the agency to
18
flesh out specific provisions of the general legislation, or has impliedly left to the agency
19
the task of developing standards to carry out the general policy of the statute.” Tovar v.
20
United States Postal Service, 3 F.3d 1271, 1276 (9th Cir. 1993). If Congress explicitly
21
instructed the agency to develop regulations, “a reviewing court must find the agency’s
22
construction permissible unless it is arbitrary, capricious, or manifestly contrary to the
23
statute.” Id. If Congress only impliedly deferred to the agency, “a court must uphold the
24
agency’s construction if it is reasonable.” Id. The latter “reasonableness standard affords
25
agencies less latitude than the arbitrary and capricious standard.” McLean v. Crabtree,
26
173 F.3d 1176, 1181 (9th Cir. 1999). But even the reasonableness standard does not
27
require the agency’s construction be the only possible construction or the one the Court
28
would reach on its own. Id.
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Appellate Case: 15-1729
Addendum 20
Page: 21
Date Filed: 08/19/2015 Entry ID: 4307753
Case 2:14-cv-00576-ROS Document 47 Filed 09/19/14 Page 13 of 15
1
The Dodd-Frank Act explicitly instructs the Commission “to issue such rules and
2
regulations as may be necessary or appropriate to implement” the whistleblower
3
provisions. 15 U.S.C. § 78u-6(j). This may qualify as an “explicit” statement such that
4
the Commission’s rule is subject to review under the arbitrary and capricious standard.
5
But the parties do not discuss the different standards and apparently are content to rely on
6
the reasonableness standard.
7
Commission’s rule unless the Court is “compell[ed] to reject” its construction of the
8
statute based on it being either irrational or obviously inconsistent with the statute.
9
Leisnoi, Inc. v. Stratman, 154 F.3d 1062, 1069 (9th Cir. 1998) (quotation omitted); Haro
10
v. Sebelius, 747 F.3d 1099, 1115 (9th Cir. 2014) (quotation omitted).
Under that standard, the Court must defer to the
11
The Commission’s rule reads the statute as providing protection to employees who
12
make only internal reports. Securities Whistleblower Incentives and Protections, 76 Fed
13
Reg. 34300-01 (June 13, 2011) (“[T]he statutory anti-retaliation protections apply to
14
three different categories of whistleblowers, and the third category includes individuals
15
who report to persons or governmental authorities other than the Commission.”). The
16
only argument offered by LifeLock that this is not a permissible construction is that,
17
given the plain language of the statute, the Commission’s rule impermissibly expands the
18
reach of the statute. As set forth above, the plain language of the statute is not clear. In
19
fact, at least one court read the language of the statute as dictating the completely
20
opposite result as that proposed by LifeLock. Bussing, 2014 WL 2111207, at *11
21
(finding protection for internal reports “flows from the statute itself, and it is not
22
necessary to determine if deference to the SEC’s construction of the statute is
23
warranted”). In these circumstances, the Commission’s rule seeking to clarify the reach
24
of the statute is neither arbitrary and capricious nor unreasonable.
25
LifeLock does not contest that if its statutory construction is rejected, Peters has
26
stated a claim under the Dodd-Frank Act. Therefore, LifeLock will be required to answer
27
that claim.
28
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Appellate Case: 15-1729
Addendum 21
Page: 22
Date Filed: 08/19/2015 Entry ID: 4307753
Case 2:14-cv-00576-ROS Document 47 Filed 09/19/14 Page 14 of 15
1
IV. Claim for Unjust Enrichment is Plausible
2
Peters moves for judgment on the pleadings regarding LifeLock’s unjust
3
enrichment counterclaim. That counterclaim seeks to recover the salary and benefits
4
Peters received during his one month of working at LifeLock. Peters’ motion seems to
5
invoke two separate arguments.4 First, that the parties’ contract prevents any resort to
6
unjust enrichment. And second, Peters’ retention of his “salary and benefits” cannot be
7
“unjust” given that he performed services for the month he was employed.
8
arguments are addressed in turn.
These
9
Peters is correct that LifeLock cannot rely on an unjust enrichment claim if “a
10
specific contract . . . governs the [parties’] relationship.” Brooks v. Valley Nat’l Bank,
11
548 P.2d 1166, 1171 (Ariz. 1976). But LifeLock is seeking rescission of the parties’
12
alleged contract. And unjust enrichment is a viable claim when a purported contract is
13
not enforceable. W. Corrections Group, Inc. v. Tierney, 96 P.3d 1070, 1077 (Ariz. Ct.
14
App. 2004) (“Quantum meruit damages are available when services are performed under
15
an unenforceable contract . . . .”). Because the parties do not agree a contract governed
16
their relationship, LifeLock can pursue an unjust enrichment claim. Of course, LifeLock
17
cannot prevail on both its breach of contract and unjust enrichment counterclaims. See
18
Edward Greenbank Enters. Of Ariz. v. Pepper, 538 P.2d 389, 391 (Ariz. 1975) (party
19
may pursue claims for fraudulent inducement and breach of contract but cannot recover
20
on both). But under the facts alleged in LifeLock’s counterclaims, LifeLock can pursue
21
both counterclaims past the pleading stage.
22
Peters is also correct that retention of his “salary and benefits” does not appear
23
“unjust,” a prerequisite to an unjust enrichment claim. Murdock-Bryant Const. Inc. v.
24
Pearson, 703 P.2d 1197, 1203 (Ariz. 1985) (“Restitutionary relief is allowable only when
25
4
26
27
28
Peters also claims the unjust enrichment counterclaim should be dismissed
because it is duplicative of the breach of contract counterclaim. LifeLock’s breach of
contract counterclaim seeks to recover the signing bonus provided to Peters while the
unjust enrichment counterclaim seeks the “salary and benefits” LifeLock paid to Peters
during his employment. Thus, the counterclaims are not duplicative. And even if they
were, such duplication would not be a valid basis for dismissal because under Federal
Rule of Civil Procedure 8(d), a party may assert claims in the alternative.
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Appellate Case: 15-1729
Addendum 22
Page: 23
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Case 2:14-cv-00576-ROS Document 47 Filed 09/19/14 Page 15 of 15
1
it would be inequitable or unjust for defendant to retain the benefit without compensating
2
plaintiff.”).
3
concealment of his “true qualifications or, rather, lack thereof.” (Doc. 36 at 6). In other
4
words, LifeLock alleges it did not receive what it bargained for and it paid the salary and
5
benefits under false pretenses. That is enough to proceed past the pleading stage.5 Cf.
6
Dilek v. Watson Enters., Inc., 885 F. Supp. 2d 632, 649 (S.D.N.Y. 2012) (rejecting unjust
7
enrichment claim brought by employer against employee because employer “had
8
materially full knowledge of the facts it alleges about [Plaintiff’s] job performance”).
9
Peters’ motion for judgment on the pleadings will be denied.
But LifeLock alleges it paid Peters’ salary and benefits based on his
10
Accordingly,
11
IT IS ORDERED the Motion to Dismiss (Doc. 15) is DENIED.
12
IT IS FURTHER ORDERED the Motion to Dismiss (Doc. 21) is GRANTED.
13
14
15
16
17
Defendant Cristy Schaan is DISMISSED.
IT IS FURTHER ORDERED the Motion for Leave to File Amicus Brief (Doc.
26) is GRANTED.
IT IS FURTHER ORDERED the Motion for Judgment on the Pleadings (Doc.
34) is DENIED.
18
IT IS FURTHER ORDERED the Stipulation of Dismissal (Doc. 41) is
19
GRANTED. Defendant Kim Jones is DISMISSED WITH PREJUDICE with each
20
party to bear his own attorneys’ fees, costs, and expenses.
21
Dated this 19th day of September, 2014.
22
23
24
Honorable Roslyn O. Silver
Senior United States District Judge
25
26
5
27
28
Whether LifeLock can recover the salary and benefits paid to Peters raises issues
under Arizona’s law regarding payment of wages. At present, it is unclear how LifeLock
plans on avoiding Arizona law regarding payment and withholding of wages. See, e.g.,
A.R.S. § 23-352 (setting forth exclusive grounds for withholding wages). But that issue
can be addressed through later motion, if appropriate.
- 15 -
Appellate Case: 15-1729
Addendum 23
Page: 24
Date Filed: 08/19/2015 Entry ID: 4307753
Case 1:14-cv-00934-LAK-HBP Document 30 Filed 03/24/15 Page 1 of 1
=======it
;-~.;:;.;_,_~--=·
USDCSDNY
DOCUMENT
ELECTRONICALLY FIU~D
DOC#:
DATE F=IL::-::E::~---o.,..-1'-Jt-:rf-~-ll
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------x
JOY SABELLA,
Plaintiff,
14-cv-0934 (LAK)
-againstTHE BANK OF NOV A SCOTIA, etc.,
Defendant.
------------------------------------------X
ORDER
LEWIS A. KAPLAN, District Judge.
Plaintiff Joy Sabella was terminated from her employment as director of project
management and business analysis by The Bank of Nova Scotia in August 2013. She brings this
action for retaliatory (1) discharge under both the Dodd-Frank Act ("DFA"), specifically 15 U.S.C.
§ 78u6(h)(1)(A)(iii), and New York Labor Law§ 740, (Counts I and II, respectively) and (2) age
and gender discrimination in violation of the New York City Human Rights Law and the New York
Labor Law (Counts III and IV, respectively). Jurisdiction is premised exclusively on the DFA, 15
U.S.C. § 78u-6(h)(l)(B)(i), and 28 U.S.C. § 1331.
Defendant moves to dismiss Counts I and II for failure to state a claim upon which
relief may be granted. In a report and recommendation dated March 11, 2015 (the "R&R"),
Magistrate Judge Henry B. Pitman recommended that the motion should be granted insofar as it
seeks dismissal of Count II, but denied with respect to Count I. Defendant objects insofar as the
R&R recommended denial of the motion with respect to Count I, arguing that the Magistrate Judge
erroneously concluded that plaintiff was a "whistleblower" within the meaning of the DF A and,
assuming that she was, that she sufficiently engaged in protected activity. If either objection were
well taken, Count I must be dismissed.
The defendant's objections are overruled. The motion to dismiss Counts I and II [DI
16] is granted to the extent that Count II is dismissed and otherwise denied. Defendant's application
for attorneys fees is denied.
SO ORDERED.
Dated:
March 24, 2015
Appellate Case: 15-1729
Addendum 24
Page: 25
Date Filed: 08/19/2015 Entry ID: 4307753
CERTIFICATE OF SERVICE
I hereby certify that I electronically filed the foregoing document with the
Clerk of Court for the United States Court of Appeals for the Eighth Circuit by
using the appellate CM/ECF system on August 19, 2015.
I certify that all participants in the case are registered CM/ECF users and
that service will be accomplished by the appellate CM/ECF system.
/s/ Stephen G. Yoder
Stephen G. Yoder
Senior Litigation Counsel
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-9040
August 19, 2015
Appellate Case: 15-1729
Page: 26
Date Filed: 08/19/2015 Entry ID: 4307753
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