By Lawrence Hurley
WASHINGTON, March 4 The U.S. Supreme Court on
Tuesday said whistleblower protections apply not just to
publicly traded companies but also to subcontractors that do
business with them.
The justices voted 6-3 along non-ideological lines in a
ruling that extends whistleblower protections to investment
advisers, law firms, accounting firms and other such businesses
working for public companies.
The three dissenting justices said the ruling had a
"stunning reach" that could give protections far beyond that,
potentially even reaching household employees like babysitters.
The National Federation of Independent Business criticized
the decision, saying in a statement that it gave plaintiffs'
lawyers "additional incentives to pursue aggressive litigation"
The justices were interpreting part of the Sarbanes-Oxley
Act, the 2002 Wall Street reform law passed by Congress that
sets standards for all U.S. publicly traded company boards,
management and public accounting firms.
Lawyers representing employers warned that the ruling
expands the scope of the provision from roughly 5,000 companies
to several million, including small businesses.
The court majority said the decision was in accordance with
how the U.S. Department of Labor had interpreted the law for
almost a decade. Justice Ruth Bader Ginsburg, writing for the
majority, noted that Congress had enacted Sarbanes-Oxley after
accounting problems brought down energy company Enron Corp and
communications provider WorldCom Inc, calling those events the
"mischief to which Congress was responding."
She questioned whether Congress, "prompted by the Enron
debacle, would exclude from whistleblower protection countless
professionals equipped to bring fraud on investors to a halt."
Employees at Enron's accounting firm, Arthur Andersen, were
retaliated against when they sought to bring the fraud to light,
Justice Sonia Sotomayor, joined by Justices Anthony Kennedy
and Samuel Alito, wrote a dissenting opinion. The majority's
interpretation gave the law too broad a reach, she wrote. Not
only babysitters but also small businesses that contract with
public companies, such as a service that cleans a Starbucks Corp
coffee shop, could be swept up, Sotomayor wrote.
The reach of the ruling could hinge on another legal
question that was not directly before the high court: whether
whistleblower protections apply only to allegations of
shareholder fraud or more broadly to other types of fraud
claims. Since 2011, the Department of Labor has embraced the
latter approach, lawyers familiar with the issue say.
Focusing on the claims in the case, which did relate to
alleged shareholder fraud, Ginsburg said there was no need for
the court to decide that question.
Eric Schnapper, the lawyer who represented the
whistleblowers, agreed with Ginsburg that future claims will
still focus on shareholder fraud.
"That's where the real impact is going to be," he said.
The court ruled that two whistleblowers were legally
protected against retaliation after they raised concerns to
their employer, FMR LLC, the parent company of Fidelity
Investments, about how some mutual funds were being managed.
While Fidelity's mutual funds are public companies and are
required to file reports with the U.S. Securities and Exchange
Commission, management services are provided by private
companies under contract with the funds, including Fidelity
Brokerage Services LLC.
The case, which will now return to lower courts for further
litigation, concerns claims made by former employees Jackie
Lawson and Jonathan Zang, both of the Boston area. Both said
they were retaliated against after highlighting what they
believed to be improper company practices.
Zang said in an email the ruling "confirms the importance of
protecting mutual fund employees from retaliation when they
report unlawful practices that harm shareholders."
Stephen Kohn, executive director of the National
Whistleblower Center, said the ruling was of particular
significance in the mutual fund industry.
"I've had a number of cases where the company tries to
manipulate the employee relationship to have the employee lose
whistleblower protections," he said. "The mutual fund industry
had this down to a science."
Vincent Loporchio, a Fidelity spokesman, said the company
has long encouraged employees to come forward with concerns. He
said the claims raised by Zang and Lawson were unfounded.
The case is Lawson v. FMR, U.S. Supreme Court, No. 12-3.