Is an Alleged Whistleblower’s Internal Disclosure Protected? Fifth Circuit Issues a New Interpretation of Dodd-Frank’s Whistleblower-Protection Provision

July 29, 2013

Whistleblower retaliation claims are increasing, and a key question is whether an internal complaint is protected, or whether, instead, the alleged whistleblower must have complained to the government. On July 17, 2013, the United States Court of Appeals for the Fifth Circuit in Asadi v. G.E. Energy USA, held that Dodd-Frank’s whistleblower-protection provision only protects individuals who disclose alleged securities law violations directly to the Securities and Exchange Commission (SEC). The ruling affirmed the lower court’s decision, but the ruling is contrary to at least five federal district court decisions and to an SEC regulation that provides that employees may be afforded whistleblower protection even if they disclose alleged fraud internally and not directly to the SEC.

Asadi, a GE Energy executive working in Amman, Jordan, claimed that he reported to his supervisor and to the GE Energy ombudsperson for the region that GE Energy had allegedly violated the Foreign Corrupt Practices Act. Asadi argued that shortly after making this internal disclosure, he received an unexpected negative performance review, was asked to accept a demotion, and one year later was fired. Asadi sued GE Energy alleging that he was terminated in retaliation for his internal reports in violation of Dodd-Frank’s whistleblower-protection provision. Dismissing the claim based on the conclusion that Dodd-Frank did not protect extraterritorial whistleblowing activity, the district court declined to rule on whether Dodd-Frank only protects employees who disclose information directly to the SEC. The Fifth Circuit, however, focused on this question on appeal.

Consistent with other district court decisions and the SEC regulation, Asadi argued that § 922 of Dodd-Frank, codified at 15 U.S.C. § 78u-6, had two conflicting and ambiguous provisions: subsection (a) which provides a definition of “whistleblower” defines the term as “an individual who provides. . . information relating to a violation of the securities laws to the Commission,” whereas the last part of subsection (h) which describes protected activity does not require that the disclosure be made directly to the SEC. Unconvinced, the Fifth Circuit held that the statute was neither conflicting nor ambiguous. The court reconciled the two subsections by interpreting them to mean that employees who disclose information directly to the SEC are, by definition, whistleblowers and because they are whistleblowers, they are also protected against retaliation for disclosing information internally. By statutory definition, the court reasoned, a person who has not disclosed information directly to the SEC is not a whistleblower and thus has no protection at all under the anti-retaliation provision of Dodd-Frank. Any other interpretation, the court found, would erroneously render the Sarbanes-Oxley (SOX) anti-retaliation provision moot because individuals would always choose to bring a claim under Dodd-Frank. Dodd-Frank allows for greater recovery, has no administrative exhaustion requirement, and has a longer statute of limitations than SOX.

The Fifth Circuit held that when Congress’ intent is clear and unambiguous, courts as well as agencies must defer to the language of the statute. Thus, since the court found Dodd-Frank’s definition of the term “whistleblower” to be clear and unambiguous, the court rejected the SEC’s broader definition of the term as stated in the agency regulation.

Given that the Fifth Circuit’s ruling differs from the district courts that had previously opined, as well as with the SEC’s regulations, it may be likely that other circuit courts of appeal will reach varying decisions and that the Supreme Court will ultimately have to resolve the issue. In the meantime, employers should view this decision as a double-edged sword. On the one hand, employers will have an easier time defending against anti-retaliation suits. On the other hand, employees knowledgeable of this ruling may go directly to the SEC with allegations rather than first discussing the information internally. As whistleblower protection statutes multiply and claims are on the rise, employers should ensure that they have state-of-the-art policies and practices in place to address complaints properly.


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This article was originally published by Bingham McCutchen LLP.