Fifth Circuit Cuts Employers Out of Whistleblower Loop

, The National Law Journal


Jenna Greene writes for The National Law Journal, an American Lawyer affiliate.

The U.S. Court of Appeals for the Fifth Circuit has ruled that would-be whistleblowers are protected from retaliation only if they report their employer's wrongdoing to the U.S. Securities and Exchange Commission — contradicting virtually every other court to consider the matter and the SEC's own rules.

Employees who report violations internally have no recourse under the Dodd-Frank Act if they are fired as a result, the court held in a 17-page ruling that may undermine painstakingly developed corporate compliance programs.

"We hold that the plain language of the Dodd-Frank whistleblower protection provision creates a private cause of action only for individuals who provide information relating to a violation of the securities laws to the SEC," Judge Jennifer Walker Elrod wrote, joined by Judge Stephen Higginson and U.S. District Judge Brian Jackson, sitting by designation from the Middle District of Louisiana.

The suit was brought by Khalid Asadi, a former employee of G.E. Energy LLC who was fired after telling his supervisor and a company ombudsperson about a suspected violation of the Foreign Corrupt Practices Act.

Asadi passed on concerns that the company had improperly hired a woman to curry favor with a senior Iraqi official in negotiating a joint venture agreement. As Asadi's source allegedly put it, GE was "pimping its way to the agreement."

Soon after, Asadi, who was based in Jordan as GE's Iraq country executive, got a "surprisingly negative" performance review and subsequently was fired.

Because Asadi made his report internally rather than going to the SEC, the court held that he was not actually a whistleblower and dismissed his complaint for failure to state a claim.

"The court's decision makes it very clear that an employee who uncovers serious wrongdoing of this type has very little protection from retaliation if that wrongdoing is not reported to the SEC," said Asadi's lawyer, Ronald Dupree of the Dupree Law Firm in Houston. "With respect to public policy, we argued and continue to believe that the anti-retaliation provisions of Dodd-Frank were intended to provide greater incentives to report wrongdoing, not less."

GE was represented by Norton Rose Fulbright partners Linda Addison and Darryl Anderson. Addison, the firm's global head of dispute resolution and litigation, did not immediately respond to a request for comment.

The court relied on a close reading of Section 922 of the Dodd-Frank Act, which defines a whistleblower as anyone who provides "information relating to a violation of the securities laws to the Commission," (emphasis by the court). "This definition, standing alone, expressly and unambiguously requires that an individual provide information to the SEC to qualify as a 'whistleblower,' " the court held.

Where it gets trickier is in subsection (h), which outlines the whistleblower protections. The law says that employers can't fire a whistleblower for providing information to the SEC, aiding the SEC or "making disclosures that are required or protected" under certain provisions of the Sarbanes-Oxley Act of 2002, the Securities Act of 1934 or "any other law, rule or regulation subject to the jurisdiction of the Commission."

Asadi's lawyer argued that this third provision covers people even if they don't interact directly with the SEC. Three other federal courts — the Southern District of New York, the Middle District of Tennessee and the District of Connecticut — that have considered the question reached that conclusion. The Southern District of Texas, where Asadi's case originated, dismissed his suit by ruling that whistleblower protection does not apply overseas, a finding that the Fifth Circuit did not discuss.

As for the SEC, the agency in its whistleblower regulations implementing Dodd-Frank extended anti-retaliation protection to people who did not report information to the agency, as long as the activity was protected under the other laws specified.

According to the Fifth Circuit, the SEC got it wrong. "We must reject the SEC's expansive interpretation of the term 'whistleblower,' " Elrod wrote, concluding that "Congress specified that a 'whistleblower,' not merely any individual, is protected from employer retaliation."

Employees who don't go to the SEC may still be protected under the Sarbanes-Oxley Act, but the court recognized that those provisions are less appealing. Sarbanes-Oxley limits monetary damages to back pay (Dodd-Frank allows two times back pay); complaints must be filed first with the secretary of Labor; and the law's statute of limitations is much shorter than Dodd-Frank's.

The Fifth Circuit decision would appear to give employees planning to a report a securities law violation a clear incentive to skip internal disclosure and go straight to the SEC. But it's a scenario that even some SEC commissioners have viewed as less than optimal, particularly given the time and money expended by many companies to set up internal programs in light of Sarbanes-Oxley.

Commissioner Troy Paredas noted the problem during a November 3, 2010, SEC meeting. "What will be the net impact on corporate conduct and legal compliance if individuals bypass a corporation's internal procedures for identifying, investigating and sanctioning unlawful activity in favor of reporting alleged violations to the SEC?" he said. "It would be unfortunate if, as result of the Dodd-Frank whistleblower program, effective corporate compliance programs were thwarted."

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