I recently read a Wall Street Journal article which discussed a $4.5 million award issued by the SEC to a whistleblower. The agency granted the award pursuant to a rule designed to incentivize internal reporting by whistleblowers who also report to the SEC within 120 days.
The WSJ article noted that this award may be one of the last provided under this particular rule due to the impact of the 2017 Supreme Court case involving Digital Realty Trust, Inc.
As a reminder, Digital Realty declared that the Dodd-Frank anti-retaliation protections extend only to whistleblowers who report to the SEC. Individuals who report allegations internally without reporting to the SEC are excluded from the definition of “whistleblower” and are therefore not entitled to these critical protections.
The article then quoted a spokesperson for Digital Realty, who said about the case: “We welcome the Supreme Court’s decision on this important legal issue and the clarity it provides employers.”
I couldn’t help but shake my head after reading this quote. Of course, both parties to a Supreme Court matter always want their case to succeed, but Digital Realty’s “win” at the Supreme Court was actually a huge loss for companies and public policy. Let me explain.
In 2010-11, the SEC developed a set of rules to implement the whistleblower provisions of Dodd-Frank. The SEC received hundreds of comments on their draft rules suggesting how the Commission should handle internal whistleblower complaints.
At the time, many companies were adamant that SEC rules should require whistleblowers to report internally before reporting misconduct to the SEC in order to be eligible for whistleblower awards. Some argued that companies had invested heavily in developing sophisticated internal compliance programs and that employees should be required to notify them of misconduct in order to collect an award from the government. Many claimed that allowing whistleblowers to sidestep these programs and report directly to the government would undermine these new compliance programs and their ability to effectively manage wrongdoing.
Good governance groups rejected this position. They raised concerns that forcing whistleblowers to report wrongdoing internally without any regard for a company’s culture or compliance program would likely dissuade whistleblowers from reporting wrongdoing entirely.
The SEC ultimately decided to split the baby — they would not require internal reporting, but would reward any whistleblower who first reported allegations internally by potentially increasing the award amount. This framework effectively incentivized internal reporting without mandating it.
Several years after the SEC promulgated this rule, there were various challenges to the reach of the law’s anti-retaliation protections. Some challenged the provisions’ exterritorial reach, while others challenged the law’s application to individuals that reported exclusively to their companies (without going to the government).
Despite the various challenges, the SEC remained publicly committed to its expansive interpretation of the law. Digital Realty ended this when the Supreme Court declared that in order to qualify for the law’s anti-retaliation protections, individuals must report securities violations to the government — declaring that internal reporting alone is not sufficient to qualify as a “whistleblower” under the law.
So where does this leave us? Individuals are now far less likely to report misconduct exclusively to their internal compliance department because they won’t have any protections against retaliation under Dodd-Frank. Indeed, this case practically ensures that individuals will either go directly to the government (and bypass their internal compliance programs completely) or report to the company and government at the same time.
So when Digital Realty says they “welcome” the Supreme Court’s decision, I can’t help but wonder if they may come to regret the role they played in undermining the law’s incentives. Digital Realty’s legal victory is a now policy loss that all companies and prospective whistleblowers must endure.