Q&A with Joe E. Edwards
Dodd-Frank whistle-blower ruling may benefit employers
Q: The U. S. Court of Appeals for the 5th Circuit recently found the Dodd-Frank Act's anti-retaliation provision doesn't protect employees who report alleged fraud internally to their employers. Such protection requires the employee to disclose the allegedly fraudulent conduct to the Securities and Exchange Commission (SEC). What are the specifics of this case?
A: In Asadi v. GE Energy USA LLC, Khaled Asadi, a former GE Energy USA LLC executive, reported allegedly fraudulent conduct involving a possible securities law violation to his employer. Asadi was fired thereafter and filed suit in February 2012. Asadi, who'd served as GE's Iraq executive from 2006 to 2011 and helped GE coordinate with Iraq's central government, learned that GE had hired an individual who was “closely associated” with Iraq's senior deputy minister of electricity. Asadi alleged that the hiring had occurred to provide GE with a competitive advantage in its talks to secure a contract with Iraq's electricity agency. Asadi reported his concerns to his immediate supervisor and to GE's ombudsman for the region. Asadi subsequently received a negative performance review and was fired in 2011.
The trial court dismissed Asadi's complaint because U.S. whistle-blower legislation didn't apply overseas. On appeal, the 5th Circuit questioned whether Asadi could even count as a whistle-blower, because he had limited his reporting to internal channels instead of reporting to the SEC. Under Dodd-Frank, a whistle-blower is any individual who discloses potential wrongdoing to the SEC. A separate anti-retaliation provision in Dodd-Frank allows whistle-blowers to sue their employers for retaliation in several situations, including if their activity is protected by the Sarbanes-Oxley Act. However, the Sarbanes-Oxley Act contains a much shorter period of time within which potential wrongdoing must be disclosed to the Department of Labor to qualify for whistle-blower protections.
Q: How did this ruling differ from previous rulings/regulations?
A: The SEC had previously addressed how these two provisions should be read together by issuing a final regulation. That regulation allows the term “whistle-blower” to include individuals who report internally to their employers and those individuals who report to the SEC. Five federal district courts also had ruled on the two provisions and followed the SEC's final regulatory guidance. The 5th Circuit disagreed.
Q: What impact will this have on employers and employees?
A: As the first federal appellate court to address this, the 5th Circuit's decision will be persuasive. However, since this decision is the first to take a path distinct from that of the SEC, other federal appellate courts may disagree. If so, differing federal appellate decisions may be resolved by the U.S. Supreme Court. Employers will strongly favor the 5th Circuit's ruling, as it will clearly diminish the wave of frivolous anti-retaliation suits.
Q: When is this issue expected to be resolved, and what are the next steps?
A: First, attorneys representing employees will now advise that alleged wrongdoing should be reported internally and to the SEC. Some whistle-blowers may choose to report alleged wrongdoing directly to the SEC, rather than internally to their employers. If no reporting has been made to the SEC of alleged wrongdoing, a claim under Dodd-Frank will be less attractive to attorneys seeking recourse for clients who fail to meet the requirements of the Sarbanes-Oxley Act. Sarbanes-Oxley requires, among other things, that whistle-blowers report alleged wrongdoing to the Department of Labor within a 180-day statute of limitations. In contrast, Dodd-Frank's statute of limitations is 10 years. The Asadi case may well limit the number of Dodd-Frank claims and make relief under Dodd-Frank and Sarbanes-Oxley more equivalent.
PAULA BURKES, BUSINESS WRITER