Dodd-Frank: Two words to strike fear into the hearts of chief executives everywhere. The leviathan law has already reshaped regulation in many different industries. But a recent case in Connecticut’s U.S. District Court suggests that the law’s language on whistle-blowing may yet prove to be one of its most powerful tools – as Connecticut companies are learning, and as companies across the nation may soon discover.   

The case, Kramer v. Trans-Lux Corp., involves a whistleblower who reported to the Securities and Exchange Commission (SEC) that the company wasn’t following required governance and disclosure rules in regard to its pension plan. Richard Kramer had been the human resources director for Trans-Lux, a publically-traded Norwalk, Conn.-based manufacturer of LED displays, and held one of three seats on its pension board.  

According to his complaint, Kramer became concerned in 2010 with the way the pension plan was being run. He first raised his concerns with his superiors, without result; he then alerted the SEC and the firm’s pension audit board. Shortly afterward, he was demoted and subsequently laid off. He then sued the company under the Dodd-Frank Act, saying it had retaliated against him for his whistle-blowing.

Trans-Lux attempted to have the case dismissed, arguing that Kramer failed to follow the official complaint procedure for SEC whistleblowers that was established when the Sarbanes-Oxley Act was passed in 2002. Kramer had written a personal letter, rather than filing his complaint online or filling out the official form. Therefore, the company argued, he shouldn’t be entitled to whistleblower status and the legal protections against retaliation that it provides.

Suit May Proceed

Last month, U.S. District Court Judge Stefan R. Underhill disagreed, ruling that language in the Dodd-Frank Act was intended to broaden the scope of protections available to whistleblowers such that even an unofficial complaint such as Kramer’s might be protected. While the outcome of Kramer’s own suit is yet to be decided – Underhill’s ruling merely allows the case to proceed – the ruling is one of the first to tackle this issue, and suggests that companies may have a lot more to worry about, said William Kelleher, an attorney with Robinson & Cole LLP in Stamford, Conn.

“It’s an interesting decision, because there haven’t been a whole lot of decisions on [whistle-blowing post-Dodd-Frank],” he said.

“There’s these two laws, Sarbanes-Oxley and Dodd-Frank. And Dodd-Frank is new. Dodd Frank provides more benefits to claimants – they can get more money [for reporting wrongdoing]. Sarbanes-Oxley provided less protection [from retaliation], but protected more activity,” explained Brett A. Strand, an attorney with Chicago-based Hinshaw & Culbertson, who specializes in employment law.

If Underhill’s interpretation of the law stands, then potential whistleblowers may get the best of both worlds, several legal experts said. It will be easier for them to acquire whistleblower status and give them more time to file a complaint. In addition, they would be entitled to greater compensation, while the broader range of violations mentioned in Sarbanes-Oxley will still be covered.

Most importantly, there is concern that if Dodd-Frank’s whistleblower rules become the standard, an increasing number of companies could be liable to whistleblower allegations. Sarbanes-Oxley is limited to companies whose stock is publically traded, which are already obligated to report many details about their financial transactions and internal accounting to the SEC so that potential shareholders can make informed decisions. But the Dodd-Frank Act is much more sweeping.

Dodd-Frank applies to “any employer, not just a public company,” said Ian Roffman, a partner at Boston-based Nutter McClennen & Fish.  Roffman points to another case, likely to be heard by the U.S. Supreme Court this term, involving a whistleblower at Boston-based finance giant Fidelity. Fidelity, though it manages public mutual funds which report to the SEC, is privately-owned. If the court decides the plaintiff in that case deserves whistleblower status, then a far broader array of companies may be affected by the new protections Dodd-Frank offers.  

“Once you start to broaden the scope of the protections, there’s a slippery slope in terms of where you draw the line of what comes with protections,” he explained.

Employer Concerns

 Even if the Dodd-Frank language only ends up applying to those reporting securities violations at public companies, figuring out how to respond to it will still keep companies on their toes.

One of the key issues and takeaways of the Connecticut case is “about how companies [need to] react to this type of complaints, how they respond to them. Should companies really be given the first shot to address these kinds of complaints? Should employees be required to go to their employers with any issues, instead of going right to the government?” asked Kelleher.

Freeing up whistleblowers to go straight to the regulators, bypassing internal reporting systems, could be “one of the areas where I think you’ll see a lot of change. A lot of these issues don’t come to public light, because companies would prefer to deal with these things internally,” Kelleher said. Companies will still want to encourage people to report internally, and setting up formal procedures to handle such concerns may be their best protection to prevent an airing of dirty laundry.

“As with many things, the tone at the top is important, and if it’s one that takes complaints seriously, that goes a long way,” said Roffman.