Dodd-Frank Amendment to Arbitrability of SOX Whistleblower Claims Cause a Stir

The Dodd-Frank Act is a sweeping piece of legislation, with reforms touching a wide array of topics, including arbitration.  Below are briefly discussed some of the interpretive issues which courts are currently struggling with.

I.                Scope of Whistleblower Protections

The Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), 15 U.S.C. 78aaa et seq. contained, among other things, two clauses which are relevant here.  First, it created a private right of action for whistleblower retaliation.  See 15 U.S.C. § 78u-6(h)(1)(A). 

The scope of this right of action remains uncertain.  Some courts have held that only individuals who have reported information to the SEC are covered by the whistleblower anti-retaliation provisions created by the Dodd-Frank Act.  See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013) (“Based on our examination of the plain language and structure of the whistleblower-protection provision, we conclude that the whistleblower-protection provision unambiguously requires individuals to provide information relating to a violation of the securities laws to the SEC to qualify for protection from retaliation under § 78u-6(h).”(emphasis in original)); Wagner v. Bank of Am. Corp., No. 12-cv-00381, 2013 U.S. Dist. LEXIS 101297, 2013 WL 3786643 (D. Colo. July 19, 2013) (“Ms. Wagner did not provide any information to the Commission, whether relating to a violation of the securities laws or otherwise, prior to her termination. Accordingly, she was not a ‘whistleblower’ as defined in this statute.”); Bank v. Apple, Inc. No. 13-cv-2977, 2013 U.S. Dist. LEXIS 149686, 2013 WL 7394596 (N.D. Cal. Sept. 27, 2013) (“Because plaintiff did not file a complaint to the SEC, he is not a ‘whistleblower’ under the Dodd-Frank Act.”)

However, the majority of courts to consider the issue have determined that the whistleblower protections apply regardless of whether the conduct was reported to the SEC prior to termination.  See Khazin v. TD Ameritrade Holding Corp., No. 13-4149 (D.N.J. March 11, 2014) (available at: http://scholar.google.com/scholar_case?case=1464737894098735581) (collecting authority and following what it characterizes as the rule endorsed by “most district courts addressing [the] issue”); Ellington v. Giacoumakis, No. 13-11791, 2013 U.S. Dist. LEXIS 148939, 2013 WL 5631046, at *3 (D. Mass. Oct. 16, 2013) (relying on SEC's comments to the Dodd-Frank Act in holding that “Congress intended that an employee terminated for reporting Sarbanes-Oxley violations to a supervisor or an outside compliance officer, and ultimately to the SEC, have a private right of action under Dodd-Frank whether or not the employer wins the race to the SEC's door with a termination notice”); Murray v. UBS Sec., LLC, No. 12-5914, 2013 U.S. Dist. LEXIS 71945, 2013 WL 2190084, at *4 (S.D.N.Y. May 21, 2013) (giving deference to the SEC's interpretation of the rule and holding that the anti-retaliation whistleblower provisions apply to individuals who report information to the SEC or provide disclosures that fall under § 78u-6(h)(1)(A)(iii));  Genberg v. Porter, 935 F. Supp. 2d 1094, 1106-07 (D. Colo. 2013); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 995 (M.D. Tenn 2012); Kramer v. Trans-Lux Corp., No. 11 Civ. 1424, 2012 U.S. Dist. LEXIS 136939, 2012 WL 4444820, at *6-7 (D. Conn. Sept. 25, 2012); Egan v. Tradingscreen, Inc., No. 10 Civ. 8202, 2011 U.S. Dist. LEXIS 47713, 2011 WL 1672066, at *6-7 (S.D.N.Y., May 4, 2011) (all holding that the Dodd-Frank Act’s whistleblower protections apply regardless of whether the employee reported information to the SEC). 

The SEC’s final rule, which was relied upon by the federal district court for the Southern District of New York, as well as other courts, in construing the reach of the Dodd-Frank Act’s whistleblower protections deals with whether SEC reporting is mandatory for whistleblower protections.  The rule explains that “the anti-retaliation whistleblower protection provisions of Dodd-Frank require Plaintiff to show that he either provided information to the SEC or that his disclosures fell under the four categories listed in Section 78u-6(h)(1)(A)(iii).” Murray, 2013 U.S. Dist. LEXIS 71945, 2013 WL 2190084 at *7 (emphasis in original); 76 Fed. Reg. 34300, 34304 (June 13, 2011) (available at: https://www.sec.gov/rules/final/2011/34-64545fr.pdf).  In brief, the SEC’s interpretation of the Dodd-Frank Act’s whistleblower protections encompasses individuals who make internal reports of violations, not only individuals who make complaints to the SEC.  In Khazin, the federal district court for the District of New Jersey held that the SEC’s rule is “a permissible construction of the statute” and, therefore, deferred to the SEC’s interpretation.  Khazin, No. 13-4149 (available at: http://scholar.google.com/scholar_case?case=1464737894098735581).

II.             Dodd-Frank and Pre-Dispute Arbitration Agreements

The Dodd-Frank Act amended the Securities Exchange Act of 1934, 15 U.S.C. § §  78a-78ll to create an Anti-Retaliation Provision.  Separately, Congress also amended 15 U.S.C. § 1514A, which contains the private right of action against retaliation which had been created by the Sarbanes-Oxley Act to append a prohibition against pre-dispute arbitration agreements.  The Anti-Retaliation Provision which the Dodd-Frank Act added to the Securities Exchange Act of 1934 did not include any provision analogous to the prohibition against pre-dispute arbitration agreements.  Although the language of the two causes of action is broadly similar, the remedy created by Dodd-Frank in the Securities Exchange Act provides for a greater recovery, and does not require that a claimant first file with OSHA. 

The provision added by the Dodd-Frank Act to the Sarbanes-Oxley Act prohibiting pre-dispute arbitration agreements is codified at 15 U.S.C. § 1514A(e), and reads:

(1) Waiver of rights and remedies.— The rights and remedies provided for in this section may not be waived by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement.
(2) Predispute arbitration agreements.— No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.

This provision makes pre-dispute arbitration agreements unenforceable to the extent that they would cover whistleblower claims brought under the provisions of the Sarbanes-Oxley Act.  The Dodd-Frank Act’s own whistleblower retaliation cause of action contains no similar provision.

Plaintiffs have argued that this provision should be read to apply to the Dodd-Frank Act’s whistleblower provisions as well due to the fact that the language of these provisions is otherwise largely parallel.  See Murray v. UBS Sec., LLC, No. 12-civ-5914, 2014 U.S. Dist. LEXIS 9696, 2014 WL 285093 at *29-*32 (S.D.N.Y. Jan. 27, 2014).  In support of this argument, plaintiffs note that the Dodd-Frank Act amended both the Sarbanes-Oxley Act and the Commodity Exchange Act to prohibit pre-dispute arbitration agreements.  However, the Securities Exchange Act was not included in this amendment.  While there is little authority on this issue, this argument appears to have been rejected by the few courts which have had occasion to consider it.  See Id.; Ruhe v. Masimo Corp., SACV 11-00734-CJC, 2011 U.S. Dist. LEXIS 104811, 2011 WL 4442790 at *4 (C.D. Cal. Sept. 16, 2011) (“Plaintiffs must arbitrate their claims brought pursuant to 15 U.S.C. § 78-u because the Dodd-Frank act does not render predispute arbitration agreements invalid or unenforceable for actions brought pursuant to this section.”)).  Similarly, the federal district court for the Southern District of New York compelled arbitration based on the “plain language” of the Securities Exchange Act – in other words, the lack of any provision voiding pre-dispute arbitration agreements.  Murray, 2014 U.S. Dist. LEXIS 9696; John Fullerton III and Jason Kaufman, The Enforceability of Predispute Arbitration Agreements With Respect to Dodd-Frank and SOX Whistleblower Retaliation Claims Continues to be a Puzzle, Lexology (March 27, 2014) (available at: http://www.financialservicesemploymentlaw.com/2014/03/27/the-enforceability-of-predispute-arbitration-agreements-with-respect-to-dodd-frank-and-sox-whistleblower-retaliation-claims-continues-to-be-a-puzzle/). 

The question of whether the Dodd-Frank Act permits pre-dispute arbitration agreements remains open.  However, the little authority extant on this question favors the enforceability of such an agreement.

III.           Retroactivity of the Dodd-Frank Amendments to the Sarbanes-Oxley Act Regarding Pre-Dispute Arbitration Agreements

Although the Sarbanes-Oxley Act was expressly amended to invalidate pre-dispute arbitration agreements to the extent that they apply to whistleblower claims brought under the Sarbanes-Oxley Act, courts are divided on the question of whether this amendment applies retroactively to void such agreements made prior to the effective date of the Dodd-Frank Act, or whether it should apply only to agreements entered into subsequent to the effective date of the Dodd-Frank Act.  See Bradley M. Nerderman, Note: Should Courts Apply Dodd-Frank’s Prohibition on the Enforcement of Pre-Dispute Arbitration Agreements Retroactively, 98 Iowa L. Rev. 2141 (July 2013) (available at: http://www.uiowa.edu/~ilr/issues/ILR_98-5_Nerderman.pdf) 

The rationale for refusing retroactive application relies on several points.  First, it is worth noting that “retroactivity is not favored by the law” absent a clear congressional intent to the contrary.  Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1998).  Assuming that there is no such clearly expressed intent, a court will evaluate whether retroactive application of the statute will “have a retroactive consequence in the disfavored sense of affecting substantive rights.”  Fernandez-Vargas v. Gonzales, 548 U.S. 30, 37 (2006). 

In most cases the dispute hinges on whether the court in question views arbitration as a jurisdictional or procedural right, or a substantive contractual right.  Courts have split on this issue.  Compare Pezza v. Investors Capital Corp., 767 F. Supp. 2d 225, 234 (D. Mass. 2011); Wong v. CKX, Inc., 890 F. Supp. 2d 411, 422 (S.D.N.Y. 2012) (both holding that the provisions prohibiting pre-dispute arbitration agreements apply retroactively); with Henderson v. Masco Framing Corp., No. 11-0088, 2011 U.S. Dist. LEXIS 80494, 2011 WL 3022535 (D. Nev. July 22, 2011); Weller v. HSBC Mrtg. Servs. Inc., No. 13-00185, 2013 U.S. Dist. LEXIS 130544, 2013 WL 4882758 at *4 (D. Colo. Sept. 11, 2013) (both holding that the provisions prohibiting pre-dispute arbitration agreements do not apply retroactively).

The federal district court for the District of Columbia addressed this issue in Taylor v. Fannie Mae, 839 F. Supp. 2d 259, 263 (D.D.C. 2012).  In Taylor, the Court denied retroactive effect to the provisions of the Sarbanes-Oxley Act which prohibit pre-dispute arbitration agreements.  Id.  After first determining that the Sarbanes-Oxley act was silent as to whether the provisions were intended to have retroactive effect, the Taylor court interpreted the provisions as having only prospective effect because it “fail[ed] to see how a retroactive application would not impair the parties’ rights possessed when they acted.”  Id. 

This, also, remains an open issue within the District of Columbia, and it is possible that other courts will not follow the decision in Taylor.  Of course it is also possible that the reasoning in Taylor will prevail and that a court would refuse to apply the amendment retroactively to invalidate arbitration agreements entered into prior to the effective date of the Dodd-Frank Act. 

Finally, assuming that the holding in Taylor prevails, an interesting question remains as to whether that determination will erode as time goes by.  To explain, it seems arbitrary that an employee of twenty years tenure, who signed a pre-amendment employment agreement should be bound to arbitrate claims decades after the United States Congress clearly stated that such agreements are void, while an employee of nineteen years tenure would not be so bound.  

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