UPDATE 2-US top court narrows scope of whistleblower suits

Mon May 16, 2011 4:51pm EDT

* 5-3 ruling limits False Claims Act lawsuits

* Ruling comes as SEC weighs whistleblower rule (Adds comment from lawyer, stock symbol)

By Jonathan Stempel

NEW YORK, May 16 (Reuters) - Corporate whistleblowers suffered a setback on Monday as a divided U.S. Supreme Court narrowed their ability to bring lawsuits alleging wrongdoing.

By a 5-3 vote, the Court said private plaintiffs cannot bring claims under the federal False Claims Act based on information they obtain from federal agencies through a request under the Freedom of Information Act.

Monday's ruling reversed an April 2010 decision by the 2nd U.S. Circuit Court of Appeals in New York in favor of Daniel Kirk, who had been an employee at Schindler Elevator Corp.

It comes as the U.S. Securities and Exchange Commission weighs how best to implement a whistleblower rule mandated by last year's Dodd-Frank financial reform law. [ID:nN11300606]

The False Claims Act lets private persons bring civil lawsuits against companies in the government's name, and lets them share in recoveries.

Schindler has offices in Morristown, New Jersey, and Scarborough, Ontario, and is a unit of Switzerland-listed Schindler Holding AG. (SCHN.S)

Kirk had contended that Schindler had since 1999 submitted hundreds of false claims for payments under its government contracts, while in violation of reporting requirements under a law concerning the employment of Vietnam veterans.

His case was based in part on information his wife obtained from the U.S. Department of Labor through three FOIA requests.

In reversing the 2nd Circuit, the Supreme Court agreed with a lower court judge who had called an agency response to a FOIA request a "report" -- which fell within a bar on False Claims Act lawsuits based on public information disclosed in reports.

The Court said this bar tries to strike a balance between encouraging private persons to root out fraud, and stifling "parasitic" lawsuits.

"The sort of case that Kirk has brought seems to us a classic example of the 'opportunistic' litigation that the public disclosure bar is designed to discourage," Justice Clarence Thomas wrote for the majority. "Anyone could have filed the same FOIA requests and then filed the same suit."

The Court sent the case back to the 2nd Circuit to examine whether Kirk's lawsuit is "based upon ... allegations or transactions" disclosed in the reports.

Joining Thomas' opinion were Chief Justice John Roberts, and justices Antonin Scalia, Anthony Kennedy and Samuel Alito.

"Mr. Kirk is disappointed in today's ruling, but is confident the court of appeals will allow his action against Schindler to proceed," his lawyer Jonathan Willens said.

Justice Ruth Bader Ginsburg dissented, saying the decision "weakens the force of the False Claims Act as a weapon against fraud on the part of government contractors." She was joined in her opinion by Justices Stephen Breyer and Sonia Sotomayor.

Justice Elena Kagan did not participate in the case.

Steven Reiss, a partner at Weil, Gotshal & Manges who represented Schindler, said he was pleased with the decision, which still allows whistleblower cases based on "significant, inside information" as envisioned under the False Claims Act.

Adina Rosenbaum, a lawyer at Public Citizen, a nonprofit that supported Kirk, said the decision "puts up an additional barrier to people who uncover fraud against the government. It sometimes takes the knowledge of a person like Mr. Kirk to find the value in documents that the government possesses."

The case is Schindler Elevator Corp v. United States ex rel. Kirk, U.S. Supreme Court, No. 10-188. (Reporting by Jonathan Stempel; Additional reporting by Sarah N. Lynch in Washington, D.C.; Editing by Robert MacMillan, Gerald E. McCormick and Matthew Lewis)

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