Categories: Financial Services

by Allen B. Roberts, Frank C. Morris, Jr., and Michael J. Slocum

In what has been reported to be the first decision permitting a retaliation claim under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) to survive dismissal, the U.S. District Court for the District of Connecticut (“Court”) has adopted a broad view of who qualifies as a “whistleblower” under that law. The Court rejected an employer’s request for a literal construction of Dodd-Frank’s definition and protection of whistleblowers, and instead relied upon what it saw as an ambiguity in the statutory language to endorse the Security and Exchange Commission’s (“SEC” or “Commission”) Final Rule implementing the whistleblower provisions of Dodd-Frank (“Final Rule”) that liberally expands protections to individuals who do not fit within the statutory definition of “whistleblowers.” In Kramer v. Trans-Lux Corp., 11-cv-01424 (D. Conn. Sept. 25, 2012), the Court declined to dismiss the lawsuit of an employee who claimed a “reasonable belief” of a “possible” securities law violation governed by the Sarbanes-Oxley Act but did not follow explicit statutory procedures for reporting it.

Kramer’s broad interpretation of Dodd-Frank’s whistleblower protection provisions may not carry the day upon review by a Circuit Court of Appeals and in other district courts, but for now, it can be anticipated that employees claiming retaliation under Dodd-Frank will point to Kramer (and to two other supportive district court cases that themselves did not advance for other reasons) in an effort to survive motions to dismiss.

Kramer Claimed That He Was Fired in Retaliation for Disclosing Alleged Violations of Trans-Lux’s Employee Pension Plan to the Company’s Board and the SEC

Richard Kramer had been the Vice President of Human Resources and Administration of Trans-Lux Corp. (“Trans-Lux”) for nearly two decades. Among his responsibilities were managing his employer’s relationship with the firm, overseeing the company’s ERISA-governed employee pension plan, ensuring compliance with applicable laws and regulations, and serving as plan fiduciary.

According to Kramer’s lawsuit, starting in March 2011, he began to voice a number of alleged concerns regarding composition of the pension plan committee, potential conflicts of interest in the administration of plan investment funds, and required approval and filing of plan amendments and reports. After raising his concerns with the CFO to whom he reported and the CEO, Kramer notified the audit committee of Trans-Lux’s board of directors in May 2011, and followed that with a letter to the SEC. Kramer claims that he began receiving letters of reprimand within hours of sending his communication to the audit committee and that a loss of support and stripping of job responsibilities followed. In July 2011, Trans-Lux announced that July 22, 2011, would be the last day of employment for all human resources personnel, including Kramer.

Kramer sued under, among other statutes, Dodd-Frank’s whistleblower protection provisions, codified at 15 U.S.C. § 78u-6, alleging that he had been terminated in retaliation for reporting his concerns about the company’s pension plan.

Court Adopts Broad View of Dodd-Frank Whistleblower Protections and Their Applicability to Claims Based on Reporting a “Reasonable Belief” of Violations Under Sarbanes-Oxley

The Court described its task as seeking to “reconcile” the language of Dodd-Frank’s whistleblower protection provisions with the law’s narrow definition of a “whistleblower.” Dodd-Frank defines a “whistleblower” to mean “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities law to the Commission, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. § 78u-6(a)(6). The law also protects covered “whistleblowers” from retaliation:

No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower –

  • in providing information to the Commission in accordance with this section;
  • in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
  • in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002, the Securities Exchange Act of 1934, including section 10A(m) of such Act, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

15 U.S.C. § 78u-6(h)(1)(A) (internal citations omitted).

In the Final Rule, the SEC prescribes that a whistleblower must submit the information online, through its website, or by mailing or faxing a Form TCR (Tip, Complaint, or Referral). 17 C.F.R. § 240.21F-9(a). Mailing a regular letter, as Kramer did, is insufficient, and the Court so found.

Trans-Lux argued that only those who both met the definition and satisfied one of the enumerated list of protected activities could qualify for protection—in other words, “that the retaliation provision applies only to those individuals who are both (a) a whistleblower under section 78u-6(a)(6), and (b) have engaged in one of the protected activities listed in section 78u-6(h)(1)(A).” Kramer argued that such an interpretation would effectively moot the third category of protected activity under Dodd-Frank, and urged instead that “those who make disclosures that are required or protected under Sarbanes-Oxley or the Securities Exchange Act of 1934 are clearly entitled to protection against whistleblower retaliation, even if those individuals do not otherwise fall under the definition of ‘whistleblower’ found in section 78u-6(a)(6).”

The Court’s analysis began by inquiring whether the language of Dodd-Frank was ambiguous, allowing reference to the Final Rule and judicial deference to it. Noting that Trans-Lux’s interpretation of the law “would dramatically narrow the available protections” to whistleblower plaintiffs—a result that “seems inconsistent with the goal of the Dodd-Frank Act”—the Court held that it was not “unambiguously clear that the Dodd-Frank Act’s retaliation provision only applies to those individuals who have provided information relating to a securities violation to the Commission, and have done so in a manner established by the Commission.”

The Court then turned to the Final Rule and its “attempt to clarify the interplay” between the law’s two provisions:

For the purposes of the retaliation protections afforded by Section 21F(h)(1) of the Exchange Act (15 U.S.C. 78u-6(h)(1)), you are a whistleblower if:

  1. You possess a reasonable belief that the information you are providing relates to a possible securities law violation (or, where applicable, to a possible violation of the provisions set forth in 18 U.S.C. 1514A(a) [Sarbanes-Oxley]) that has occurred, is ongoing, or is about to occur, and;
  2. You provide that information in a manner described in Section 21F(h(1)(A) of the Exchange Act (15 U.S.C. 78u-6(h)(1)(A)).

17 C.F.R. § 240.21F-2(b)(1).

Trans-Lux argued that the SEC’s rule would allow whistleblower plaintiffs to pursue what would have been Sarbanes-Oxley retaliation claims under Dodd-Frank instead, which the company urged would be an improper result “because the Dodd-Frank Act has a longer statute of limitations than Sarbanes-Oxley, and no exhaustion requirement.” The Court rejected these concerns, however, reasoning that “the Dodd-Frank Act appears to have been intended to expand upon the protections of Sarbanes-Oxley, and thus the claimed problem is no problem at all.” The Court therefore adopted the Final Rule as “a permissible construction of the Dodd-Frank Act” that it was bound to follow.

The Court next rejected Trans-Lux’s argument that Kramer had not engaged in protected activity because his letter to the SEC was not submitted “in a manner established, by rule or regulation, by the Commission.” That requirement, the Court reasoned, “does not apply to section 78u-6(h)(1)(A). Instead, [under the Final Rule] an individual must only allege that he possessed a ‘reasonable belief that the information’ provided ‘relates to a possible securities law violation,’ and that he provided the information in a manner described in section 78u-6(h)(1)(A).” The Court did not remark on, nor seem troubled by, the fact that the cited statutory provision does not “describe” a “manner” of providing information as the Final Rule clearly specifies: “online, through its website, or by mailing or faxing a Form”; the cited statutory section describes the protected activity, not the means to perfect a claim.

Finally, the Court rejected Trans-Lux’s argument that Kramer had not engaged in protected activity because his disclosures were not “required” under Sarbanes-Oxley. The Court noted that Dodd-Frank protects disclosures that are either “required or protected under the Sarbanes-Oxley Act of 2002,” and therefore the statute “indicates that disclosures that are protected under Sarbanes-Oxley’s whistleblower provision are also protected under the Dodd-Frank-Act’s whistleblower provision.”

Finding that Kramer’s lawsuit sufficiently pleaded that Kramer provided information he “reasonably believed” evidenced a “possible” violation of the securities law, the Court held that his disclosures—both internally to Trans-Lux and externally to the SEC—were protected under Sarbanes-Oxley and therefore also protected under Dodd-Frank. The Court denied the motion to dismiss his Dodd-Frank retaliation claim.

Kramer Expands Scope of Dodd-Frank Whistleblower Protections and May Lead to an Increase in Claims of Retaliation Against Employers

The Court’s decision in Kramer represents an expansive view of the whistleblower protections afforded employees under Dodd-Frank. Of particular significance, the decision may provide employees whose retaliation claims might have been procedurally barred under Sarbanes-Oxley an opportunity to salvage those claims under Dodd-Frank’s much longer statute of limitations that extends to at least six years, compared to 180 days for claims brought directly under Sarbanes-Oxley—as amended by Dodd-Frank.

In our July 5, 2012, posting, District Court Holds That Dodd-Frank Whistleblower Protection Does Not Have Extraterritorial Reach--Longstanding Presumption Against Extraterritoriality May Also Apply to Other Statutes, we noted that a District Court in Texas reserved judgment on the obvious conflict between Dodd-Frank’s express statutory definition of “whistleblower” and broad claims invoking Dodd-Frank to qualify for whistleblower protection. We remarked that the court did not express its own opinion on the issue and left that question open for another day or another court. Now, another court has weighed in, but it remains to be seen whether the expansive view of Dodd-Frank’s whistleblower protections espoused by the Final Rule and the Kramer decision will win acceptance with other district courts or survive Circuit Court of Appeals review. For the immediate future, at least, the decision in Kramer may lead to an increase in whistleblower retaliation lawsuits—as the lowest common denominator of Dodd-Frank whistleblower protections is explored.

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