August 29, 2013

Fifth Circuit Eliminates Key Whistleblower Retaliation Protections Under Dodd-Frank – A Pyrrhic Victory for Corporations

By Gordon Schnell

Photo Credit: sec.gov

In a legal ruling that many corporations are surely celebrating, the Fifth Circuit Court of Appeals has significantly narrowed the scope of who qualifies as a whistleblower under the Dodd-Frank Act.  It is only those individuals who actually provide information to the government (through the SEC or CFTC).  If a whistleblower only reports internally, to a supervisor or through the company’s internal compliance program, there is no coverage under the statute’s protections, the Fifth Circuit says.  It is the first appellate court to reach this decision.  While it is an outcome that many large corporations have championed, they are likely to learn very soon that they, not would-be whistleblowers, are the real losers here.

The decision, Asadi v. GE Energy, involved Khaled Asadi, a GE employee who oversaw the company’s Iraq operations and learned of the company’s alleged efforts to improperly influence a senior Iraqi official to help secure a lucrative contract there.  He immediately reported it to his supervisor and the company’s ombudsperson for the region as a possible violation of the Foreign Corrupt Practices Act (FCPA).  This is the statute that bars U.S. companies from bribing foreign officials or otherwise trying to improperly influence their official government actions.  Shortly after Asadi filed these internal reports, he received a “surprisingly negative” performance review, was pressured to accept a reduced role in the region with minimal responsibility, and was ultimately fired from the company altogether.

Asadi sued GE for violating the whistleblower retaliation protections of the Dodd-Frank Act.  These provisions prevent a company from firing, demoting, harassing or in any way retaliating against an employee for blowing the whistle on potential violations of the securities or commodities laws.  GE argued that these protections did not apply to Asadi because he never reported the company’s alleged FCPA violations, which may also constitute securities violations, to the SEC.  The company also argued that the protections did not apply because Asadi’s whistleblowing occurred outside the U.S.

The district court agreed with GE on this latter argument and dismissed Asadi’s case.  The Fifth Circuit affirmed the dismissal but not based on this jurisdictional argument.  Instead, it zeroed in on GE’s argument that Asadi did not qualify as a Dodd-Frank whistleblower because he never reported the alleged misconduct to the SEC.  The court found that the “plain language” of the statute “creates a private cause of action only for individuals who provide information . . . to the SEC.  Because Asadi failed to do so, his whistleblower-protection claim fails.”

In reaching its decision, the Fifth Circuit rejected the rulings of several district courts that found reporting to the SEC was not a prerequisite for Dodd-Frank whistleblower retaliation protection.  It also rejected the SEC’s own implementing regulations which likewise do not provide for any such precondition to protection (see 17 CFR § 240.21F-2(b)(1)).  On this issue, the Fifth Circuit stands alone.  But, since it is the highest court to speak on it, its decision, at least for now, can be considered the prevailing law.  And it will certainly heavily, if not definitively influence, how whistleblowers and their lawyers behave going forward when deciding how to proceed with a whistleblower complaint involving potential SEC (or CFTC) violations.

The short answer is that they will now be compelled to bring any such complaint to the SEC (or CFTC).  The problem with this result is that, in many cases, it is better for all involved – the whistleblower, the offending company and the public – for the whistleblower to work with the company to clean up its house without getting the government (and the press) involved.  In fact, one of the biggest concerns that surrounded the passing of the Dodd-Frank whistleblower provisions was that it would undermine companies’ internal compliance programs by encouraging whistleblowers to bypass them completely.

Ironically, GE was among a host of large companies that even argued for a requirement that whistleblowers report internally first before being permitted to report to the SEC potential securities violations under Dodd-Frank.  In a letter GE wrote to the SEC (along with Google, Honeywell, JP Morgan Chase, Microsoft and Northrop Grumman) before the statute was finalized, the company argued that “the best way to balance the desires for strong compliance functions and an effective whistleblower program is to require internal reporting to be eligible for an award” under the statute.  Such a precondition to Dodd-Frank coverage was rightly rejected by the SEC.  But the corporate push for one highlights the important role these internal programs can play.

Unfortunately, with the Fifth Circuit’s decision, the only logical path for a whistleblower to take will be to go directly to the government as soon as possible.  It is a perfect case of “be careful what you wish for.”  GE was successful in dismissing this particular whistleblower retaliation claim.  In doing so, however, GE is ensuring that well counseled whistleblowers will now ignore their companies’ internal compliance programs no matter how well they are run or how seriously the company takes them.  It is the very outcome GE and other companies were so desperately trying to avoid.

Other companies are already jumping on this misguided bandwagon.  According to a recent report in the Wall Street Journal, UBS and Siemens have in recent litigation made the same argument GE made in trying to escape whistleblower liability under Dodd-Frank.  Siemens even pointed to the Asadi decision for support.  These and other companies would be wise to take a step back and reconsider what they are hoping to accomplish with this new charge against whistleblower retaliation claims.  Any short-term benefit it may yield likely will soon be overshadowed by driving future whistleblowers directly into the open arms of the government enforcers.

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3 Responses to “Fifth Circuit Eliminates Key Whistleblower Retaliation Protections Under Dodd-Frank – A Pyrrhic Victory for Corporations

  1. A well written and informative piece. The Government may get more than it wishes for as well, encouraging lower level issues and miscommunications that could be handled or remedied internally. This will likely lead to greater allocation of already stretched government resources to investigate claims valid or not.

    It would seem to me that there needs to be both internal and external protections for whistle blowers so that the options of internal corporation compliance are not bypassed.