Morrison, Whistleblowers And Limits On Federal Authority

Morrison, Whistleblowers And Limits On Federal Authority

The fundamental question in National Federation of Independent Business v. Sebelius, Secretary of HHS, No. 11-393 (S.Ct. June 28, 2012), which addressed the constitutionality of the Affordable Care Act, was the scope of federal power within the United States. There the Court fashioned new limits on the reach of the commerce clause while upholding the Act based on the federal government's taxing authority.

Two years earlier the Court addressed the reach of federal power outside the United States in Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010). There the Court held in a so-called foreign cubed case that while the Exchange Act vested courts with the judicial power or jurisdiction to hear extraterritorial claims, the reach of antifraud Section 10(b) was limited to the shores of the U.S. The Court reasoned first that the presumption against extraterritoriality delimits the reach of a federal statute unless it specifically states it extends outside the U.S. If it does not so state, it does not have extraterritorial application. Second, the Court looked to the focus of the statute to confirm the scope of the statute's reach. Since Section 10(b) is concerned with the purchase and sale of securities and says nothing about extraterritorial effect, the Section has none. The teachings of Morrison extend beyond Exchange Act Section 10(b) to all federal statutes as the High Court made clear. Read together with National Federation, the two decisions help define the limits of federal authority.

Now Morrison has delimited the reach of the whistleblower protections incorporated in the Dodd-Frank Wall Street Reform Act. That Act provided new incentives to whistleblowers to cooperate with the SEC which are widely expected to provide the agency with a bounty of information about corporate wrong doing. This may be particularly true in view of the Commission's controversial rules implementing the whistleblower provisions which do not require reporting the information to the company prior to going to the SEC. The statute also creates a private cause of action for whistleblower who are subject to retaliatory discharge.

The court in Asadi v. G.E. Energy (USA), LLC, Civil Action No. 4:12-345 (S.D. Tx. Decided June 28, 2012) relied on Morrison to dismiss a suit by a whistleblower who claimed retaliatory discharge. The case was brought by Khaled Asaid, a U.S. based employee of GE Energy who was on temporary relocation to Amman, Jordan. His position required him to coordinate with Iraq's governing bodies to secure and manage energy service contacts for GE. After observing conduct which he believed might violate the Foreign Corrupt Practices Act he reported the matter to his supervisor. Subsequently, he received a surprisingly negative performance review and was pressured to resign. This ended with his termination on June 24, 2011. The e-mail terminating his employment stated in part that "as an at-will employee, as allowed under U.S. law" and that "[a]s a U.S. -based employee you will be terminated in the U.S. . ."

Mr. Asadi brought suit under the Dodd-Frank whistleblower provisions. The court granted the defendant's motion to dismiss based on Morrison. Initially, the court notes that there is in fact a question as to whether Mr. Asaid is a protected whistleblower. That term is defined in Dodd-Frank to mean those who furnish information to the SEC. Here Mr. Asadi only reported to the company, not the Commission.

Nevertheless, Mr. Asadi claimed to be covered by the Act. He argued that the provisions providing protection from retaliation are broader than the definition of whistleblower. The two decisions which have considered this question agree with this proposition, although the holdings are not identical. Egan v. TradingScreen, Inc., 2011 WL 1672066 (S.D.N.Y. May 4, 2011)(holding that the anti-retaliation provisions apply to disclosures not made to the SEC if they are made to a federal regulatory or law enforcement agency, members of or a committee of Congress, or a person with supervisory authority over the employee with authority to investigate, discover or terminate misconduct); Nollner v. Souther Baptist Convention, Inc., 2012 WL 1108923, at * 10 (M.D. Tenn. April 3, 2012)(holding that the apparently contradictory provisions can be read to include reports to the SEC or if the disclosures were disclosures under Sarbanes-Oxley, the Exchange Act, 18 U.S. C. Section 1513(e) or other laws or regulations subject to the jurisdiction of the SEC).

Here the Court found it unnecessary to resolve the question of whether plaintiff was a protected whistleblower in view of Morrison. First, considering the text of the statute in view of the presumption against extraterritoriality, it is clear that the it has none. There is noting in the section which indicates that Congress intended the protections to have extraterritorial reach. While the e-mail terminating plaintiff references U.S. law and actions, as Morrison states, it is a rare case which does not have some U.S. connection.

Second, examination of Dodd-Frank confirms the fact that the sections have no extraterritorial reach. Section 929P specifically addresses the extraterritorial scope of the Act in a limited context. There the Section gives the district courts jurisdiction over extraterritorial claims in the limited context of certain enforcement actions brought by the SEC or the Department of Justice. The fact that Congress chose to specifically include extraterritorial reach in one provision but not others confirms the fact that the whistleblower protection sections have none. That point is bolstered by the fact that Congress chose not to provide for private rights of action in Section 929P but only to requested that the SEC conduct a study of the question. Accordingly, the court dismissed the suit.

Lexis.com subscribers can access Lexis enhanced versions of the Nat'l Fed'n of Indep. Bus. v. Sebelius, 2012 U.S. LEXIS 4876 (U.S. June 28, 2012), Morrison v. Nat'l Austl. Bank Ltd., 130 S. Ct. 2869 (U.S. 2010),
Asadi v. G.E. Energy (USA), LLC, 2012 U.S. Dist. LEXIS 89746 (S.D. Tex. June 28, 2012), Egan v. Tradingscreen, Inc., 2011 U.S. Dist. LEXIS 47713 (S.D.N.Y. May 4, 2011), and Nollner v. Southern Baptist Convention, Inc., 2012 U.S. Dist. LEXIS 46484 (M.D. Tenn. Apr. 3, 2012) decisions with summaries, headnotes, and Shepard's.

For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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