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Digital Realty – Elevating Form Over Function to the Detriment of SEC Whistleblowers

The Supreme Court issued its opinion in Digital Realty Trust, Inc. v. Somers recently, holding that the anti-retaliation provisions of the Dodd-Frank Act and SEC rule 21F protect employees who report possible Securities Law violations internally only if they have also filed a Tip, Complaint, or Referral (“TCR”) report with the SEC whistleblower program.  In doing so, the Court elevated statutory text above the pragmatic concerns animating the statute and created what many employers will consider a perverse system.  Now even if an employee prefers to raise concerns internally, he or she must report them to the SEC to obtain protection against retaliation.


Dodd Frank Whistleblower Protections


The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 929-Z, 124 Stat. 1376, 1871 (2010) (codified at 15 U.S.C. § 78o) included two distinct programs applicable to whistleblowers:

  1. A rewards program offering 10-30% of the SEC’s recovery to those who submit tips (“Reward Program”), see 15 U. S. C. § 78u-6(b)(1)(A-B)
  2. Protections against retaliation based on the whistleblower’s attempts to report her concerns (“Protections”), see 15 U. S. C. § 78u-6(h).

The Protections within Dodd-Frank are very broad and prohibit retaliation against whistleblowers who

  1. provide information to the SEC,
  2. who assist or testify in SEC investigations, and
  3. who report (even internally) suspected violations of securities laws or regulations

15 U. S. C. § 78u-6(h)(1)(A).

Broad whistleblower protections make sense.  Congress wanted to encourage people to report potential securities fraud and making sure they don’t get fired for doing the right thing is an important part of that.  However, in the section dealing with the Reward Program, Dodd-Frank defines “whistleblower” as an individual who provides the SEC with information relating to a securities violation[1]. 15 U. S. C. § 78u–6(a)(6).  This also makes sense in the context of the Rewards Program – rewards should be limited to people that actually give information to the SEC.


Are the Protections Limited To “Tipsters”?


As written, Dodd-Frank says that the Protections apply to whistleblowers, who fall within one of the three categories above.  15 U. S. C. §78u-6(h)(1)(A).  If you apply the restrictive definition of whistleblower from § 78u–6(a)(6), it would mean that the broad protections apply only to people who filed a tip with the SEC.  To put it simply, does Dodd-Frank protect you if you fall within one of the Whistleblower Protection categories, but you did not provide any information to the SEC? This was the situation presented in Digital Realty.  Paul Somers reported concerns about securities violations to his bosses but did not provide any information to the SEC and was fired for doing so.

In a unanimous decision, the Supreme Court concluded that Dodd-Frank did not protect Paul Somers because he’d never reported his concerns to the SEC. The Court decided that Congress had intended to limit its protections to “tipsters” to encourage reporting to the SEC.  Id. at 11.


Dangerous Implications for Digital Realty


The decision is plainly bad for whistleblowers, but the practical result is also bad for employers.  Under the Supreme Court’s interpretation, if an employee intends to report a suspected securities violation internally, or has done so and fears imminent retaliation, she should report some information under SEC’s TCR program so as to qualify as a “whistleblower” eligible for the Whistleblower Protections.

In an upcoming post, we will discuss ways in which the SEC might extend the Whistleblower Protections to all whistleblowers. But until SEC remedies the effects of Digital Realty, any individual contemplating even internal reporting of securities violations should seek experienced legal counsel to help them ensure they are protected to the fullest extent of the law.

[1] The SEC has further defined Whistleblowers to include only individuals that submit information according to the SEC TCR process.  17 CFR § 240.21F-2(a).

Happy Fourth of July from Boston

The patriots who signed the Declaration of Independence over 235 years ago, concluded the Declaration with these words:

And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor“.

Had their bold experiment failed, they would have lost everything, including their lives.


As the long 4th of July holiday weekend is unfolding, let us remember the vision, sacrifice, faith, and hard work that have preserved our democracy, and appreciate the many acts, large and small, that contribute to the common good.


Among these are the courageous whistleblowers who at great personal cost come forward to tell “the government”, our government, that it is being cheated, by a defense contractor, a health care company, a bank, or others.   Sometimes they succeed, sometimes they fail, but regardless they are doing their part as citizens in a democracy.

In just the past month, we have already seen the largest settlement involving alleged violations of the Anti-Kickback Statute by skilling nursing facilities in the United States, Trinity Industries was ordered to pay 463.4 for defrauding the Federal Highway Administration, and UPS agreed to pay for False Claims Act violations.  All due to the contributions of whistleblowers.  Their bravery, and the dedication of the public servants who work the cases, inspire us.

We wish everyone a safe and happy Fourth of July from Boston!

“Ambiguous” Government Reg Not Automatic Defense

A common defense in a False Claims Act case is to argue that the defendant cannot be liable because the applicable government regulation was “ambiguous” and the defendant’s interpretation of the regulation is “reasonable” therefore the defendant could not have “knowingly” submitted a “false” claim (two key elements of FCA liability). Indeed, this defense is central to a declined qui tam case pending in U.S. District Court in Missouri against Anesthesia Associates of Kansas City (“AAKC”). Last week the Justice Department supported the whistleblower by filing a Statement of Interest debunking this defense.


The U.S. first addressed the argument that the defendant could not have acted “knowingly” or in other words with the requisite scienter to have violated the FCA. The FCA defines “knowingly” to mean having actual knowledge, reckless disregard, or deliberate ignorance of the falsity of the claim, and no proof of specific intent to defraud is required. 31 U.S.C. § 3729(b)(1). Defendant AAKC argued that CMS’ regulation was ambiguous and that AAKC could now advance a reasonable interpretation of the regulation. The U.S. rebutted this argument stating:


“An FCA defendant’s scienter, or lack thereof, depends on the surrounding facts as they existed at the time, not on whether its lawyers can point to ambiguities in regulatory language and advance plausible post hoc interpretations… To hold otherwise would mistakenly absolve of liability any defendant who can later advance a plausible regulatory basis for the submission of false claims. It would allow a defendant who fully intended to submit false claims to escape liability. It would eliminate liability, across the board and regardless of circumstances, for those who recognized an ambiguity and made the decision not to inquire.”


Brief at 2-3 (emphasis added).


As part of the court’s fact finding exercise, it may look at the defendant’s state of mind at the time the claims were being submitted; the U.S. acknowledged that “evidence of whether or not the defendant reasonably interpreted the governing regulation and submitted claims it, in good faith, believed to be truthful at the time of submission is important to consider.” Brief at 4. However, the U.S. reminded the court that the defendant cannot engage in “ostrich-like conduct” by effectively sticking its head in the sand. Brief at 6.


The U.S. then turned its fire on the argument that the claim could not have been “false” because of defendant’s purported reasonable interpretation. The U.S. rejected this argument out of hand, characterizing it as a “misstatement of the law.” Brief at 8. Explaining that “knowledge” and “falsity” are separate elements of FCA liability, the U.S. went on to note that it is up to the court to determine “falsity” by using “normal tools of statutory construction to determine whether statements or claims are ‘objectively’ false.” Id. (emphasis added).


This case is worth keeping an eye on to see how the district court rules. Anyone litigating a FCA case should consult the U.S. Brief for an excellent summary of the law of “knowledge” and the meaning of “falsity” under the FCA.

Medical Device Manufacturer Settles False Claims Act Lawsuit

A whistleblower False Claims Act lawsuit accusing Medtronic, Inc. of promoting off label unapproved uses of its “SubQ” spinal stimulation device has been settled by the Department of Justice for $2.8 million.


The suit, brought by a former Medtronic sales representative, alleged that “from 2007 through 2011, Medtronic knowingly caused dozens of physicians located throughout more than 20 states to submit claims to Medicare and TRICARE for investigational medical procedures known as SubQ stimulation that were not reimbursable.” While the safety and efficacy of SubQ stimulation had not been proved to the FDA, Medtronic nevertheless persuaded doctors to implant Medtronic’s spinal cord stimulation devices just beneath the patient’s skin near an area of pain, most often in the lower back, where the devices would purportedly provide electrical impulses intended to alleviate chronic pain.


Devices or drugs prescribed for purposes that are not FDA approved and thus are “off label” are unfortunately all too common. Indeed, the successful, but unlawful, promotion of prescription drugs for off label purposes has led to multiple large FCA recoveries in the last several years.  On Sunday night John Oliver did a hilarious, sad but true, piece on these drug company tactics on his show Last Week With John Oliver.


Patients should not be treated like guinea pigs for profit. Ask your doctor…or ask John Oliver..or ask a lawyer who represents FCA whistleblowers.