Somers v. Digital Realty Trust Inc et al, No. 3:2014cv05180 - Document 62 (N.D. Cal. 2015)

Court Description: AMENDED ORDER DENYING 20 Defendants' Motion to Dismiss. Signed by Judge Edward M. Chen on 7/22/15. (emclc1, COURT STAFF) (Filed on 7/22/2015)

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Somers v. Digital Realty Trust Inc et al Doc. 62 1 2 3 4 NOT FOR PUBLICATION 5 UNITED STATES DISTRICT COURT 6 NORTHERN DISTRICT OF CALIFORNIA 7 8 PAUL SOMERS, 9 Plaintiff, AMENDED ORDER DENYING (1) DEFENDANT’S MOTION TO DISMISS; (2) PLAINTIFF’S MOTION TO DISQUALIFY DEFENSE COUNSEL v. 11 For the Northern District of California United States District Court 10 No. C-14-5180 EMC DIGITAL REALTY TRUST, INC., et al., 12 Defendants. ___________________________________/ 13 (Docket Nos. 20, 31) (Revisions in Green Highlight) 14 15 16 I. INTRODUCTION Plaintiff Paul Somers brought this lawsuit against his former employer, Digital Realty Trust, 17 and Ellen Jacobs, a Senior Vice President at Digital Realty Trust (collectively, Digital Realty, or 18 Defendants). See Docket No. 1 (Complaint); see also Docket No. 38 (Ellen Jacobs Decl.) at ¶ 2. 19 While Somers’ complaint pleads five separate causes of action, including claims for discrimination 20 on the basis of his sexual orientation and defamation, Digital Realty’s current motion to dismiss 21 challenges only one cause of action: that Digital Realty violated the anti-retaliation provisions of the 22 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank, or DFA) 23 where it allegedly terminated Somers’ employment in retaliation for his making internal reports of 24 securities law violations. See Complaint at ¶¶ 44-51; Docket No. 20 (Motion to Dismiss). 25 Specifically, Digital Realty argues that Somers’ Dodd-Frank claim fails as a matter of law because 26 27 28 1 Somers doesn’t qualify as a “whistleblower” under the statute.1 For the reasons explained below, 2 Digital Realty appears mistaken. The Securities and Exchange Commission (SEC, or Commission) 3 has formally issued a rule that clarifies the scope and meaning of the whistleblower protections of 4 Dodd-Frank, and extends the protection of those provisions to individuals like Somers who report 5 suspected violations not to the SEC, but to internal management. Because the Court finds that the 6 SEC’s rule is entitled to Chevron deference, Digital Realty’s motion to dismiss is DENIED. 7 Also pending before the Court is Somers’ motion to disqualify Defendants’ counsel, Seyfarth 8 Shaw, for a purported conflict of interest. Because Seyfarth Shaw’s prior representation of Somers – 9 for a total of 2.1 hours of billable time – is not “substantially related” to its current successive representation of the Defendants, disqualification is not appropriate. This motion is also DENIED. 11 For the Northern District of California United States District Court 10 12 13 II. A. BACKGROUND Background Relevant to Digital Realty’s Motion to Dismiss Somers was hired by Digital Realty in July 2010. Complaint at ¶ 10. According to Plaintiff, 14 Digital Realty “operates as a real estate investment trust” that “owns, acquires, develops and 15 manages technology-related real estate.” Complaint at ¶ 13. 16 Somers worked as a Vice President of Portfolio Management at Digital Realty, first in 17 Europe and then in Singapore. Id. at ¶¶ 10, 15. In Singapore, Somers reported to Senior Vice 18 President Kris Kumar, who headed up the Asian Pacific region for Digital Realty. Id. at ¶ 15. 19 “Shortly before Plaintiff’s wrongful termination by Defendant Digital, Plaintiff made complaints to 20 senior management regarding actions by Kumar which eliminated internal controls over certain 21 corporate actions in violation of Sarbanes Oxley.” Id. at ¶ 22; see also id. at ¶ 46 (“Plaintiff 22 complained to Defendant Digital’s officers, directors, and/or managing agents that certain of 23 Kumar’s activities violated requirements for internal controls established by [] the Sarbanes-Oxley 24 Act of 2002.”). According to Somers, Kumar had committed a number of acts of “serious 25 26 27 28 1 Digital Realty also argued that Somers could not maintain a cause of action for whistleblower retaliation under the Sarbanes-Oxley Act directly because Somers did not exhaust his administrative remedies. Somers states in his opposition brief that he did not plead or intend to bring a Sarbanes-Oxley whistleblower claim, see Docket No. 21 at 1, and so Defendants’ motion to dismiss any such claim is currently unripe. 2 1 misconduct,” including “hiding [] seven million dollars in cost overruns on a development in Hong 2 Kong.” Id. at ¶ 27. 3 Somers was fired by Digital Realty on April 9, 2014. According to Somers, he was fired (at 4 least in part) in retaliation for internally reporting Kumar’s alleged violation(s) of Sarbanes-Oxley or 5 other applicable laws. See Complaint at ¶ 50. It is undisputed that Somers never reported Kumar’s 6 alleged violations to the SEC or any other outside enforcement agency. See Docket No. 21 7 (Plaintiff’s Opposition to Motion to Dismiss) at 2. 8 B. Background Relevant to Somers’ Motion to Disqualify Shaw, Eugene Jacobs.2 Docket No. 34 (Somers Decl.) at ¶ 2. According to Mr. Jacobs, he gave a 11 For the Northern District of California Before going to work for Digital Realty, Plaintiff was represented by a partner at Seyfarth 10 United States District Court 9 presentation on April 20, 2010, to executive clients of “Kensington International, an executive 12 recruiting and placement firm.” Docket No. 39 (Eugene Jacobs Decl.) at ¶ 3. At the April 20 13 presentation, Mr. Jacobs “prepared a standard discussion outline called ‘Executive Employment 14 Agreement Issues for Consideration’ that contains a general overview of issues and discussion 15 points for things to consider when negotiating executive employment agreements.” Id. at ¶ 4. A 16 copy of the outline indicates that the topics discussed at the April 20 meeting included how to 17 negotiate a new executive’s title with the hiring company, executive benefits, and termination 18 provisions. Id. at Ex. A. 19 Sometime after the presentation, Mr. Jacobs avers that he was contacted by Susan Duda, an 20 executive coach at Kensington International, asking for an additional copy of the discussion 21 handout, “presumably so she could share it with [her client] Mr. Somers.” Eugene Jacobs Decl. at ¶ 22 7. Jacobs sent Duda the discussion handout. Id. Two days later, Ms. Duda “sent Mr. Somers’ 23 resume to me and told me that he may contact me about legal representation. Later that day, Mr. 24 Somers engaged me to provide legal advice regarding his potential employment agreement with 25 Newcastle Limited, a Chicago-based real estate advisor and investor.” Id. at ¶ 8. According to Mr. 26 Jacobs’ time records from April 22, 2010, he spent .8 hours on a “[t]elephone conference [with] P. 27 28 2 Mr. Jacobs is not related to Defendant Ellen Jacobs. Ellen Jacobs Decl. at ¶ 10. 3 1 Somers regarding employment matter issues and strategies.” Somers Decl., Ex. A (Bill from 2 Seyfarth Shaw to Somers). 3 On April 26, Mr. Jacobs contends that Somers “sent me documents that Newcastle had sent 4 him about the position for which he interviewed, including an offer letter template, job description, 5 and summary of employee benefits available to Newcastle employees.” Eugene Jacobs Decl. at ¶ 6 10. Mr. Jacobs’ time records indicate that he conducted a 1.3 hour-long telephone conference with 7 Somers that day to “review Newcastle offer letter and related documents; identify issues.” Somers 8 Decl., Ex. A. These two telephone conferences, lasting 2.1 hours in total, are the only legal work 9 Jacobs (and Seyfarth Shaw) performed for Somers. See Somers Decl. at ¶ 5. According to Jacobs, he next heard from Somers on April 30, when Somers “advised me that 11 For the Northern District of California United States District Court 10 his negotiations with Newcastle had stalled.” Eugene Jacobs Decl. at ¶ 11. Somers then “emailed 12 [Jacobs] out of the blue” in June 2010 to tell him “that he had already accepted a position with 13 Digital Realty Trust.” Eugene Jacobs Decl. at ¶ 12. According to Jacobs, he “had no input 14 whatsoever in any negotiations, if there were any, or other terms and conditions relating to Mr. 15 Somers’ employment with Digital Realty.” Jacobs further declares that: 16 Mr. Somers never sought any legal advice of any nature from me in connection with the job at Digital Realty, nor did I provide any legal counsel to him regarding Digital Realty in any regard whatsoever. In addition, Mr. Somers did not share any confidential information with me about his job at Digital Realty. My representation of Mr. Somers was limited to advising him on issues relating to the negotiation of an employment agreement with Newcastle. 17 18 19 20 Id. at ¶ 14. Somers confirms that he “did not ask Mr. Jacobs to negotiate [his] agreement with 21 Digital [Realty].” Somers Decl. at ¶ 2. However, Somers claims that he used “ideas” from Mr. 22 Jacobs’ presentation outline “in other subsequent matters,” and that he “obtained my job with Digital 23 Realty Trust, Inc. while still in communication with Mr. Jacobs.” Id. at ¶¶ 2-3. Mr. Somers also 24 claims that he “discussed the Digital Realty opportunity briefly with Mr. Jacobs and informed Mr. 25 Jacobs about some aspects of my approach to obtaining the job with Digital.” Id. at ¶ 4. 26 /// 27 /// 28 /// 4 1 2 3 III. A. DISCUSSION Defendant’s Motion to Dismiss Somers’ Dodd-Frank Whistleblower Claim Digital Realty moves to dismiss Somers’ second cause of action, which alleges that Somers 4 was wrongfully terminated from his employment in retaliation for reporting his supervisor’s 5 purported law violations to Digital Realty management. According to Digital Realty, Somers does 6 not qualify as a “whistleblower” under the Dodd-Frank Act because he did not report any alleged 7 law violations to the SEC. Digital Realty also argues in its reply brief that Somers has not 8 adequately pleaded that his internal reports were either “required or protected” under the Sarbanes- 9 Oxley Act. See 15 U.S.C. § 78u-6(h)(1)(A)(iii). For the reasons explained below, Digital Realty’s first argument is unavailing and its second argument was waived where Digital Realty failed to raise 11 For the Northern District of California United States District Court 10 it in its original motion. 12 1. 13 Dodd-Frank established a new whistleblower program in 2010 by adding Section 21F to the Passage of Dodd-Frank and Relevant Statutory Provisions 14 Securities Exchange Act of 1934 (Exchange Act). See Section 21F, codified at 15 U.S.C. § 78u-6. 15 Section 21F “encourages individuals to provide information relating to a violation of U.S. securities 16 laws” through two “related provisions that: (1) require the SEC to pay significant monetary awards 17 to individuals who provide information to the SEC which leads to a successful enforcement action; 18 and (2) create a private cause of action for certain individuals against employers who retaliate 19 against them for taking specified protected actions.” Asadi v. GE Energy (USA), L.L.C., 720 F.3d 20 620, 623 (5th Cir. 2013). Courts frequently refer to the award provision as the “whistleblower- 21 incentive program” and the provision protecting whistleblowers from retaliation as the 22 “whistleblower-protection program.” See id. at 623 n.3; see also Connolly v. Remkes, No. 5:14-cv- 23 01344-LHK, 2014 WL 5473144, at *4 (N.D. Cal. Oct. 28, 2014). Only the provisions of the 24 whistleblower-protection program are at issue here. 25 The DFA defines a “whistleblower” as “any individual who provides, or 2 or more 26 individuals acting jointly who provide, information relating to a violation of the securities laws to 27 the Commission, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. 28 § 78u-6(a)(6) (emphasis added). Dodd-Frank forbids employers from retaliating against 5 1 whistleblowers, and sets forth specific prohibitions. Specifically the DFA provides that “[n]o 2 employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other 3 manner discriminate against, a whistleblower in the terms and conditions of employment because of 4 any lawful act done by the whistleblower – 5 (i) in providing information to the Commission in accordance with this section; 6 (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or 7 8 (iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter [i.e., the Exchange Act], including section 78j-1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.” 9 11 For the Northern District of California United States District Court 10 12 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii). The DFA provides that an employee may bring suit against any 13 employer who violates the whistleblower protections codified in Section 21F. See 15 U.S.C. §78u- 14 6(h)(1)(B). Dodd-Frank further provides that “[t]he Commission shall have the authority to issue 15 such rules and regulations as may be necessary or appropriate to implement the provisions of this 16 section [i.e., the whistleblower program] consistent with the purposes of this section.” 15 U.S.C. 17 § 78u-6(j). 18 An aggrieved whistleblower under the DFA may also have a claim under the Sarbanes-Oxley 19 Act, which created a civil right of action to protect employees from retaliation for reporting law 20 violations. See 18 U.S.C. § 1514A. However, the remedies and procedures associated with a 21 Sarbanes-Oxley Act anti-retaliation claim are considerably different from those provided under the 22 whistleblower-protection provision of the DFA. Three main differences bear highlighting. First, the 23 DFA provides for recovery of two times back pay, whereas Sarbanes-Oxley provides for recovery of 24 back pay without a multiplier, along with other economic damages such as emotional distress 25 damages. Compare 15 U.S.C. § 78u-6(h)(1)(C) with 18 U.S.C. § 1514A(c)(2); see also Halliburton, 26 Inc. v. Admin. Review Bd., 771 F.3d 254, 266 (5th Cir. 2014) (per curiam) (holding that Sarbanes- 27 Oxley “affords noneconomic compensatory damages, including emotional distress and reputational 28 harm”). Second, Sarbanes-Oxley act claimants must first file an administrative complaint with the 6 1 Department of Labor, whereas DFA plaintiffs are not required to exhaust any administrative 2 remedies. See 18 U.S.C. § 1514A(b)(1). And third, DFA claimaints have between six and ten years 3 to file suit from the time a violation occurs, whereas Sarbanes-Oxley plaintiffs must file suit 4 between 180 days after the violation occurs and 180 days after the employee becomes aware of the 5 violation. See 15 U.S.C. § 78u-6(h)(1)(B)(iii); 18 U.S.C. § 1514A(b)(2)(D). 6 7 2. The SEC Issues Rule 21F-2(b)(1) Interpreting the Whistleblower-Protection Provisions 8 The SEC issued final rules interpreting and implementing Section 21F of the DFA in June 9 2011. See Securities Whistleblower Incentives and Protections (Adopting Release), 78 Fed. Reg. 34300, 34301-34304 (June 13, 2011). In particular, the SEC issued Exchange Act Rule 21F-2(b)(1), 11 For the Northern District of California United States District Court 10 which states that for the purpose of the whistleblower-protection program, “you are a whistleblower 12 if . . . [y]ou provide information in a manner described in . . . 15 U.S.C. 78u-6(h)(1)(A).” See 17 13 C.F.R. §240.21F-2(b)(1). 14 As noted above, the DFA – and specifically, section 78u-6(h)(1)(A) – “sets forth three types 15 of protected whistleblower activity, the last of which [i.e., subsection (iii)] includes ‘making 16 disclosures that are required or protected under the Sarbanes-Oxley Act.’” Connolly, 2014 WL 17 5473144, at *4 (quoting 15 U.S.C. § 78u-6(h)(1)(A)(iii)). “In turn, the Sarbanes-Oxley Act affords 18 whistleblower protection to an employee who gives ‘information or assistance’ to ‘a person with 19 supervisory authority over the employee’” id. (quoting 18 U.S.C. § 1514A(a)(1)(C)), or to any other 20 “such person working for the employer who has the authority to investigate, discover, or terminate 21 misconduct.” 18 U.S.C. § 1514A(a)(1)(C). That is, Sarbanes-Oxley protects employee disclosures 22 made internally to certain supervisory personnel irrespective of whether the employee separately 23 reports the information to the SEC. Thus, by providing that an individual is a “whistleblower if” 24 they “provide information in a manner described in” subsection (iii) of section 78u-6(h)(1)(A), Rule 25 21F-2(b)(1) stipulates that the whistleblowing-protection program of the DFA does not require an 26 employee to report violations directly to the SEC. See Connolly, 2014 WL 5473144, at *4; Asadi, 27 720 F.3d at 629 (refusing to defer to SEC interpretation of the DFA, but explaining that Rule21F- 28 2(b)(1) defines whistleblower “broadly by providing that an individual qualifies as a whistleblower 7 1 even though he never reports any information to the SEC, so long as he has undertaken the protected 2 activity listed in 15 U.S.C. § 78u-6(h)(1)(A)”); see also Adopting Release at 34304 (explaining that 3 under the SEC rule, “the statutory anti-retaliation protections apply to three different categories of 4 whistleblowers, and the third category includes individuals who report to persons or governmental 5 authorities other than the Commission”). 6 3. 7 The determinative issue for resolving Digital Realty’s motion to dismiss is whether SEC SEC Rule 21F-2(b)(1) is Entitled to Deference 8 Rule 21F-2(b)(1) is entitled to Chevron deference. See Chevron, U.S.A. v. Natural Res. Def. 9 Council, Inc., 467 U.S. 837 (1984) (holding that a court should defer to a responsible executive agency’s permissible construction of a statute where the statutory language is ambiguous or 11 For the Northern District of California United States District Court 10 otherwise does not speak precisely to the question at issue). If it is entitled to deference, then 12 Somers has pleaded a legally sufficient retaliation claim under Dodd-Frank. For instance, Somers 13 alleges that he was fired in retaliation for “complain[ing] to Defendant Digital’s officers, directors, 14 and/or managing agents that certain of Kumar’s activities violated requirements for internal controls 15 established by the Sarbanes-Oxley Act of 2002.” Complaint at ¶ 46. If, on the other hand, the 16 Commission rule is not entitled to deference, then a fair reading of the DFA requires that Somers 17 must have reported a violation to the SEC in order to have cause of action under the DFA: Since 18 Somers admits that he did not make a report to the SEC before he was fired, he could not be a 19 whistleblower under the DFA. 20 a. Applicability and Legal Standards of Chevron Framework 21 “[A]dministrative implementation of a particular statutory provision qualifies for Chevron 22 deference when it appears that Congress delegated authority to the agency generally to make rules 23 carrying the force of law, and that the agency interpretation claiming deference was promulgated in 24 the exercise of that authority.” United States v. Mead Corp., 533 U.S. 218, 226-27 (2001); see also 25 Navarro v. Encino Motorcars, LLC, 780 F.3d 1267, 1272 (9th Cir. 2015) (holding that Chevron’s 26 reasonableness standard applies to a “regulation duly promulgated after a notice-and-comment 27 period”). Rule 21F-2(b)(1) was promulgated pursuant to an express provision of the DFA and after 28 8 1 a notice-and comment period, and thus qualifies for Chevron deference. See 15 U.S.C. § 78u-6(j); 2 see also Adopting Release at 34300. 3 However, consideration of whether an agency interpretation is permissible under Chevron 4 requires an examination of two steps. First, as a threshold matter, the Court must consider “whether 5 Congress has directly spoken to the precise question at issue.” Chevron, 467 U.S. at 842. “If so, 6 then the inquiry is over, and we must give effect to the ‘unambiguously express intent of 7 Congress.’” Navarro, 780 F.3d at 1271 (quoting Chevron, 467 U.S. at 842). But if the statute is 8 silent or ambiguous with respect to the specific issue, the Court must proceed to the second step and 9 determine whether the agency’s interpretation is “based on a permissible construction of the statute.” Chevron, 467 U.S. at 843. If the agency’s interpretation of the statute “is a reasonable one, this 11 For the Northern District of California United States District Court 10 court may not substitute its own construction of the statutory provision,” even if the Court believes 12 the provision would best be read differently. Navarro, 780 F.3d at 1273 (citation omitted). 13 b. Chevron Step One: The Statute is Ambiguous 14 Under the first step of Chevron, the Court must determine whether the whistleblower- 15 protection provisions of the DFA are ambiguous. “The plainness or ambiguity of statutory language 16 is determined by reference to the language itself, the specific context in which that language is used, 17 and the broader context of the statute as a whole.” Robinson v. Shell Oil Co., 519 U.S. 337, 341 18 (1997). General cannons of statutory interpretation are particularly helpful in resolving close cases 19 regarding statutory meaning. See, e.g., United States v. Monsanto, 491 U.S. 600, 611 (1989). Here, 20 two interpretative cannons are particularly germane to this Court’s inquiry, the surplusage cannon, 21 which holds that a “court should give effect, if possible, to every word and every provision Congress 22 used” in the statute, Asadi, 720 F.3d at 622, and the harmonious-reading cannon, which provides 23 that a court should “interpret [a] statute as a symmetrical and coherent regulatory scheme, and fit, if 24 possible, all parts into an harmonious whole.” FDA v. Brown & Williamson Tobacco Corp., 529 25 U.S. 120, 133 (2000); see generally Antonin Scalia & Bryan A. Garner, Reading Law: The 26 Interpretation of Legal Texts 174-183 (1st ed. 2012) (discussing the surplusage and harmonious- 27 reading cannons). 28 9 1 As Judge Koh recently explained, the “large majority”3 of courts to consider Dodd-Frank’s and 78u-6(h)(1)(A)(iii)” and thus have “deferr[ed] to the SEC’s interpretation of Dodd-Frank.”4 4 Connolly, 2014 WL 5473144, at *5. To appreciate the tension between these provisions, it is helpful 5 to first examine the overall structure of Section 21F. As quoted in full above, Section 21F(h)(1)(A) 6 prohibits an employer from retaliating against a whistleblower for: (i) “providing information to the 7 Commission in accordance with this section”; (ii) “initiating, testifying in, or assisting in” an 8 investigation or enforcement action of the Commission “based upon or related to such information”; 9 or (iii) “in making disclosures that are required or protected under” Sarbanes-Oxley, the Exchange 10 Act (including section 78j-1 of the Exchange Act), 18 U.S.C. § 1513(e), or “any other law, rule, or 11 For the Northern District of California whistleblower-protection provisions have found ambiguity “in the interplay between §§ 78u-6(a)(6) 3 United States District Court 2 regulation subject to the jurisdiction of the Commission.” 15 U.S.C. § 78u-6(h)(1)(A)(i)-(iii). As 12 the statutory language makes plain, subsections (i) and (ii) protect individuals from retaliation for 13 whistleblowing to the Commission about securities law violations. Subsection (iii), however, 14 appears to afford much broader protection, prohibiting retaliatory acts against employees who make 15 much more varied types of disclosures, such as disclosures of securities law violations to an 16 immediate supervisor at their company or to the board of directors. See 18 U.S.C. § 17 1514A(a)(1)(C) (protecting certain disclosures regarding securities laws violations made to 18 19 3 20 21 22 23 24 25 The following is a non-exhaustive list of other district courts that have concluded that the DFA is ambiguous and determined that the SEC interpretation of the DFA whistleblower-protection provisions is entitled to deference. Murray v. UBS Securities, LLC, No. 12 Civ. 5914 (JMF), 2013 WL 2190084 (S.D.N.Y. May 21, 2013); Yang v. Navigators Group, Inc., 18 F. Supp. 3d 519, 534 (S.D.N.Y. 2014); Khazin v. TD Ameritrade Holding Corp., No. 13-4149 (SDW)(MCA), 2014 WL 940703, at *3-6 (D.N.J. Mar. 11, 2014); Ellington v. Giacoumakis, 977 F. Supp. 2d 42, 44 (D. Mass. 2013); Genberg v. Porter, 935 F. Supp. 2d 1094, 1106-07 (D. Colo. 2013); Nollner v. Southern Baptist Convention, Inc., 852 F. Supp. 2d 986, 995 (M.D. Tenn. 2012); see also Egan v. TradingScreen, Inc., No. 10 Civ. 8202 (LBS), 2011 WL 1672066, at *4-6 (S.D.N.Y. May 4, 2011) (finding Section 21F of the DFA ambiguous and concluding, without reference to the then-uncodified SEC rule discussed here, that “whistleblower” under the DFA encompasses those who make required internal reports under Sarbanes-Oxley). 4 26 27 28 As will be discussed below, however, a small minority of courts – including the only appellate court to have ruled on the issue – have held that the language of the DFA is unambiguous and requires a whistleblower to make a report to the SEC in order to qualify for anti-retaliation protection. See, e.g., Asadi, 720 F.3d at 629; Banko v. Apple Inc., 20 F. Supp. 3d 749, 756-57 (N.D. Cal. 2013); Verfeurth v. Orion Energy Sys., Inc., -- F. Supp. 3d --, 2014 WL 5682514, at *3 (E.D. Wisc. Nov. 4, 2014). The Court respectfully declines to follow these courts’ reasoning. 10 1 individuals with “supervisory authority” over the reporting employee); 15 U.S.C. § 78j-1 (requiring 2 certain disclosures regarding illegal acts to be made to the board of directors). Section 21F(a)(6). The DFA only provides anti-retaliation protection to “a whistleblower in the 5 terms and conditions of employment,” and Section 21F(a)(6) defines a “whistleblower” as “any 6 individual who provides . . . information relating to a violation of the securities laws to the 7 Commission.” 15 U.S.C. § 78u-6(a)(6) (emphasis added). As a number of courts have recognized, 8 Section21F(h)(1)(A)(iii) appears to be “‘in direct conflict with the DFA’s definition of a 9 whistleblower because [subsection (iii)] provides protection to persons who have not disclosed 10 information to the SEC,’” while Section21F(a)(6) requires the person report to the Commission. 11 For the Northern District of California The tension arises when one considers the definition of a “whistleblower” as codified in 4 United States District Court 3 Khazin, 2014 WL 940703, at *6 (quoting Genberg, 935 F. Supp. 2d at 1106); see also Connolly, 12 2014 WL 5473144, at *6 (finding statutory ambiguity given the conflict between the DFA 13 provisions). Put differently, the majority of courts to consider the issue have found that subsection 14 (iii) “would be ineffective if whistleblowers must report directly to the SEC.” Connolly, 2014 WL 15 5473144, at * 6. 16 Digital Realty’s arguments that there is no ambiguity or conflict in the DFA – which 17 essentially parrot the arguments made by those courts that have concluded similarly – are not 18 entirely persuasive. The first argument is that because the “whistleblower” definition in Section 19 21F(a)(6) is plain and unambiguous, the plain language of that definition must control over any 20 putatively conflicting statutory text that appears later in Section 21F. See Asadi, 720 F.3d at 623-24 21 (holding that there can “only be one category of whistleblower” under the DFA given the “plain 22 language and structure” of the Act); see also Banko, 20 F. Supp. 3d at 756 (holding that “the statute 23 specifies that an employer may not [retaliate] against a whistleblower. It is not until after this clause 24 that Congress adds protection for reports that are protected by Sarbanes-Oxley, indicating that the 25 latter is subordinate to the former”) (emphasis in original). 26 In support of the argument that a clear definitional term must control, the Asadi court cites to 27 the Scalia & Garner treatise, which states that “[w]hen . . . a definitional section says that a word 28 ‘means’ something, the clear import is that this is its only meaning.” Scalia & Garner, supra, at 226 11 1 (emphasis in original). But just two pages later, the very same treatise recognizes that while a 2 statutory definition provides a “very strong indication” of a term’s meaning, it is “nonetheless one 3 that can be contradicted by other indications. So where the artificial or limited meaning would cause 4 a provision to contradict another provision, whereas the normal meaning of the word would 5 harmonize the two, the normal meaning should be applied.” Id. at 228. Indeed, just two terms ago 6 the Supreme Court concluded that an express and clear definitional term in a statute may ultimately 7 need to yield to countervailing interpretative factors in order to harmonize the meaning of a statute. 8 See Bond v. United States, 134 S. Ct. 2077, 2091 (2014). In Bond, the Court considered whether a 9 criminal prohibition codified in the Chemical Weapons Convention Implementation Act of 1998 could apply to a defendant whose “amateur attempt . . . to injure her husband’s lover” with common 11 For the Northern District of California United States District Court 10 chemicals resulted in the victim suffering a “minor thumb burn readily treated by rinsing with 12 water.” Id. at 2083. The defendant had been convicted under statutory language that rendered it 13 unlawful for any person to knowingly “use . . . any chemical weapon.”5 Id. at 2086; see also 18 14 U.S.C. § 229(a). Despite the statute’s clear definition of “chemical weapon,” and despite the fact 15 that the defendant had obviously used a “chemical weapon” with the necessary men rea, the Court 16 reversed the defendant’s conviction. Bond, 134 S. Ct. at 2091. Specifically, the majority held that 17 “chemical weapon” could not be given its defined meaning because doing so would violate other 18 principles of statutory interpretation – namely the “background assumption that Congress normally 19 preserves the constitutional balance between the National Government and the States.” Id. at 2091. 20 (citation omitted); see also id. at 2097 (Scalia, J. dissenting) (recognizing that a court may ignore the 21 unambiguous words of a statutory definition in the rare case where doing so will interpret the 22 “words fairly, in light of their statutory context”). 23 24 25 26 27 28 5 “Chemical weapon” was defined in relevant part as “[t]oxic chemicals and their precursors . . .” where “toxic chemical” was in turn defined as “[a]ny chemical which through its chemical action on life processes can cause death, temporary incapacitation or permanent harm to humans or animals.” Bond, 134 S. Ct. at 2085. As the Court noted, the ordinary reading of the relevant statutory language would “render the statute striking in its breadth and turn every kitchen cupboard and cleaning cabinet in America into a potential chemical weapons cache.” Id. at 2086 (internal quotation marks and citation omitted). 12 1 Indeed, just this Term the Court again found contextual ambiguity in what otherwise 2 appeared to be seemingly clear statutory language. See Yates v. United States, 135 S. Ct. 1074, 1079 3 (2015). In Yates, the defendant had been convicted of violating a provision of Sarbanes-Oxley that 4 prohibited the destruction of a “tangible object” with the intent to obstruct a law enforcement 5 investigation. Id. at 1079. The Court noted that “although dictionary definitions” of terms such as 6 “tangible object” should “bear consideration, they are not dispositive . . . .” Id. at 1082. The Court 7 ultimately reversed Yates’ conviction – obtained after he destroyed what was indisputably a 8 “tangible object” (fish) with the requisite intent – because the majority concluded that the term 9 “tangible object” in the relevant provision of Sarbanes-Oxley could not be given its dictionary definition in light of the “specific context in which that language is used,” including the historic 11 For the Northern District of California United States District Court 10 origins and legislative purpose of the law. Id. at 1082; see also United States v. Carroll, No. CR-13- 12 566 EMC, 2015 WL 2251206 (N.D. Cal. May 13, 2015) (discussing Yates). 13 As both Bond and Yates demonstrate, a court may decline to strictly apply a definitional term 14 in a statute, or otherwise adopt the plain and ordinary meaning of statutory language, where other 15 tools of statutory interpretation strongly suggest such a result. According, just because Section 21F 16 expressly defines the term “whistleblower” to require a report to the SEC does not mean that the 17 plain language of that definition must control in the face of arguably conflicting statutory language 18 or other persuasive indications of legislative intent. See generally Bond, 134 S. Ct. at 2091. 19 In determining whether the DFA’s definition of “whistleblower” itself compels the outcome 20 in this case, the Court must consider the “specific context in which that language is used, and the 21 broader context of the statute as a whole.” Robinson, 519 U.S. at 341. Digital Realty argues that 22 there is no conflict between the provisions of the DFA which would render the statute ambiguous, 23 and thus there is no reason to defer to the SEC’s interpretation of the statute. For the reasons 24 explained below, the Court disagrees. 25 /// 26 /// 27 /// 28 /// 13 1 i. The Whistleblower Definition Would Render Subsection (iii) 2 Superflous Because That Definition Conflicts with Various Provisions 3 of Subsection (iii) Which Clearly Contemplate Only Internal Reports, 4 and not Reports to the SEC 5 As noted above, the broad language of subsection (iii) is arguably in tension with the 6 narrower definition of a whistleblower contained in Section 21F(a)(6). As Judge Koh observed in 7 Connolly, subsection (iii) would be rendered meaningless by the strict application of the definition 8 of “whistleblower” under the DFA because subsection (iii) appears to contemplate a broad scope of 9 protection for individuals who do not make reports to the Commission. Connolly, 2014 WL 5473144, at *6. A number of courts are in accord. See footnote 3, supra. 11 For the Northern District of California United States District Court 10 Despite the fact that a number of courts have found that subsection (iii) of the DFA “would 12 be ineffective if whistleblowers must report directly to the SEC,” Connolly, 2014 WL 5473144, at 13 *6, the Fifth Circuit has held that the restrictive definition of “whistleblower” articulated in Section 14 21F(a)(6) does not render Section 21F(h)(1)(a)(iii) superfluous. Asadi, 720 F.3d at 626. In support 15 of this argument, the Fifth Circuit posited a hypothetical situation whereby the whistleblower 16 protections of Section 21F(h)(1)(a)(iii) could have effect if an employee both internally reported 17 securities law violations to his employer and to the SEC: 18 19 20 21 22 23 24 25 26 27 Assume a mid-level manager discovers a securities law violation. On the day he makes this discovery, he immediately reports this securities law violation (1) to his company’s chief executive officer (“CEO”) and (2) to the SEC. Unfortunately for the mid-level manager, the CEO, who is not yet aware of the disclosure to the SEC, immediately fires the mid-level manager. The mid-level manager, clearly a “whistleblower” as defined in Dodd-Frank because he provided information to the SEC relating to a securities law violation, would be unable to prove that he was retaliated against because of the report to the SEC. Accordingly, the first and second category of protected activity would not shield this whistleblower from retaliation. The third category of protected activity, however, protects the mid-level manager. In this scenario, the internal disclosure to the CEO, a person with supervisory authority over the mid-level manager, is protected under 18 U.S.C. § 1514A, the anti-retaliation provision enacted as part of the Sarbanes-Oxley Act of 2002 (“the SOX anti-retaliation provision”). Accordingly, even though the CEO was not aware of the report to the SEC at the time he terminated the mid-level manager, the mid-level manager can state a claim under the Dodd-Frank whistleblower-protection provision because he was a “whistleblower” 28 14 1 and suffered retaliation based on his disclosure to the CEO, which was protected under SOX. 2 3 Id. at 627–28. 4 Digital Realty’s reliance on Asadi is misplaced. While the Court assumes, without deciding, 5 that the above hypothetical posited in Asadi actually presents one situation where sections 21F(a)(6) 6 and 21F(h)(1)(A)(iii) could be applied in harmony such that the latter section would not be 7 superfluous,6 the Court finds there are other points of tension between these two provisions. 8 9 There are a number of provisions in subsection (iii) that conflict with the assumption that only those who report to the SEC enjoin the whistleblowing protection of the DFA. For instance, subsection (iii) expressly protects a whistleblower who makes required or protected disclosures 11 For the Northern District of California United States District Court 10 under section 78j-1 of the Exchange Act. See 15 U.S.C. § 78u-6(h)(1)(A)(iii). Section 78j-1(b), 12 entitled “Required response to audit discoveries,” provides that an individual conducting an audit of 13 a public company must, under certain circumstances, “inform the appropriate level of the 14 management of the issuer . . . [of] illegal acts that have been detected or have otherwise come to the 15 attention” of the auditor “unless the illegal act is clearly inconsequential.” 15 U.S.C. § 78j- 16 1(b)(1)(B). Section 78j-1 further requires that if the company (i.e. “issuer”) does not take reasonable 17 “remedial action” after receiving such a report of illegal acts, an auditor must “directly report its 18 conclusions to the board of directors” of the corporation. 15 U.S.C. § 78j-1(b)(2). Critically, 19 section 78j-1 only permits an auditor to report such “illegal acts” to the SEC if the board of directors 20 or other internal management fails to take appropriate remedial action. See 15 U.S.C § 78j- 21 1(b)(3)(B) (providing that an auditor may either resign or report putative law violations to the SEC 22 6 23 24 25 26 27 28 The Court notes that the SEC has taken the position in various other litigations that the Fifth Circuit hypothetical is flawed because “[w]hether an individual’s disclosures constitute a ‘protected activity’ under the Fifth Circuit’s narrow reading of clause (iii) would turn on whether the individual has made a separate disclosure to the Commission. The Commission contends that if the employer is genuinely unaware that the employee has separately disclosed to the Commission, any adverse employment action that the employer takes would appear to lack the requisite retaliatory intent – i.e., the intent to punish the employee for engaging in a protected activity.” See Br. of the Sec. & Exch. Comm’n at 23, Safarian v. American DG Energy Inc., No. 14-2374 (3d Cir. Dec. 11, 2014) (SEC Amicus Br.). However, under the Fifth Circuit’s hypothetical, the defendant would have the intent to retaliate because of the employee’s complaint to management; the concurrent complaint to the SEC is not the purported basis of the retaliatory intent but serves the satisfy the gatekeeping function of Section 21(a)(6)’s definition of “whistleblower” entitled to DFA’s remedies. 15 1 where management fails to appropriately respond to an internal report of such violations). That is, 2 section 78j-1 clearly requires internal reporting of illegal acts, and does not contemplate any report 3 of such acts to the SEC, except in limited circumstances. Congress’s express mention of section 4 78j-1 in subsection (iii) of the Dodd-Frank whistleblower protection provision would seem to 5 indicate that Congress wished to cover auditors who made required internal reports about illegal 6 acts. Yet if this Court is required to limit the DFA’s protection to those who report to the SEC, 7 nearly all of the conduct “required” under section 78j-1 and its scheme of internal reports would be 8 undermined. 9 As another example, subsection (iii) clearly covers internal reports required of attorneys under Sarbanes Oxley. See 15 U.S.C. § 78u-6(h)(1)(A)(iii) (prohibiting retaliation for disclosures 11 For the Northern District of California United States District Court 10 that are “required or protected under the Sarbanes-Oxley Act”). 15 U.S.C. § 7245 requires attorneys 12 to “report evidence of a material violation of securities law . . . or similar violation[s] by the 13 company . . . to the chief legal counsel or the chief executive officer of the company.” 15 U.S.C. 14 § 7245(1). Congress has further required attorneys to report such evidence “to the audit committee 15 of the board of directors . . . or to another committee of the board of directors” if “the counsel or 16 officer does not appropriately respond to the evidence.” 15 U.S.C. § 7245(2). Similar to Section 17 78j-1, Sarbanes-Oxley requires attorneys to report certain law violations internally up the chain of 18 command. Indeed, a later-enacted SEC rule provides that attorneys must first report violations 19 internally before any eventual report can be made to the SEC, because “[b]y communicating 20 [evidence of a material violation] to the issuer’s officers or directors, an attorney does not reveal 21 client confidences or secrets privileged or otherwise protected . . . related to the attorney’s 22 representation of an issuer.” 17 C.F.R. § 205.3(b)(1). The SEC rule specifically contemplates that 23 attorneys will not externally report law violations to the Commission unless a number of 24 preconditions are satisfied. See 17 C.F.R. § 205.3(d)(2)(i)-(ii). Indeed, external reports may be 25 prohibited by attorney ethics rules.7 Applying the narrow definition of “whistleblower” from 26 7 27 28 The Court notes that there has been some controversy between the SEC and certain State Bar Associations, which have argued that an attorney may not report to the SEC without client consent, and that attorneys may be subject to discipline for complying with 17 C.F.R. § 205.3. See generally The New World of Risk for Corporate Attorneys and Their Boards Post – Sarbanes-Oxley: An Assessment 16 1 Section 21F(a)(6) to attorneys who have made required internal reports under Sarbanes-Oxley would 2 leave such lawyers largely (if not entirely) unprotected from retaliation under the DFA. 3 In light of these examples, Section 21F(a)(6)’s narrow definition of whistleblower cannot 4 easily be reconciled with Section 21F(h)(1)(A)(iii)’s seemingly expansive scope, which appears to 5 cover conduct under statutes that expressly require internal whistleblowing activity to occur before 6 an individual may even consider making a voluntary report to the SEC. 7 ii. 8 9 The Whistleblower Definition Would Render the Words “To The Commission” in Subsections (i) and (ii) Superfluous Digital Realty (and Asadi’s) next argument – that reading the DFA to apply to employees who do not make a report to the SEC would read the words “to the Commission” out of the statutory 11 For the Northern District of California United States District Court 10 definition of a whistleblower – is not dispositive. See Asadi, 720 F.3d at 625; Banko, 20 F. Supp. 3d 12 at 756. While it is true that the SEC’s Rule does effectively read the words “to the Commission” out 13 of the definition of whistleblower as Section 21F(a)(6) would apply to (iii), Digital Realty’s 14 interpretation itself would create surplusage in subsections (i) and (ii). Section 21F(h)(1)(A) 15 prohibits retaliation against a “whistleblower,” which is defined in Section 21F(a)(6) as an 16 “individual who provides . . . information relating to a violation of the securities laws to the 17 Commission.” 15 U.S.C. § 78u-6(a)(6). But applying this limited definition of whistleblower would 18 render superfluous the phrase “to the Commission” in subsections (i) and (ii). For instance, 19 subsection (i) prohibits retaliating against a whistleblower “in providing information to the 20 Commission in accordance with this section.” 15 U.S.C. § 78u-6(h)(1)(A)(i). This subsection 21 would be entirely unnecessary if, as Digital Realty and the Asadi court contend, only persons who 22 provide information to the Commission can ever be whistleblowers. As the Supreme Court has 23 noted, “the cannon against superfluity assists only where a competing interpretation gives effect to 24 every clause and word of a statute.” Microsoft Corp. v. i4i Ltd. P’Ship, 131 S. Ct. 2238, 2248 25 (2011) (internal quotation marks and citation omitted). Here, no interpretation appears to avoid 26 excess language. 27 28 of Impact and a Prescription for Action, 2 Berkeley Bus. L.J. 185, 205-2010 (2005). 17 1 iii. The Wording of Sections (i) and (ii) as Compared to (iii) and the 2 Legislative History of the DFA Further Supports a Finding of 3 Ambiguity 4 Moreover, subsections (i) and (ii) expressly refer to providing information or testimony to 5 the Commission, while (iii) makes no similar reference to the Commission. The difference in 6 language, wherein the key qualification articulated in (i) and (ii) is omitted from (iii), suggests a 7 legislative intent that (iii) not be read to require SEC reporting. See Sebelius v. Auburn Regional 8 Med. Cntr., 133 S. Ct. 817, 825 (2013) (“We have recognized, as a general rule, that Congress’s use 9 of ‘certain language in one party of the statute and different language in another’ can indicate that ‘different meanings were intended.’”) (quoting Sosa v. Alvarez-Machain, 542 U.S. 629, 711 n.9 11 For the Northern District of California United States District Court 10 (2004)). 12 Indeed, this construction accords with the legislative history. Subsection (iii) was added to 13 the DFA at the very last minute. Indeed, subsection (iii) never appears in any version of DFA until 14 it formally passed, nor does it appear to have ever been discussed in the legislative record. See, e.g., 15 H.R. 4173, 111th Congress (May 27, 2010; Public Print) (last version of Dodd-Frank before passage 16 did not contain relevant subsection). The conflict between the newly-added (and very broad) 17 subsection (iii) and the narrow whistleblower definition that was consistently present in every 18 version of the bill from its first introduction in Congress, see H.R. 4173, 111th Congress (Dec. 2, 19 2009), could well have been a legislative oversight. And given the belated addition of subsection 20 (iii), it is at least reasonable to assume that Congress intended for the scope of the DFA 21 whistleblower-provisions to be broader than in earlier versions of the bill, which versions 22 unambiguously required an external report to the Commission in order to be protected from 23 employer retaliation. See, e.g., H.R. 4173, 111th Congress (May 27, 2010; Public Print) (report to 24 Commission unambiguously required under penultimate draft of Dodd-Frank). Certainly, the 25 legislative history contains no indication, apart from the definition of whistleblower itself, that 26 Congress purposefully intended to limit whistleblower protections under (iii) solely to those making 27 reports to the Commission. See Bond, 134 S. Ct. at 2091 (even express statutory definitions may be 28 overridden in appropriate circumstances). 18 1 iv. 2 3 The Fifth Circuit’s Concerns Regarding Rendering the SarbanesOxley Act Anti-Retaliation Provisions “Moot” are Unfounded The Asadi court also contends that an expansive reading of the Dodd-Frank whistleblower purposes, moot.” Asadi, 720 F.3d at 628. According to the Fifth Circuit, an expansive construction 6 “has this impact because an individual who makes a disclosure that is protected by the SOX anti- 7 retaliation provision could also bring a Dodd-Frank whistleblower protection claim on the basis that 8 the disclosure was protected by SOX.” Id. But such an individual would be unlikely to file suit 9 under Sarbanes-Oxley Asadi tells us, because Dodd-Frank “provides for greater monetary damages,” 10 has a longer limitations period, and does not require administrative exhaustion with the Department 11 For the Northern District of California protection provisions would render the Sarbanes-Oxley “anti-retaliation provision, for practical 5 United States District Court 4 of Labor before filing suit in federal court. Id. at 629. This Court disagrees. 12 The Fifth Circuit overlooked two reasons why individuals might choose to file a claim under 13 Sarbanes-Oxley’s whistleblower provisions, either in addition to, or in place of, a DFA claim. First, 14 certain individuals may actually prefer the administrative forum provided by SOX, especially given 15 that OSHA assumes responsibility for investigating and presenting a retaliation claim under 16 Sarbanes-Oxley. See, e.g., 29 C.F.R. § 1980.104-1980.105 (providing that OSHA, rather than the 17 plaintiff, will investigate Sarbanes-Oxley whistleblower claims in the first instance and present its 18 findings to an administrative law judge). Second, while the DFA provides greater back pay than is 19 allowable under SOX, a plaintiff who prevails under SOX can obtain other types of monetary 20 damages not available under the DFA. For instance, a winning SOX plaintiff can recover damages 21 for noneconomic harms such as emotional distress and reputational harm. See 18 U.S.C. § 22 1514A(c)(2)(C); Halliburton, 771 F.3d at 266 (holding that “the statue affords noneconomic 23 compensatory damages, including emotional distress and reputational harm”). Put simply, there is 24 no reason to suspect that a broad reading of the DFA will put an end to Sarbanes-Oxley 25 whistleblower actions, even if such a consideration were relevant at Chevron step-one. 26 27 28 v. Policy Reasons Support a Finding of Ambiguity Because this Court believes that the language of the DFA whistleblower-protection provision is at least somewhat in conflict, it is relevant to observe that the Fifth Circuit’s resolution of that 19 1 conflict – reading subsection (iii) narrowly to require a report to the Commission – seems at odds 2 with public policy underlying the DFA. As Judge Koh has noted, the Fifth Circuit’s reading of the 3 law is entirely “contrary to Dodd-Frank’s purpose of encouraging reporting of securities violations” 4 and otherwise improving accountability in the financial system. Connolly, 2014 WL 5473144, at *5; 5 see also Pub. L. 11-203, H.R. 4173 (stating that a main purpose of Dodd-Frank is to “promote the 6 financial stability of the United States by improving accountability and transparency in the financial 7 system”). Moreover, reading subsection (iii) to require a report to the SEC would render the statute 8 “utterly ineffective as a preventive measure because employers would not know that a report was 9 made to the Commission.” Id. at *6. As the SEC has explained in an amicus brief, “because in [the Fifth Circuit’s posited scenario] employers would not know that a report was made to the 11 For the Northern District of California United States District Court 10 Commission, clause (iii) would have no appreciable effect in deterring employers from taking 12 adverse employment action for internal reports or the other disclosures listed in clause (iii).” SEC 13 Amicus Br. at 22. Put simply, requiring SEC reporting adds nothing to the policy of deterring 14 employer retaliation. 15 16 vi. Summary At bottom, it is difficult to find a clear and simple way to read the statutory provisions of 17 Section 21F in perfect harmony with one another. While Asadi’s interpretation of the statute is not 18 unreasonable, neither is the counterveiling interpretation rendered by a number of district courts. 19 The issue before this Court is not the preferable interpretation, but whether the statute is ambiguous. 20 The Court finds there is sufficient ambiguity to open the door to administrative interpretation and 21 invocation of Chevron deference to the SEC’s interpretative regulation. Cf. Nat’l Ass’n of Home 22 Builders v. Defenders of Wildlife, 551 U.S. 644, 661-66 (2007) (affording Chevron deference to 23 agency interpretation because where two statutory provisions present “seemingly categorical – and, 24 at first glance, irreconcilable – legislative commands” there is a “fundamental ambiguity that is not 25 resolved by the statutory text”). The relevant “portions of Dodd-Frank are – at a minimum – 26 susceptible to more than one interpretation when read together.” Connolly, 2014 WL 5473144, at 27 *6; see also Rosenblum, 984 F. Supp. 2d at 147-48 (“When considering the DFA as a whole, it is 28 plain that a narrow reading of the statute requiring a report to the SEC conflicts with the anti- 20 1 retaliation provision, which does not have such a requirement. Thus, the governing statute is 2 ambiguous.”). For all of the reasons explained above, the Court concludes that the DFA provisions 3 are ambiguous, and thus will proceed on to consider Chevron step-two. 4 4. 5 Given that the whistleblower protection provisions of the DFA are ambiguous, the next Chevron Step-Two: The SEC Rule is Entitled To Deference 6 question this Court must decide is whether SEC Rule 21F-2(b)(1) is a “permissible construction of 7 the statute.” Connolly, 2014 WL 5473144, at *6 (quoting McMaster v. United States, 731 F.3d 881, 8 889 (9th Cir. 2013)). As every court that has considered Chevron step-two has concluded, the 9 answer to that question is “yes.” See id. (“The SEC’s interpretation is a reasonable position that most other courts have adopted”); see also Khazin, 2014 WL 940703, at *6 (holding that “the SEC’s 11 For the Northern District of California United States District Court 10 rule is a permissible construction of the statute and warrants judicial deference”); Murray, 2013 WL 12 2190084, at *5 (holding that “the SEC’s interpretation is a reasonable one”). 13 First, the SEC’s interpretation is reasonable because it effectively eliminates the tension 14 between the narrow definition of whistleblower in Section 21F(a)(6) and the seemingly very broad 15 coverage of subsection (iii). Put simply, the SEC’s interpretation is reasonable because it permits a 16 large class of individuals to qualify as protected whistleblowers, a result which appears consistent 17 with the broad language Congress employed in subsection (iii). 18 Second, the SEC’s interpretation is reasonable because it “comports with Dodd-Frank’s 19 scheme to incentivize broader reporting of illegal activities.” Connolly, 2014 WL 5473144, at *6; 20 see also Kramer v. Trans-Lux Corp., No. 3:11-cv-1424 (SRU), 2012 WL 4444820, at *5 (D. Conn. 21 Sep. 15, 2012) (explaining that the DFA “appears to have been intended to expand upon the 22 protections of Sarbanes-Oxley”); Pub. L. 11-203, H.R. 4173 (stating that a main purpose of Dodd- 23 Frank is to “promote the financial stability of the United States by improving accountability and 24 transparency in the financial system”). 25 Third, the Court finds the SEC’s interpretation is reasonable because it encourages internal 26 reporting of possible law violations. As the SEC persuasively explained in an amicus brief, Rule 27 21F-2(b)(1) establishes parity between individuals who first report to the SEC and those who first 28 report internally, thereby avoiding a “two-tiered structure of anti-retaliation protections that might 21 1 discourage some individuals from first reporting internally in appropriate circumstances, and, thus, 2 jeopardize the benefits that can result from internal reporting.” SEC Amicus Br. at 28; see also 3 Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities 4 Exchange Act of 1934, 75 Fed. Reg. 70488, 70488 (Nov. 17, 2010) (expressing concern that overly 5 incentivizing external reporting would “reduce the effectiveness of a company’s existing 6 compliance, legal, audit and similar internal processes for investigating and responding to potential 7 violations of the Federal securities laws”); id. at 70516 (expressing concern that the Commission 8 will “incur costs to process and validate” whistleblower “tips of varying quality” if companies are 9 not allowed “to investigate and respond to potential securities laws violations prior to reporting them to the Commission”); Orly Lobel, Lawyering Loyalties: Speech Rights and Duties Within Twenty- 11 For the Northern District of California United States District Court 10 First-Century New Governance, 77 Fordham L. Rev. 1245, 1250 (2009) (arguing that “internal 12 protections are particularly crucial in view of research findings that . . . employees are more likely to 13 choose internal reporting systems”). 14 Finally, the Court finds the SEC’s interpretation is reasonable because it enhances the 15 Commission’s ability to bring enforcement actions against employers that engage in retaliatory 16 conduct. As the SEC has stated, a narrow reading of Dodd-Frank would “significantly weaken the 17 deterrence effect on employers who might otherwise consider taking an adverse employment 18 action.” SEC Amicus Br. at 29; see also Connolly, 2014 WL 5473144, at *6. 19 20 Put simply, Rule 21F-2(b)(1) appears to be a reasonable interpretation of Dodd-Frank’s whistleblower-protection provisions, and thus is entitled to deference. 21 5. 22 In its reply brief, Digital Realty argues for the first time that Somers’ retaliation claim must 23 fail because he did not adequately allege that his internal reports were “protected” under Sarbanes- 24 Oxley and thus he cannot claim under subsection (iii). Specifically, Digital Realty argues that 25 because Somers did not exhaust his administrative remedies to bring a whistleblower claim under 26 Sarbanes-Oxley directly, his disclosures were not “protected” under Sarbanes-Oxley, and thus the 27 DFA does not apply irrespective of whether Somers could have qualified as a “whistleblower.” See Digital Realty’s Remaining Argument is Waived 28 22 1 15 U.S.C. § 78u-6(h)(1)(A)(iii) (DFA prohibits retaliation against an individual who makes 2 “disclosures that are required or protected under the Sarbanes-Oxley Act”). 3 Because Digital Realty did not make this argument in its initial motion to dismiss, the 4 argument is waived. See Dytch v. Yoon, No. C 10-02915 MEJ, 2011 WL 839421, at *3 (N.D. Cal. 5 Mar. 7, 2011) (explaining that parties “cannot raise a new issue for the first time in their reply 6 briefs”); see also United States v. Anderson, 472 F.3d 662, 668 (9th Cir. 2006) (recognizing the 7 general principle that arguments raised for the first time in a reply brief are waived). Digital 8 Realty’s motion to dismiss Somer’s DFA claim is denied. 9 B. Plaintiff’s motion to disqualify Defendants’ counsel, Seyfarth Shaw, must similarly be 11 For the Northern District of California United States District Court 10 Plaintiff’s Motion to Disqualify Defendants’ Counsel denied. “[W]e apply state law in determining matters of disqualification.” In re Cnty. of Los 12 Angeles, 223 F.3d 990, 995 (9th Cir. 2000). Rule 3-310 of the California Rules of Professional 13 Conduct provides that a member of the bar “shall not, without the informed written consent of each 14 client . . . [a]ccept or continue representation of more than one client in a matter in which the 15 interests of the clients potentially conflict.” Cal. Rules of Prof. Conduct 3-310(C)(2). Where the 16 potential conflict arises from the successive representation of clients with potentially adverse 17 interests, as it does here, “the courts have recognized that the chief fiduciary value jeopardized is 18 that of client confidentiality.” Flatt v. Super. Ct., 9 Cal. 4th 275, 283 (1994) (emphasis omitted). 19 “Thus, where a former client seeks to have a previous attorney disqualified from serving as counsel 20 to a successive client in litigation adverse to the interests of the first client, the governing test 21 requires that the client demonstrate a ‘substantial relationship’ between the subjects of the 22 antecedent and current representations.” Id. (emphasis in original). 23 Under the substantial relationship test, disqualification “turns on two variables: (1) the 24 relationship between the legal problem involved in the former representation and the legal problem 25 involved in the current representation, and (2) the relationship between the attorney and the former 26 client with respect to the legal problem involved in the former representation.” Jessen v. Hartford 27 Cas. Ins. Co., 111 Cal. App. 4th 698, 709 (2003). “[D]isqualification will depend upon the strength 28 of the similarities between the legal problem involved in the former representation and the legal 23 1 problem involved in the current representation.” Id. At bottom, “successive representations will be 2 ‘substantially related’ when the evidence before the trial court supports a rational conclusion that 3 information material to the evaluation, prosecution, settlement or accomplishment of the former 4 representation given its factual and legal issues is also material to the evaluation, prosecution, 5 settlement or accomplishment of the current representation given its factual and legal issues.” Id. at 6 713. 7 Here, the substantial relationship test is plainly not met. Somers hired Eugene Jacobs, a 8 partner at Seyfarth Shaw, to provide 2.1 hours of legal work related to his efforts to secure a position 9 at Newcastle Limited, a Chicago-based real estate advisor and investor. See Eugene Jacobs Decl. at ¶ 8. Somers admits that Jacobs did not advise him with regards to his employment contract with 11 For the Northern District of California United States District Court 10 Digital Realty. Somers Decl. at ¶ 2. Somers vaguely claims that he “discussed the Digital Realty 12 opportunity briefly with Mr. Jacobs and informed Mr. Jacobs about some aspects of my approach to 13 obtaining the job with Digital,” but even if this were true,8 it would not demonstrate that 14 “information material to . . . accomplishment of the former representation . . . is also material to the . 15 . . accomplishment of the current representation.” Jessen, 111 Cal. App. 4th at 713. At best, Jacobs 16 provided Somers with advice regarding how to best negotiate an executive agreement, advice that 17 Somers later used when negotiating with Digital Realty. The information that would have passed 18 from Somers to Jacobs in order to “evaluate” or “accomplish” this prior representation has 19 absolutely nothing to do with the “evaluation, prosecution, settlement or accomplishment of the 20 current representation,” where Seyfarth Shaw is defending Digital Realty against claims of 21 discrimination, whistleblower retaliation and defamation. Plaintiff’s disqualification motion is 22 therefore denied. 23 24 25 8 26 27 28 Jacobs denies Somers’ vague allegations: “Mr. Somers never sought any legal advice of any nature from me in connection with the job at Digital Realty, nor did I provide any legal counsel to him regarding Digital Realty in any regard whatsoever. In addition, Mr. Somers did not share any confidential information with me about his job at Digital Realty. My representation of Mr. Somers was limited to advising him on issues relating to the negotiation of an employment agreement with Newcastle.” Eugene Jacobs Decl. at ¶ 14. 24 1 2 3 IV. CONCLUSION Defendants’ motion to dismiss is denied because Somers has pleaded sufficient facts to 4 establish a plausible claim that he is a whistleblower under the Dodd-Frank Act. An external 5 complaint to the SEC is not required under Rule 21F2-(b)(1), and that rule is entitled to Chevron 6 deference. The Court finds, and hereby certifies pursuant to 28 U.S.C. § 1292(b), that this aspect of 7 the Court’s order is appropriate for interlocutory appeal, as the issue presented “involves a 8 controlling question of law as to which there is substantial ground for difference of opinion and that 9 an immediate appeal from the order may materially advance the ultimate termination of the litigation.” Id.; see also Docket No. 61 (Order granting Defendants’ request to certify for 11 For the Northern District of California United States District Court 10 interlocutory appeal, and explaining this Court’s reasoning). 12 Plaintiff’s motion to disqualify Seyfarth Shaw is denied because Seyfarth’s short 13 representation of Somers is wholly unrelated – let alone substantially so – to Seyfarth’s current 14 representation of Digital Realty. 15 16 This order disposes of Docket Nos. 20 and 31. 17 18 IT IS SO ORDERED. 19 20 Dated: July 22, 2015 21 _________________________ EDWARD M. CHEN United States District Judge 22 23 24 25 26 27 28 25
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