In the case of Asadi v. G.E. Energy (USA), LLC, Docket No. 12-20522 (5th Cir. July 17, 2013), the Fifth Circuit Court of Appeals held that an employee must first report alleged misconduct to the SEC in order to enjoy protection from retaliation under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). An employee who makes only an internal complaint of misconduct, such as the plaintiff in Asadi, who reported concerns about a violation of the Foreign Corrupt Practices Act only to his supervisor and a corporate ombudsperson, is unprotected.
The operative whistleblower protection provision of Dodd-Frank prohibits an employer from retaliating against a "whistleblower" for engaging in the following: (i) providing information to the SEC in accordance with the SEC Whistleblower Program (the "bounty" provision of Dodd-Frank allowing informants to collect 10-30% of the award recovered by the SEC in a subsequent enforcement action); (ii) participating in an investigation or other action relating to such information; or (iii) making disclosures that are required or protected under the securities laws. See 15 U.S.C. § 78u-6(h)(1)(A). Both the whistleblower and bounty provisions of Dodd-Frank are included in 15 U.S.C. § 78u-6. That section also defines the term "whistleblower" to mean "any individual who provides...information relating to a violation of the securities laws to the [SEC]..." 15 U.S.C. § 78u-6(a)(6).
In Asadi, the Fifth Circuit read the language of § 78u-6 to be a plain and unambiguous expression of Congressional intent to protect only defined "whistleblowers." Accordingly, the Court rejected the SEC's "expansive interpretation" of the term as conflicting with Congress' clear intent with respect to the precise question at issue. The Court recognized that, under its holding, “individuals may take protected activity yet still not qualify as a whistleblower.”
While the Fifth Circuit's holding in Asadi resulted in a victory for the employer, the impact of the decision for employers may be mixed. Certainly, the holding narrows the universe of potential plaintiffs who may successfully pursue claims under the Dodd-Frank whistleblower protection provision and, at least in the Fifth Circuit, allows the summary dismissal of claims where a plaintiff has not taken the concrete, unambiguous step of reporting alleged misconduct to the SEC. However, during the SEC's recent rulemaking process, employers fought to make internal reporting a prerequisite for participation in the "bounty" program. Although employers were unsuccessful in this effort, certain guidelines on the calculation of the bounty, as well as employer policies, may nudge employees towards internal reporting. By withholding protection for internal complaints, the Asadi holding incentivizes employees to make their initial reports of possible securities laws violations directly to the SEC.
Moreover, the Court recognized that, because protected activity under the Dodd-Frank Act substantially overlaps with the definition of protected activity under the Sarbanes Oxley Act (SOX), individuals denied protection under Dodd-Frank still would likely qualify for protection under SOX. Significantly, however, the inability to use the Dodd-Frank is material because that statute generally provides a greater level of protection, with double backpay damages, original jurisdiction in the federal district courts and a much more liberal limitations period.