Paul Somers v. Digital Realty Trust, Inc. , 850 F.3d 1045 ( 2017 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
PAUL SOMERS, No. 15-17352
Plaintiff-Appellee,
D.C. No.
v. 3:14-cv-05180-EMC
DIGITAL REALTY TRUST INC.,
a Maryland corporation; OPINION
ELLEN JACOBS,
Defendants-Appellants.
Appeal from the United States District Court
for the Northern District of California
Edward M. Chen, District Judge, Presiding
Argued and Submitted November 16, 2016
San Francisco, California
Filed March 8, 2017
Before: Mary M. Schroeder, Kim McLane Wardlaw, and
John B. Owens, Circuit Judges.
Opinion by Judge Schroeder;
Dissent by Judge Owens
2 SOMERS V. DIGITAL REALTY TRUST
SUMMARY*
Dodd-Frank Act
The panel affirmed the district court’s denial of the
defendant’s motion to dismiss a whistleblower claim brought
under the Dodd-Frank Act’s anti-retaliation provision.
Following the approach of the Second Circuit, rather than
the Fifth Circuit, the panel held that, in using the term
“whistleblower,” Congress did not intend to limit protections
to those who disclose information to the Securities and
Exchange Commission. Rather, the anti-retaliation provision
also protects those who were fired after making internal
disclosures of alleged unlawful activity under the Sarbanes-
Oxley Act and other laws, rules, and regulations. The panel
agreed with the Second Circuit that, even if the use of the
word “whistleblower” in a last-minute addition to the anti-
retaliation provision created uncertainty, an SEC regulation
resolved any ambiguity, and was entitled to deference.
Dissenting, Judge Owens agreed with the Fifth Circuit.
He wrote that King v. Burwell, 135 S. Ct. 2480 (2015)
(holding that terms can have different operative consequences
in different contexts), on which the majority and the Second
Circuit relied in part, should be quarantined to the specific
facts of that case.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
SOMERS V. DIGITAL REALTY TRUST 3
COUNSEL
Brian T. Ashe (argued) and Tamara H. Fisher, Seyfarth Shaw
LLP, San Francisco, California; Kyle A. Petersen, Seyfarth
Shaw LLP, Chicago, Illinois; for Defendants-Appellants.
Stephen F. Henry, Esq. (argued), Berkeley, California, for
Plaintiff-Appellee.
Stephen G. Yoder (argued), Senior Litigation Counsel; Anne
K. Small, General Counsel; Sanket J. Bulsara, Deputy
General Counsel; Michael A. Conley, Solicitor; Thomas J.
Karr, Assistant General Counsel; Security and Exchange
Commission, Washington D. C.; as and for Amicus Curiae.
OPINION
SCHROEDER, Circuit Judge:
INTRODUCTION
This appeal presents an issue of securities law that has
divided the federal district and circuit courts. It results from
a last-minute addition to the anti-retaliation protections of the
Dodd-Frank Act (“DFA”) to extend protection to those who
make disclosures under the Sarbanes-Oxley Act and other
laws, rules, and regulations. 15 U.S.C. § 78u-6(h)(1)(A)(iii).
The underlying issue is whether, in using the term
“whistleblower,” Congress intended to limit protections to
those who come within DFA’s formal definition, which
would include only those who disclose information to the
Securities and Exchange Commission (“SEC”). See 15
U.S.C. § 78u-6(a)(6). If so, it would exclude those, like the
4 SOMERS V. DIGITAL REALTY TRUST
plaintiff in this case, who were fired after making internal
disclosures of alleged unlawful activity.
The Fifth Circuit was the first to weigh in on the question
and strictly applied DFA’s definition of “whistleblower” to
the later anti-retaliation provision, so as to require dismissal
of the plaintiff’s action in that case because he did not make
his disclosures to the SEC. Asadi v. G.E. Energy (USA),
L.L.C., 720 F.3d 620, 621 (5th Cir. 2013). It therefore
rejected the SEC’s regulation adopting a contrary
interpretation. Id. at 630.
The Second Circuit, viewing the statute itself as
ambiguous, applied Chevron deference to the SEC’s
regulation. Berman v. Neo@Ogilvy LLC, 801 F.3d 145, 155
(2d Cir. 2015). That regulation, in effect, interprets the
provision to extend protections to all those who make
disclosures of suspected violations, whether the disclosures
are made internally or to the SEC. 17 C.F.R. § 240.21F-2.
The district court in this case followed the Second
Circuit’s approach, denied Defendant’s motion to dismiss,
and certified an interlocutory appeal. We agree with the
district court that the regulation is consistent with Congress’s
overall purpose to protect those who report violations
internally as well as those who report to the government.
This intent is reflected in the language of the specific
statutory subdivision in question, which explicitly references
internal reporting provisions of Sarbanes-Oxley and the
Securities Exchange Act of 1934 (“Exchange Act”). 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
SOMERS V. DIGITAL REALTY TRUST 5
internal disclosures as well as to those who make disclosures
to the SEC. We therefore affirm.
BACKGROUND
Plaintiff-Appellee, Paul Somers, was employed as a Vice
President by Defendant-Appellant, Digital Realty Trust, Inc.
(“Digital Realty”), from 2010 to 2014. According to
Somers’s complaint in district court, he made several reports
to senior management regarding possible securities law
violations by the company, soon after which the company
fired him. Somers was not able to report his concerns to the
SEC before Digital Realty terminated his employment.
Somers subsequently sued Digital Realty, alleging
violations of various state and federal laws, including Section
21F of the Exchange Act. That section, entitled “Securities
Whistleblower Incentives and Protection,” includes the anti-
retaliation protections created by DFA. Digital Realty sought
to dismiss the DFA claim on the ground that, because Somers
only reported the possible violations internally and not to the
SEC, he was not a “whistleblower” entitled to DFA’s
protections.
The district court, in a published opinion, denied Digital
Realty’s motion to dismiss the DFA claim. The court
conducted an extensive analysis of the statutory text, DFA’s
legislative history, and the procedural and practical
implications of harmonizing the narrow definition of
“whistleblower” with the broad protections of the anti-
retaliation provision. Somers v. Dig. Realty Tr. Inc., 119 F.
Supp. 3d 1088, 1100–05 (N.D. Cal. 2015). The court
observed that “[a]t bottom, it is difficult to find a clear and
simple way to read the statutory provisions of Section 21F in
6 SOMERS V. DIGITAL REALTY TRUST
perfect harmony with one another.” Id. at 1104. Having
analyzed the tension between the definition and anti-
retaliation provisions, the district court deferred to the SEC’s
interpretation that individuals who report internally only are
nonetheless protected from retaliation under DFA. Id. at
1106. The district court certified the DFA question for
interlocutory appeal pursuant to 28 U.S.C. § 1292(b), id. at
1108, and we subsequently granted Digital Realty’s Petition
for Permission to Appeal.
DISCUSSION
The case must be seen against the background of twenty-
first century statutes to curb securities abuses. Congress
enacted the Sarbanes-Oxley Act in 2002, following a major
financial scandal. Its purpose was “[t]o safeguard investors
in public companies and restore trust in the financial markets
following the collapse of Enron Corporation.” Lawson v.
FMR LLC, 134 S. Ct. 1158, 1161 (2014). As a key part of its
safeguards, Sarbanes-Oxley requires internal reporting by
lawyers working for public companies. See 15 U.S.C. §7245.
This is in addition to internal reporting by auditors, which
was already mandated by the Exchange Act. See 15 U.S.C.
§ 78j-1(b). Further, Sarbanes-Oxley requires that companies
maintain internal compliance systems that include procedures
for employees to anonymously report concerns about
accounting or auditing matters. See 15 U.S.C. § 78-j-1(m)(4),
7262. It also provides protections to these and other
“whistleblower” employees in the event that companies
retaliate against them. 18 U.S.C. § 1514A(a). Sarbanes-
Oxley expressly protects those who lawfully provide
information to federal agencies, Congress, or “a person with
supervisory authority over the employee.” Id.
SOMERS V. DIGITAL REALTY TRUST 7
Like Sarbanes-Oxley, DFA was passed in the wake of a
financial scandal—the subprime mortgage bubble and
subsequent market collapse of 2008. See Samuel C. Leifer,
Note, Protecting Whistleblower Protections in the
Dodd-Frank Act, 113 MICH. L. REV. 121, 129–30 (2014)
(discussing the mortgage crisis and Congress’s response). In
enacting DFA, Congress said the main purposes included
“promot[ing] the financial stability of the United States by
improving accountability and transparency in the financial
system” and “protect[ing] consumers from abusive financial
services practices.” Pub. L. No. 111-203, 124 Stat. 1376,
1376 (2010). DFA provided new incentives and employment
protections for whistleblowers by adding Section 21F to the
Securities Exchange Act of 1934. Section 21F defines a
whistleblower as, “any individual who provides, or 2 or more
individuals acting jointly who provide, information relating
to a violation of the securities laws to the Commission, in a
manner established, by rule or regulation, by the
Commission.” 15 U.S.C. § 78u-6(a)(6). This definition thus
describes only those who report information to the SEC.
The anti-retaliation provision in question in this case is
found in a later subsection of Section 21F. It provides broad
protections and states:
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—
(i) in providing information to the Commission in
accordance with this section;
8 SOMERS V. DIGITAL REALTY TRUST
(ii) 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
(iii) in making disclosures that are required or
protected under the Sarbanes-Oxley Act of
2002 (15 U.S.C. 7201 et seq.), this chapter,
including section 78j-1(m) of this title, 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). The issue in this case concerns
subdivision (iii), which gives whistleblower protection to all
those who make any required or protected disclosure under
Sarbanes-Oxley and all other relevant laws.
Subdivision (iii) was added after the bill went through
Committee. There is no legislative history explaining its
purpose, but its language illuminates congressional intent. By
broadly incorporating, through subdivision (iii), Sarbanes-
Oxley’s disclosure requirements and protections, DFA
necessarily bars retaliation against an employee of a public
company who reports violations to the boss, i.e., one who
“provide[s] information” regarding a securities law violation
to “a person with supervisory authority over the employee.”
18 U.S.C. § 1514A(a). Provisions of Sarbanes-Oxley and the
Exchange Act mandate internal reporting before external
reporting. Auditors, for example, must “as soon as
practicable, inform the appropriate level of management” of
illegal acts, and only after such internal reporting may
auditors bring their concerns to the SEC. 15 U.S.C. § 78j-
1(b). Leaving employees without protection for that required
SOMERS V. DIGITAL REALTY TRUST 9
preliminary step would result in early retaliation before the
information could reach the regulators. As the Second Circuit
noted, “[I]f subdivision (iii) requires reporting to the [SEC],
its express cross-reference to the provisions of Sarbanes-
Oxley would afford an auditor almost no Dodd-Frank
protection for retaliation because the auditor must await a
company response to internal reporting before reporting to the
Commission, and any retaliation would almost always
precede Commission reporting.” Berman, 801 F.3d at 151.
Sarbanes-Oxley likewise requires lawyers to report internally,
15 U.S.C. § 7245, and the SEC’s Standards of Professional
Conduct set forth only limited instances in which an attorney
may reveal client confidences to the SEC, 17 C.F.R.
§ 205.3(d)(2). The attorney would be left with little DFA
protection.
That DFA’s definitional provision describes
“whistleblowers” as employees who report “to the
Commission” thus should not be dispositive of the scope of
DFA’s later anti-retaliation provision. Terms can have
different operative consequences in different contexts. See
King v. Burwell, 135 S. Ct. 2480, 2489 (2015). The use of a
term in one part of a statute “may mean [a] different thing[]”
in a different part, depending on context. See id. at 2493 n.3.
This is true even where, as here, the statute includes a
definitional provision: “[Statutory d]efinitions are, after all,
just one indication of meaning—a very strong indication, to
be sure, but nonetheless one that can be contradicted by other
indications.” Antonin Scalia & Bryan A. Garner, Reading
Law: The Interpretation of Legal Texts 228 (2012). DFA’s
anti-retaliation provision unambiguously and expressly
protects from retaliation all those who report to the SEC and
who report internally. See King, 135 S. Ct. at 2493 n.3. Its
terms should be enforced.
10 SOMERS V. DIGITAL REALTY TRUST
Reading the use of the word “whistleblower” in the anti-
retaliation provision to incorporate the earlier, narrow
definition would make little practical sense and undercut
congressional intent. As the Second Circuit pointed out,
subdivision (iii) would be narrowed to the point of absurdity;
the only class of employees protected would be those who
had reported possible securities violations both internally and
to the SEC, when the employer—unaware of the report to the
SEC—fires the employee solely on the basis of the
employee’s internal report. See Berman, 801 F.3d at 151–52.
This reading is illogical. Employees are not likely to report
in both ways, but are far more likely to choose reporting
either to the SEC or reporting internally. See id. Reporting
to the SEC brings a higher likelihood of a problem being
addressed, along with an increased risk of employer
retaliation, whereas internal reporting may be less efficient
but safer. Id. As we have seen, Sarbanes-Oxley and the
Exchange Act prohibit potential whistleblowers—auditors
and lawyers—from reporting to the SEC until after they have
reported internally. Id. at 152–53. The anti-retaliation
provision would do nothing to protect these employees from
immediate retaliation in response to their initial internal
report. A strict application of DFA’s definition of
whistleblower would, in effect, all but read subdivision (iii)
out of the statute. We should try to give effect to all statutory
language. See Duncan v. Walker, 533 U.S. 167, 174 (2001)
(rejecting a statutory construction that would render a term
“insignificant, if not wholly superfluous”); see also Nat. Res.
Def. Council, Inc. v. Pritzker, 828 F.3d 1125, 1133 (9th Cir.
2016).
We recognize there is intercircuit disagreement. The
Second Circuit in Berman disagreed with the Fifth Circuit,
which had earlier applied the formal definition of
SOMERS V. DIGITAL REALTY TRUST 11
whistleblower to limit the scope of the anti-retaliation
provision. Asadi, 720 F.3d at 630. The Asadi decision
reasoned that if DFA protected the same conduct that
Sarbanes-Oxley did, then the Sarbanes-Oxley enforcement
scheme would be rendered moot or superfluous, on the theory
that no one would use it. See id. at 628–29. The Fifth Circuit
pointed out that Sarbanes-Oxley lacks DFA’s double damage
provision, has a shorter statute of limitations, and has more
extensive administrative requirements. Id. But as the SEC
has pointed out in its amicus brief in this case, DFA’s
enforcement scheme is not more protective in all situations
and would not swallow Sarbanes-Oxley because Sarbanes-
Oxley offers a different process from DFA. Sarbanes-Oxley
may be more attractive to the whistleblowing employee in at
least two important ways. First, Sarbanes-Oxley provides for
adjudication through administrative review, with the
Department of Labor taking responsibility for asserting the
claim on the whistleblower’s behalf. 18 U.S.C.
§ 1514A(b)(2). This procedure would likely be significantly
less costly and stressful for whistleblowers than having to file
an action in federal court, pursuant to DFA’s enforcement
scheme. See 15 U.S.C. § 78u-6(h)(1)(B). Second, while
DFA provides for awards of double back pay, 15 U.S.C.
§ 78u-6(h)(1)(C), Sarbanes-Oxley allows employees to
recover “all relief necessary to make the employee whole,”
including compensation for special damages, 18 U.S.C.
§ 1514A(c). An employee who has suffered more substantial
emotional injury than financial harm would likely be better
off with Sarbanes-Oxley’s allowance for special damages.
See Jones v. SouthPeak Interactive Corp., 777 F.3d 658, 672
(4th Cir. 2015) (joining the Fifth and Tenth Circuits in
concluding that emotional distress damages are available
under Sarbanes-Oxley as “special damages”). DFA’s
protection for internal reporting therefore does not render
12 SOMERS V. DIGITAL REALTY TRUST
Sarbanes-Oxley’s enforcement scheme superfluous. The
statutes provide alternative enforcement mechanisms.
For all these reasons, we conclude that subdivision (iii) of
section 21F should be read to provide protections to those
who report internally as well as to those who report to the
SEC. We also agree with the Second Circuit that, even if the
use of the word “whistleblower” in the anti-retaliation
provision creates uncertainty because of the earlier narrow
definition of the term, the agency responsible for enforcing
the securities laws has resolved any ambiguity and its
regulation is entitled to deference. In 2011, the SEC issued
Exchange Act Rule 21F-2, 17 C.F.R. § 240.21F-2, pursuant
to its rule-making authority under 15 U.S.C. § 78u-6(j). The
SEC’s rule in our view accurately reflects Congress’s intent
to provide broad whistleblower protections under DFA. The
Rule says that anyone who does any of the things described
in subdivisions (i), (ii), and (iii) of the anti-retaliation
provision is entitled to protection, including those who make
internal disclosures under Sarbanes-Oxley. They are all
whistleblowers. The Rule is quite direct: “For purposes of
the anti-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: . . . [y]ou provide that information in a
manner described in [the anti-retaliation provision] of the
Exchange Act (15 U.S.C. 78u-6(h)(1)(A)).” 17 C.F.R.
§ 240.21F-2.
The regulation accurately reflects congressional intent
that DFA protect employees whether they blow the whistle
SOMERS V. DIGITAL REALTY TRUST 13
internally, as in many instances, or they report directly to the
SEC. The district court correctly so recognized.
The judgment of the district court is AFFIRMED.
OWENS, Circuit Judge, dissenting:
I agree with the Fifth Circuit in Asadi v. G.E. Energy
(USA), L.L.C., 720 F.3d 620, 621 (5th Cir. 2013), and Judge
Jacobs’ dissent in Berman v. Neo@Ogilvy LLC, 801 F.3d
145, 155–60 (2d Cir. 2015), and therefore respectfully
dissent. Both the majority here and the Second Circuit in
Berman rely in part on King v. Burwell, 135 S. Ct. 2480
(2015), to read the relevant statutes in favor of the
government’s position. In my view, we should quarantine
King and its potentially dangerous shapeshifting nature to
the specific facts of that case to avoid jurisprudential
disruption on a cellular level. Cf. John Carpenter’s The
Thing (Universal Pictures 1982).