How should the law protect employees who report bona fide evidence of violations, without also giving undue leverage to others who assert bad faith claims?
This policy tradeoff underlies the current split in the federal circuits over whether the Dodd-Frank Act’s whistleblower protections extend to people who report internally but do not contact the SEC. In Asahi v. G.E. Energy (USA) (PDF: 275 KB), the Fifth Circuit held that Dodd-Frank Act protects only people who report to the SEC; in Berman v. Neo@Ogilvy LLC (PDF: 17.3 MB), the Second Circuit, agreeing with the Commission, extended the Act’s protections to internal reporters as well.
The issue in these cases was not whether internal reporters enjoy any whistleblower protections at all. The Sarbanes-Oxley Act provides baseline coverage for all public company employees whether or not they report to the SEC. At issue in Asahi and Berman was a more limited question: whether internal reporters qualify for the additional Dodd-Frank Act remedies (a longer statute of limitations, double back pay, and the right to proceed directly to court without first filing a complaint with the Department of Labor).
To illustrate the tradeoff, imagine an employee who makes a good faith internal report of a potential violation and then experiences an adverse job action. Because the employee has not approached the SEC, he or she has no remedy under Asahi. This loss of remedy is a social cost because we want to protect bona fide informants. But the magnitude of the cost is limited by the fact that the informant loses only her Dodd-Frank remedies; she still has recourse to the whistleblower protections of the Sarbanes-Oxley Act and thus is entitled to reinstatement, back pay, and other relief if her claim of retaliation proves out.
Now imagine an employee who is disaffected, suspicious, and vindictive. She complains internally about a purported violation but her employer, after investigation, correctly concludes that the allegation lacks merit. Later the employee suffers an adverse job action for reasons having nothing to do with her complaint. The Berman rule gives this employee hold-up leverage in a subsequent lawsuit against the employer. With access to the Dodd-Frank Act whistleblower remedies, she can proceed directly to court and thus gain access to a potentially favorable factfinder. She can threaten to extract larger monetary compensation than would be available under the Sarbanes-Oxley Act. And she might be able to state a Dodd-Frank retaliation claim even if she knew or should have known that her allegations were unfounded when she made them. The Sarbanes-Oxley Act requires that an employee have a “reasonable belief” in the truth of her allegations; but no such reasonable belief requirement appears in the analogous Dodd-Frank rule.
These costs of bad-faith claims would not be absent under Asahi, but they would be lower in magnitude. The employee would need to present her concerns in a timely fashion to the SEC – a substantial deterrent against baseless post hoc claims. Moreover, if an employee did present unfounded allegations to the SEC, the Commission would refuse to act, a circumstance that might enhance the employer’s bargaining position in subsequent whistleblower litigation.
In an ideal world, we would like to know which approach imposes the lowest social cost: the Asahi rule, which reduces the danger of opportunistic claims but also denies enhanced protections for bona fide internal reports; or the Berman rule, which provides greater protection for bona fide internal reports but also increases incentives for opportunistic claims.
In the real world, we lack an instrument that can reliably measure these effects. Nevertheless, even without the benefit of precise information, clear thinking about the cost tradeoffs might sometimes produce better outcomes than would be generated through intuition or doctrinal analysis alone.
Geoffrey Parsons Miller is the Stuyvesant Comfort Professor at NYU Law School, co-director of the law school’s Program on Corporate Compliance and Enforcement, and author of “The Law of Governance, Risk Management and Compliance” (Wolters Kluwer 2014).
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