On The Case

SCOTUS whistleblower case dodges Chevron deference showdown

(Reuters) - Last November, a couple of weeks before the U.S. Supreme Court heard oral arguments in Digital Realty Trust v. Somers, I told you about a radical idea floated by Digital Realty Trust’s lawyers at Williams & Connolly.

In the company’s reply brief, the real estate investment trust repeated its primary argument that the statutory language of Dodd-Frank’s whistleblower provisions limits anti-retaliation protection to employees who report their concerns to the Securities and Exchange Commission, not those who follow the Sarbanes-Oxley directive to report problems to bosses. But in a parting shot, Digital Realty said that if the justices determined the SEC’s more expansive interpretation of the scope of Dodd-Frank’s whistleblower protection was entitled to deference under the Supreme Court’s 1984 precedent in Chevron v. Natural Resources Defense Council, this case might be a good opportunity for the court to blow up Chevron – the longtime bedrock of U.S. administrative law.

That’s not going to happen.

The Supreme Court issued its decision Wednesday in the Digital Realty case, and it wasn’t even close. All of the justices agreed that Dodd-Frank’s text expressly defines whistleblowers as those who report suspected fraud to the SEC. Employees who claim they were fired after informing their supervisors, but not the SEC, of potential issues are not shielded by Dodd-Frank’s robust whistleblower protections – a conclusion, said Justice Ruth Bader Ginsburg, that aligns with Congress’s intention of encouraging whistleblowers to alert the SEC of fraud allegations. (Justice Clarence Thomas, in a partial concurrence joined by Justices Neil Gorsuch and Samuel Alito, wrote that the court should have ended its analysis with the statutory text and not proceeded to discuss congressional intent.)

Because the justices concluded the statute was not ambiguous in its definition of a whistleblower, the court never had to decide whether to defer to the SEC’s interpretation that Dodd-Frank protection extends to employees who have reported internally and not to the commission. The first part of the Chevron deference test, as you know, is whether the underlying statute is ambiguous. (The second part is whether the agency’s statutory interpretation is reasonable.) In Digital Realty, the court’s Chevron analysis ended almost as soon as it began.

“We find the statute’s definition of ‘whistleblower’ clear and conclusive. Because ‘Congress has directly spoken to the precise question at issue,’” Justice Ginsburg wrote, quoting Chevron, “we do not accord deference to the contrary view advanced by the SEC … The statute’s unambiguous whistleblower definition, in short, precludes the commission from more expansively interpreting that term.”

The court’s decision seems to spell the end of Paul Somers’ case against Digital Realty, which he accused of firing him when he told his supervisors he suspected financial fraud by the company. Somers failed to follow Sarbanes-Oxley’s administrative procedures for whistleblowers alleging retaliation, so he is apparently out of options. His Supreme Court counsel, Daniel Geyser of Stris & Mayer, declined to comment.

Whistleblower lawyers said Wednesday that the court’s decision will drive employees to the SEC when they’re worried about possible corporate misconduct. Whistleblowers receive more powerful protection under Dodd-Frank than under Sarbanes-Oxley, including a longer statute of limitations, fewer administrative hurdles and higher potential recovery. If concerned employees are not entitled to those Dodd-Frank benefits without reporting concerns to the commission, their incentive is to call the SEC hotline.

That’s a mixed blessing for employers, said Sean McKessy of Phillips & Cohen, founding director of the former SEC Office of the Whistleblower. “Previously, we might have advised whistleblowers to report their concerns through internal compliance systems, when those systems were legitimate and strong, as well as report claims to the SEC,” McKessy said in an email statement. “Now we will tailor our advice to whistleblowers to take the Supreme Court decision into account, so as to avoid the risk of losing the right to be protected from retaliation.”

Digital Realty Trust’s Supreme Court counsel, Kannon Shanmugam of Williams & Connolly, was arguing a different case at the Supreme Court on Wednesday so was not available for comment.