Securities laws like the Foreign Corrupt Practices Act of 1977 (FCPA) that regulate corporate behavior abroad are critical to national security. Their enforcement relies heavily on whistleblowers. And yet, U.S. courts have been reluctant to extend the same protections they afford domestic informants to employees of American companies based abroad.
The FCPA prohibits the making of payments to foreign government officials for the purposes of obtaining business. By combating corruption that undermines the rule of law and destabilizes economies, the law not only promotes the ability of U.S. companies to compete globally but advances our national security. In fact, almost every securities law is capable of being violated in one regard or another by a foreign-based company listed on a U.S. exchange. This makes foreign whistleblowers indispensable in calling attention to and successfully prosecuting these cases, given regulators’ lack of access to overseas violations. Unfortunately, statutory protections available to foreign whistleblowers have not been commensurate to their importance.
Section 806 of the Sarbanes-Oxley Act of 2002 made it illegal for companies to take adverse actions against employees who report (or otherwise assist the government in investigating) conduct that they reasonably believe to be a violation of the FCPA and other securities laws. However, any prospect for extending these protections to whistleblowers overseas was extinguished in 2010. In the seminal Morrison v. National Australia Bank decision, the Supreme Court invoked the “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States” to limit anti-fraud claims under Section 10(b) of the Securities and Exchange Act (“SEA”) to those arising from securities transacted in the United States.
In so doing, the Court rejected the prevailing Second Circuit conduct-and-effects test for extraterritorial application, i.e. whether the violation had “some effect on American securities markets or investors” or there was “significant conduct in the United States.” Instead, the Court focused only on “whether the purchase or sale [was] made in the United States, or involve[d] a security listed on a domestic exchange.” Since the relevant shares were purchased on the Australian stock exchange, the Court refused to apply the statute. The Court found it irrelevant that the deceptive conduct occurred in Florida. Though it did not explicitly address whistleblower protections, Morrison delivered a major blow to the extraterritorial application of Sarbanes-Oxley. Michael D. Goldhaber, U.S. correspondent for the International Bar Association, said at the time that “perhaps no precedent has ever cut down so many claims of such great value so rapidly.”
Reaction to Morrison was swift. The decision was issued in June 2010, and by July, Congress had passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank sought to cement the extraterritorial application of securities laws. Section 929P(b) states that “district courts . . . shall have jurisdiction over an action or proceeding brought or instituted by the [SEC] … involving … conduct occurring outside the United States that has a foreseeable substantial effect within the United States.” This was widely viewed as an attempt to overrule Morrison’s bright line transactional test. Dodd-Frank also established significant new protections for whistleblowers, who became eligible for rewards totaling 10 to 30 percent of any penalties collected by regulators. The law also created private rights of action for employees who are retaliated against to sue for damages.
Section 922 of Dodd-Frank defines “whistleblower” broadly and does not explicitly limit the rewards program to U.S. individuals. However, this anti-retaliation provision is silent as to extraterritoriality, which has given courts leeway to interpret the law narrowly as far as foreign whistleblowers go.
One of the first cases to address the issue was Asadi v. GE Energy in 2012. A U.S. citizen working for GE Energy in Iraq alleged that his employer retaliated against him after he reported a potential violation of the FCPA. Specifically, the plaintiff conveyed information to his superiors that a woman closely associated with a senior Iraqi official was hired to curry favor with that official while negotiating a joint venture agreement. Shortly thereafter, he received a negative performance review and was pressured to step down from his position and eventually fired. The Southern District of Texas, relying heavily on Morrison, concluded that because, just like SEA Section 10(b), Dodd-Frank’s anti-retaliation provision is silent on extraterritoriality, the “presumption that the provision does not govern conduct outside the United States” applied. The court also noted that the explicit grant of extraterritorial jurisdiction in other portions of the law “strengthens the conclusion that the Anti-Retaliation Provision does not apply extraterritorially.” On appeal, the Fifth Circuit affirmed the decision, though not on extraterritoriality grounds, finding that Asadi did not qualify as a whistleblower since he only conveyed his doubts internally rather than to regulators.
In the first appellate decision to address the extraterritorial application of the whistleblower provision, the Second Circuit in Liu v. Siemens examined the case of a compliance officer employed by a Taiwanese subsidiary of Siemens A.G. who similarly alleged that he was terminated for reporting suspected violations of the FCPA relating to kickbacks paid on medical equipment sold throughout Asia. The plaintiff insisted that
[t]he plain language of the statute contains very broad language that includes all employees, both foreign and domestic. By expressly extending extraterritorial jurisdiction for SEC enforcement actions—and concurrently providing anti-retaliation whistleblower protection to whistleblowers who provide information to the SEC that is used in such enforcement actions—Congress evidenced a clear intent to protect whistleblowers located overseas.
Citing Asadi, the district court had concluded that to apply the anti-retaliation provision extraterritorially would constitute “an intrusion into the employment law of a foreign nation [which] could disrupt the delicate field of international relations, an interest protected by the presumption against extraterritoriality.” The Second Circuit affirmed the decision, noting that the whistleblower, the employer, and all the entities involved were foreign, and that the whistleblowing, corrupt activity, and retaliation also all occurred abroad. While often cited for the premise that Dodd-Frank whistleblower protections do not appear extraterritorially, the appellate decision appears to have been decided on the lack of a U.S. nexus, without making a determination as to whether the Morrison test was the appropriate framework for evaluating the facts.
Similarly, in 2018, the Second Circuit affirmed the dismissal of a foreign whistleblower’s anti-retaliation claims. The plaintiff in Ulrich v. Moody’s Corp. worked in Hong Kong for a foreign subsidiary of Moody’s and reported securities violations that occurred in Asia. The court found that the protections did not apply despite the fact that he was a U.S. citizen who sometimes interacted with the company’s U.S. managers.
Neither Dodd-Frank’s language nor legislative history conclusively resolves the question of extraterritorial reach. Indeed, the above-cited rulings rely heavily on the fact that Dodd-Frank explicitly grants extraterritorial jurisdiction for violations of securities laws, but is silent as far as the anti-retaliation provision. However, it is also plausible that, having explicitly granted such reach throughout the Act, Congress did not feel obligated to reiterate it in the derivative anti-retaliation provision. The Act’s legislative history is also mixed, despite one of the sponsors of Section 929(P) indicating that the Act was intended to directly rebut Morrison. On the one hand, the language of Section 929(P), drafted prior to the Morrison decision, was not revised in the month after its issuance, to clarify that the provision was meant to apply extraterritorially, despite the prevalence of the issue at the time. On the other hand, one could just as equally argue that a Congress opposed to extraterritoriality would have specifically negated such reach. Rather than trying to divine congressional intent, courts should focus on a holistic assessment of whether questions of comity, sovereignty, forum, and policy warrant applying whistleblower provisions in the cases before them.
The Way Forward
Decisions like Asadi, Liu, and Ulrich are certain to have a chilling effect on the reporting of overseas violations of the FCPA and other securities laws important to national security. This is especially true given that many countries where these violations take place lack their own whistleblower laws. Countries like China are known to actively prosecute whistleblowers. Even France has a “blocking statute” that prohibits the disclosure of financial information that may be used in a foreign proceeding.
For the time being, the overseas application of corporate whistleblower protections remains an evolving area of law. In addition to the growing body of case law interpreting Section 929(P), there have been a slew of Department of Labor Administrative Review Board cases inconsistently interpreting Sarbanes-Oxley’s whistleblower provisions. The Supreme Court has yet to take up the issue in the wake of Dodd-Frank.
In the meantime, we can expect to see the law evolve most with respect to the determination of whether a case entails an extraterritorial application in the first place. Indeed, the Southern District recently did just that in Prout v. Anne C. Vladeck, a case involving FCPA bribery violations stemming out of Japan, by citing Liu and Ulrich for the presumption against the extraterritorial application of anti-retaliation provisions, while nonetheless finding that the facts sufficed to “render the application domestic.” If plaintiffs want the best chance of succeeding in these cases, they would do well to focus not on combating the interpretation of the underlying law, but by moving the goalpost as to what facts constitute a sufficient nexus to the United States.
The views expressed in this post are the author’s own and do not reflect the views of her employer.