Dodd-Frank doesn’t protect whistleblowers overseas, Second Circuit rules

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Whistleblower protections of the Dodd-Frank Act do not apply outside the United States, an appellate court has ruled. The U.S. Court of Appeals for the Second Circuit issued the ruling on August 14 in the case, Liu Meng-Lin v. Siemens AG. The case involves Meng-Lin Liu, a former compliance officer for Siemens China, who reported concerns to management that kickbacks apparently had been funneled to Chinese and North Korean hospital officials in violation of the U.S. Foreign Corrupt Practices Act. Soon afterward, Siemens cancelled the remainder of Liu’s contract and did not renew it. Liu subsequently contacted the Securities and Exchange Commission (SEC) and filed suit in the US District Court for the Southern District of New York. Although the events took place overseas and Liu is a resident of Taiwan, Liu claimed whistleblower protections of the Dodd-Frank Act applied because the parent company Siemens AG (a German firm) is listed on the New York Stock Exchange.

Liu argued that by using the phrases “any individual” and “no employer,” the statute evinces an intent to protect whistleblowers wherever they are. The Court rejected Liu’s hypothesis, stating that the statute is silent regarding whether it applies extraterritorially. That silence, said the Court, “invokes a strong presumption against extraterritoriality.” (Global Trade Law Blog)

The Second Circuit echoed the opnion of district court judge William Pauley III, who wrote, “There is simply no indication that Congress intended the anti-retaliation provision to apply extraterritorially.” Thomas R. Fox, at FCPA Compliance and Ethics Blog, comments:

The New York District Court followed the logic of the Fifth Circuit Court of Appeals in the Asadi decision that the Dodd-Frank Act itself does not explicitly provide for an extraterritorial application of the anti-retaliation provision even though a foreign employee may fall within the definition of a whistleblower for whistleblower award purposes. So even though Dodd-Frank and Sarbanes-Oxley (SOX) protect extraterritorial disclosures, they do not protect extraterritorial employees who make them. (FCPA C&E Blog)

In its defense, Siemens argued that Liu did not qualify for whistleblower protections under Dodd-Frank because he did not report his concerns to the SEC before the alleged retaliation occurred. Erika Kelton (Forbes) points out the hypocrisy in that argument.

Siemens’ US CEO sits on the Board of the US Chamber of Commerce. Perhaps not so coincidentally, the Chamber argued fiercely during the SEC whistleblower rulemaking that employees should be required to report wrongdoing internally first, lest internal reporting procedures be undermined by employees who go directly to the SEC. Siemens’ handling of the Liu case shows the hypocrisy of the Chamber’s position and suggests how cynically the company views its internal compliance mechanisms. (Forbes)

Failing to protect internal disclosures would have a major impact on whistleblowing. A 2013 survey conducted by the Ethics Resource Center found that 92 percent of those who observe misconduct first disclose it internally, and more than one in five reported retaliation (National Law Journal.)  Kelton observes, “If the court accepts Siemens’ position, it will become a race to see whether a company can fire an employee who speaks up about wrongdoing faster than that employee can file a whistleblower claim with the SEC.” In an earlier case, Ellington v. Giacoumakis, the District of Massachusetts upheld Dodd-Frank protections for internal reporting, rejecting the Fifth Circuit’s reasoning in Asadi v. G.E. Energy (USA), LLC. (JDSupra)  In Asadi v. GE Energy (USA), LLC, the Fifth Circuit decided that an employee must report to the SEC to qualify as a “whistleblower” under Dodd-Frank. “However, most of the district courts that have addressed the issue have decided that an employee need not report to the SEC in order to be protected from adverse actions by his or her employer,” writes Jason M. Knott (Suits By Suits). Ultimately, the Second Circuit did not render a decision on the issue of whistleblower protections for internal reporting, but it did signal its position.

Because we find that Liu’s complaint was properly dismissed for other reasons, we need not address Siemens’s argument that such internal reporting is insufficient to evoke the protection of the antiretaliation provision. We thus assume without deciding that internal reporting is sufficient to qualify for the statute’s protection.

An amicus brief filed by the SEC in support of Liu, thus did not have an impact on the outcome. It did, however, serve notice to employers of the regulatory agency’s position that internal disclosures are protected from retaliation by Dodd-Frank, whether or not the employee discloses to the SEC. Fox provides a thought-provoking summary for the case.

It is hard to conceive that neither Congress nor the SEC understood that by its nature, FCPA violations would occur overseas since it is a law which prohibits bribery of foreign government officials, not US government officials. While both the Southern District of New York and the Fifth Circuit Court of Appeals may think they are doing corporations a favor by ruling against international employees who internally report, the reality is that both the Liu and the Asadi decision out of the Fifth Circuit will both hurt corporations in the long run as now employees are only protected if they run to the SEC without giving the companies a chance to investigate, remediate or self-disclose any alleged FCPA violations. (FCPA C&E Blog)

Cited Material

Case Documents

Meng-Lin Liu v. Siemens A.G., Liu v. Siemens AG, No. 13-4385-cv (2d Cir. Aug. 14, 2014)

Meng-Lin Liu v. Siemens A.G., 978 F. Supp. 2d 325, 330 (S.D.N.Y. 2013)

Securities and Exchange Commission amicus curiae in support of the appellant Liu Meng-Lin, 13-4385

Ellington v. Giacoumakis, No. 1:13-cv-11791-RGS, 2013 BL 288136 (D. Mass. Oct. 16, 2013)

Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 – Court of Appeals, Fifth Circuit, 2013

Laws

Dodd-Frank Wall Street Reform and Consumer Protection Act

Foreign Corrupt Practices Act

Articles

The Tuck Rule, the Push Rule and Retaliation Against Whistleblowers, FCPA Compliance and Ethics Blog

SEC Ready To Rumble In Siemens Whistleblower Case, Forbes

Employers May Come to Regret Seeking Narrow Definition of “Whistleblower,” National Law Journal

Dodd-Frank Retaliation Cases Continue To Be a Mixed Bag For Companies, JDSupra

Dodd-Frank Whistleblower Protection: For America Only, Global Trade Law Blog

Does Dodd-Frank Protect Whistleblowers Who Don’t Report to SEC? Another Court Chooses Sides in the Debate, Suits By Suits

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