Dodd-Frank Anti-Retaliation Provisions Do Not Protect Overseas Whistleblowers

Dodd-Frank Anti-Retaliation Provisions Do Not Protect Overseas Whistleblowers

 In the latest fiscal year report of the SEC Office of the Whistleblower, the agency reported that as of the end of the 2013 fiscal year it had received  a total of 6,573 whistleblower reports since the the Dodd-Frank whistleblower program’s inception. These figures include not only domestic whistleblower reports but also reports from a total of sixty-eight different countries. During fiscal year 2013, there were 404 whistleblower reports from outside the U.S. representing nearly 12% of all reports during the year. Clearly, whistleblower reports from non-U.S. countries have represented a significant part of the whistleblower program, and foreign whistleblowers have been drawn to the program.

However, based on a recent Second Circuit decision, prospective foreign whistleblowers thinking about making a whistleblower report had better be prepared to watch out for themselves, as according to the appellate court’s August 14, 2014 decision in Liu Meng-Lin v. Siemens AG (here), the Dodd-Frank Act’s whistleblower anti-retaliation protections do not apply extraterritorially — that is, they do not protect whistleblowers outside the U.S. [an enhanced version of this opinion is available to lexis.com subscribers] This ruling obviously could dampen the interest of prospective foreign tipsters from making whistleblower reports.

In this action, a Taiwanese former compliance officer of Siemen’s Chinese healthcare subsidiary alleged that he had been retaliated against for making a whistleblower report. The claimant filed the claim in reliance on provisions of the Dodd-Frank Act that prohibit employers from retaliating against whistleblower employees who make reports protected by the Act. The plaintiff allegedly had discovered that employees of the Chinese subsidiary were making improper payments to officials in North Korea and China in connection with medical equipment sales in those countries. The plaintiff alleged that after reporting this conduct to superiors through internal company procedures, he was demoted and ultimately fired. Two months after being fired, the plaintiff reported the allegedly corrupt conduct to the SEC.

The plaintiff filed an action alleging that the employment actions taken against him violated the Dodd-Frank Act’s anti-retaliation provisions. Siemens moved to dismiss the plaintiff’s action, arguing that the anti-retaliation provisions do not apply extraterritorially and that all of the key actions involved here had taken place outside the United States. The district court granted the defendant’s motion to dismiss and the plaintiff appealed.

In an August 14, 2014 opinion written by Judge Gerard E. Lynch, a three-judge panel of the Second Circuit affirmed the district court’s dismissal of the action. The Court said, in reliance on the U.S. Supreme Court’s Morrison decision, that in the absence of clear congressional intent to the contrary a statute is presumed, to apply only domestically, and “because there is no evidence that the anti-retaliation provision is intended to have extraterritorial reach, we conclude that that provision does not apply extraterritorially.” The Court said further that because the plaintiff “was a non-citizen employed abroad by a foreign company, and that all events allegedly giving rise to liability occurred outside the United States, applying the anti-retaliation provisions to these facts would constitute an extraterritorial application.”

The Court did not reach the question whether or not the protections of the anti-retaliation provisions apply to protect whistleblowers that make their reports internally. There has been a split among various courts on the question of whether or not the provisions protect internal whistleblowers. (For example, in July 2013, the Fifth Circuit held that the anti-retaliation provisions only protect those that make reports directly to the SEC. [enhanced version])  The appellate court said only that it “need not reach” that question given its ruling on extraterritoriality.

The Second Circuit’s decision clearly will have an impact on prospective whistleblowers outside the United States. Many may hesitate to make reports out of fear of retaliation.

Just the same, the Second Circuit’s decision left many questions unanswered, as discussed in an August 14, 2014 Law 360 article entitled “2nd Circ. Ruling on Overseas Tipsters Dodges Big Issues” (here, subscription required). This case arguably was straightforward, since every aspect of the case took place outside   the U.S. and there were no U.S. connections involved. The Second Circuit’s ruling gives no indication of what the impact on its ruling might have been if the whistleblower were a U.S. citizen or if the whistleblower report had involved a U.S. company operating overseas, or if any of the alleged misconduct had taken place inside the U.S. These issues will have to be addressed in future cases. In the meantime, it seems probable that the seeming enthusiasm for whistleblower reports from outside the U.S. will be dampened.

I will say that as I have traveled overseas in recent years, I have heard concerns about the extent of whistleblower reports from outside the U.S. and the extent to which this whistleblowing activity might lead to enforcement action or claims against the companies involved  in their home countries. These concerns may be relieved to a certain extent by the Second Circuit’s ruling. If prospective overseas whistleblowers know they will not have the benefit of anti-retaliation provisions, there likely will be fewer whistleblower reports, reducing the  risk of the feared possible enforcement action or follow-on claim activity in other jurisdictions.

Another concern I have heard as I have travelled around the world is that observers in other countries are alarmed by the extent to which U.S. regulators are willing to try to assert their regulatory authority outside of the U.S. border, a phenomenon about which I recently wrote here. However, this case, and in the Second Circuit’s recent opinion in the Porsche case, about which I commented in an accompanying blog post, seem to reflect the U.S. courts straining to avoid the extraterritorial application of the U.S. laws. While there may be very good reasons for concern about U.S. regulators’ cross-border assertion of their authority, there are also important cross-currents working against the extraterritorial assertion of U.S. laws.

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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