Made in the USA: Second Circuit Holds Whistleblower Protections Don’t Apply Extraterritorially, Leaves Other Questions Unanswered

Last week, the Second Circuit affirmed the dismissal of a suit brought against Siemens AG for violating Dodd-Frank’s anti-retaliation provision, holding that the anti-retaliation provision does not apply extraterritorially.  Liu v. Siemens AG, No. 13-4385-cv (2d Cir. Aug. 14, 2014).  But the court specifically declined to decide whether the anti-retaliation provision protects disclosures of FCPA violations, a question that the Southern District of New York had answered in the negative.  Nor did the Second Circuit accept the SEC’s invitation to weigh in on the question of whether a whistleblower is protected for reporting internally.

Lui, a Taiwanese citizen, was employed as a compliance officer at a Chinese subsidiary of Siemens AG.  Lui claimed that he was demoted, and ultimately fired, for reporting possible violations of the Foreign Corrupt Practices Act (“FCPA”).  After his termination, Lui reported Siemens’ allegedly corrupt conduct to the SEC and brought an action in the Southern District of New York claiming Siemens retaliated against him in violation of the whistleblower protection provisions of Dodd-Frank.

The District Court dismissed Lui’s claims after concluding that the Dodd-Frank anti-retaliation provisions did not apply extraterritorially.  The District Court also held that the whistleblower protections did not extend to disclosures of FCPA violations.  Finally, while noting the debate as to whether an internal complaint of wrongdoing can enjoy Dodd-Frank protection, the District Court elected not to “wade into” that question.

The Second Circuit was even more circumspect in its holding.  Citing to Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247 (2010) and the presumption against extraterritoriality, the court found no evidence that Congress intended the whistleblower anti-retaliation provisions to have extraterritorial effect.  The court described the allegations in Liu’s complaint as “extraterritorial by any reasonable definition” given that “the whistleblower, his employer, and the other entities involved in the alleged wrongdoing are all foreigners based abroad, and the whistleblowing, the alleged corrupt activity and the retaliation all occurred abroad.”  Notably, however, the court declined to reach other issues raised on appeal, specifically stating that it “express[ed] no views” on the questions (1) whether the district court correctly ruled that the anti-retaliation provisions do not encompass disclosures of FCPA violations and (2) whether internal reporting of misconduct qualifies a tipster as a “whistleblower” under the Dodd-Frank Act.

Also notable is the court’s dicta regarding the extraterritorial reach of the Dodd-Frank whistleblower bounty program. Liu had pointed to SEC regulations suggesting an international application of the bounty program as evidence that the anti-retaliation provisions of Dodd-Frank were meant to apply extraterritoriality.  The Second Circuit stated “it is far from clear that an agency’s assertion that a statute has extraterritorial effect, unmoored from any plausible statutory basis for rebutting the presumption against extraterritoriality, should be given deference.”  In any event, the court concluded that even if the bounty program were to apply extraterritorially, this would not support Liu’s claim that the anti-retaliation provision likewise should have international reach.

Takeaway

In 2013, whistleblowers from 55 foreign countries reported 404 potential violations to the SEC, accounting for 11.8% of the SEC’s total whistleblowing tips.  The Second Circuit’s decision, like the decision it affirmed and Asadi v. G.E. Energy (U.S.A.), LLC, No. 4:12-345, 2012 WL 2522599 (S.D. Tex. June 28, 2012), may serve as a deterrent to these foreign whistleblowers.  But the Second Circuit did not decide whether reports of FCPA violations are “required or protected” disclosures under the relevant statutes as required by the anti-retaliation provision.  It also left open the important question of whether reporting internally to company management, and not to the SEC, qualifies the reporter as a “whistleblower” for purposes of Dodd-Frank.  These questions will no doubt continue to be litigated.