The Supreme Court is to hear arguments Tuesday in a case that could determine whether corporate whistle-blowers are protected from being fired if they disclose wrongdoing to company officials rather than to the Securities and Exchange Commission.
At issue is the scope of the Dodd-Frank Act, which aimed to encourage whistle-blowers and prevent the kind of retaliation seen against those who tried to sound alarms at Lehman Bros. and other companies that collapsed during the 2007-09 financial crisis.
But it is unclear that the law does as much as its sponsors and supporters assumed. It faces a stiff challenge based on "textualism," the approach that has won favor with most of the justices, and none more so than new Justice Neil M. Gorsuch. He has repeatedly declared devotion to deciding cases based on the text of a law, not its broader purpose.
Although the 2010 law clearly says companies may be sued if they "discharge or demote" employees for disclosing wrongdoing, it separately defines a whistle-blower as an "individual who provides information . . . to the commission."
The question is now whether that narrow definition excludes those who step forward to expose potential frauds by reporting them internally, rather than to the SEC. And if a company quickly fires such an employee, before a report is made to the SEC, is the whistle-blower left unprotected by Dodd-Frank?
Gorsuch gave the keynote address this month at the conservative Federalist Society's annual meeting and credited the late Justice Antonin Scalia with winning over most of the justices to the view they should focus narrowly on the words of the law.
"Textualism has triumphed," Gorsuch said, and it is not "going anywhere on my watch. . . . The duty of a judge is to say what the law is, not what it should be."
The case, Digital Realty Trust v. Somers, highlights the clash between two ways of interpreting a federal law.
Three years ago, Paul Somers was a vice president and portfolio manager working in Singapore for Digital Realty, a real estate trust based in San Francisco. He said business in Asia was booming, but he became concerned that his supervisor was cutting corners, including hiding a $7 million cost overrun on a project in Hong Kong.
He decided to report his concerns to the company's top executives. "I didn't want to go to the SEC. I loved my company and my job, and I wanted to resolve this discreetly inside the company," Somers said in an interview. The company's code of conduct required employees to report suspected wrongdoing within the company, he added.
But a few weeks after he sent his memo, Somers was terminated. "It was a strange situation, and I never got to the bottom of it," he said.
He filed a wrongful-termination lawsuit in federal court in San Francisco, alleging he had been fired in retaliation for disclosing wrongdoing, in violation of the Dodd-Frank Act. He relied on one provision that broadly protects employees "in making disclosures" of potential violations of "any other law, rule, or regulation" enforced by the SEC.
The law authorizes double back pay for those fired in retaliation for disclosing violations.
Lawyers for Digital Realty said the suit should be dismissed because Somers did not qualify as a protected whistle-blower, citing the strict definition. U.S. District Judge Edward Chen denied the motion, saying it was a close case because different provisions of the law were in conflict, but he deferred to the SEC, which said internal whistle-blowers were protected.
Digital Realty appealed, but in March a panel from the U.S. Court of Appeals for the Ninth Circuit, in a 2-1 decision, cleared the suit to proceed.
Judge Mary Schroeder pointed to the provision that broadly protected employees who disclose violations: "In view of that language, and the overall operation of the statute, we conclude that the SEC regulation correctly reflects congressional intent to provide protection for those who make internal disclosures as well as to those who make disclosures to the SEC."