Second Circuit to Decide Scope of Whistleblower Protection

The following post comes to us from Maria von Tippelskirch, Assistant Professor, University of Hamburg and LL.M. candidate, Columbia Law School.

The Dodd-Frank Act protects whistleblowers from retaliation by their employers. Yet it is not clear whether this protection is limited to employees who have reported suspected wrongdoing to the SEC directly (external whistleblowers). The Fifth Circuit, in Asadi v. GE, has restricted the scope of application in this way, while some district courts have also granted anti-retaliation protection to employees who only raised their concerns within the company (internal whistleblowers). A case dealing with this question is currently before the Second Circuit, in which the SEC has filed an amicus brief arguing in favor of a broad application that includes internal whistleblowers.

Meng-Lin Liu, the plaintiff-appellant before the Second Circuit, was not just any Siemens employee. He was a division compliance officer for Siemens China Ltd., and allegedly found himself without a job the same day that he had raised concerns about alleged FCPA violations with the Siemens China President and CEO.

Even if the Second Circuit were not willing to follow the SEC in its broad approach of granting anti-retaliation protection to all internal whistleblowers, they should at least extend it to compliance officers, such as Meng-Lin Liu, who usually have no choice but to report internally. Otherwise, compliance officers who fear retaliation might refrain from speaking up about their concerns in order to protect themselves from negative consequences. This could endanger the efficacy of the very compliance systems that Dodd-Frank and other regulations are meant to endorse.

Potential internal whistleblowers who are aware of the lack of anti-retaliatory protection might choose the – more secure – external alternative. This might have been their preference anyway, because the monetary incentives (“whistleblower bounty money”) are limited to reports to the SEC that lead to successful enforcement actions.

But for one particular group of employees – as my paper discusses – the external alternative is not an option: Compliance officers are not incentivized to report suspected wrongdoing externally. Quite to the contrary, it is an essential component of their job description to report their findings and suspicions internally. The opportunity to obtain monetary awards for disclosing information to the SEC does not exist for them under the Dodd-Frank Act.

Therefore, compliance officers who are denied anti-retaliation protection find themselves in a dilemma:  Reporting externally would violate their professional duties. Reporting internally, on the other hand, carries the risk of retaliation from their employer, for which there would be no legal remedy. So there is a good chance that rational compliance officers – when in doubt – decide not to blow the whistle after all, which might lead to avoidable violations and damages.

To prevent this consequence, the Second Circuit does not have to adopt the SEC’s broad position as a whole. It could instead focus on the nature of the whistleblower’s function within the company and grant protection to Meng-Lin Liu on the grounds that he was allegedly retaliated against for reporting in his role as a compliance officer.

The full article is available here.