Digital Realty Trust v. Somers: Hasn’t Chevron Deference Gone Too Far?

This article appeared in Harvard Law Review on October 17, 2017.
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In the high-flying corporate world, employees from time to time suspect that a colleague or boss may be violating federal securities laws. But they may shy away from reporting these violations — from “blowing the whistle” — either to the employer or relevant authorities, because of a risk of retaliation. When Congress passed the Dodd-Frank Act in the wake of the Great Recession, it included an “anti-retaliation” provision to protect those employees who report securities violations to the government. The statutory text defines a “whistleblower” as an “individual who provides . . . information relating to a violation of the securities laws to the [Securities and Exchange] Commission.” The statute is unambiguous: If someone reports a violation of the relevant laws to the SEC, Dodd-Frank gives them a remedy against employer retaliation.

In 2014, Paul Somers sued his former employer, Digital Realty Trust Company, claiming that he was fired for complaining to senior management that his supervisor had violated the Sarbanes-Oxley Act of 2002 (one of the laws covered by Dodd-Frank’s securities-whistleblower provision). But Somers failed to report anything to the SEC, so Digital Realty moved to dismiss because the text of Dodd-Frank specifies protection for reporting to the SEC, not for reporting to company management.

The District Court for the Northern District of California disagreed, however, holding that the definition of “whistleblower” was ambiguous and that Chevron deference was owed to a 2011 SEC rulethat had redefined the term to include those who internally report violations to their employer. Digital Realty appealed to the U.S. Court of Appeals for the Ninth Circuit, but lost there as well. The Ninth Circuit not only agreed with the district court that the statute was ambiguous — and that Chevrondeference should apply to the SEC’s rulemaking — but also found that a better reading of the statute’s text protected internal reporting!

Digital Realty asked the Supreme Court to hear the case and the Court granted cert. Petitioner’s argument that the statutory text of the Dodd-Frank Act is unambiguous and thus forecloses respondent’s claim is rather straightforward: The law could not be clearer in specifying that if a person reports a violation of the covered laws to the SEC, Dodd-Frank provides him or her a remedy against retaliating employers. It’s a pretty basic point, so I’ll refer you to Digital Realty’s brief on the merits for more technical details.

More interesting, and potentially of broader impact, is the administrative-law angle, which was the focus of the amicus brief that I filed for the Cato Institute in support of Digital Realty. The last few years have of course seen renewed attention—academic, judicial, and journalistic—to the question of whether courts have become altogether too deferential to executive agencies. While Chevron deference (and its cousins, Auer and Seminole Rock deference) was originally justified as a necessary tool for preventing courts from unduly meddling in administrative decisionmaking, hasn’t the pendulum swung too far?

Regardless of one’s views on the debates over various deference doctrines, Digital Realty should be low-hanging fruit for the reassertion of Article III review of Article II overreach. Here, even if five Justices somehow find the statutory text to be ambiguous, the Supreme Court shouldn’t simply defer to the SEC’s interpretation of Dodd-Frank, because the agency ignored a basic tenet of administrative due process. Indeed, the SEC violated the Administrative Procedure Act (APA) when it failed to provide fair notice to the public that it would redefine — and thus expand — the definition of “whistleblower” in its final rule.

After all, in 2010 the SEC had agreed with Digital Realty’s position. In its Notice of Proposed Rulemaking (NPRM), the commission defined “whistleblower” in line with the statutory definition: “You are a whistleblower if, alone or jointly with others, you provide the Commission with information relating to a potential violation of the securities laws (emphasis added).” So far, so good. The SEC’s NPRM didn’t try to change the statute’s definition or otherwise indicate that it was contemplating doing so. Nor did it ask for comments on whether it should. Indeed, there was no mention at all that it would expand the statute’s meaning as to who qualifies as a “whistleblower.”

When the SEC promulgated its final rule the following year, however, something was different: The definition of “whistleblower” (for anti-retaliation purposes) was expanded to cover people who don’t report securities violations to the SEC, so long as they had undertaken the protected activity listed in the statute. The SEC didn’t even try to explain why it was changing the definition in its final rule. Nor did it cite to any public comment that led it to do so. It merely announced that it was expanding the definition of “whistleblower” to reach those who do not report covered securities violations to the SEC.

The APA’s notice-and-comment procedures simply don’t allow the SEC to do this. The APA requires that final rules be the “logical outgrowth” of proposed rules. In other words, the SEC can’t include things in its final rule that weren’t in the proposed rule, because that doesn’t give the public “fair notice” and an opportunity to comment on the legal interpretation. As the Supreme Court explained in Long Island Care at Home, Ltd. v. Coke in 2007, the APA requires an agency conducting notice-and-comment rulemaking to provide the public with “fair notice” of what will be, or might be, included in its final regulation. Yet there was nothing in the SEC’s NPRM that would have given any notice to the public that it was going to change whom Dodd-Frank would protect from retaliation.

Just last year, the Court reaffirmed in Encino Motorcars, LLC v. Navarro that procedurally deficient rules that violate the APA do not receive Chevron deference because they lack the “force of law.” The SEC regulation here was procedurally deficient because of the final rule’s fair-notice problem, so it shouldn’t qualify for Chevron.

The APA serves as a vital procedural check on an ever-growing administrative state. When agencies like the SEC flout these important administrative due-process provisions, the Court should not reward them by erasing the procedural protections Congress has enacted.