Supreme Court Decision Expands Whistleblower Protections

The U.S. Supreme Court recently ruled that the whistleblower protections of the Sarbanes-Oxley Act not only shield employees of public companies, but also employees of privately held contractors and subcontractors, such as lawyers, advisers, and accountants, who perform work for the public company.

The U.S. Supreme Court recently ruled that the whistleblower protections of the Sarbanes-Oxley Act not only shield employees of public companies, but also employees of privately held contractors and subcontractors, such as lawyers, advisers, and accountants, who perform work for the public company.

In Lawson v. FMR LLC, the plaintiffs alleged that they blew the whistle on securities fraud and, as a consequence, were fired by FMR. They sought protection under section 806 of the Sarbanes-Oxley Act of 2002, which states: “No [public] company . . ., or any . . . contractor [or] subcontractor . . . of such company, may discharge, demote, suspend, threaten, harass, or . . . discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity].”

In response to the litigation, FMR argued that the provision protects only employees of public companies, and not employees of private companies that contract with public companies. As is common in the industry, the mutual funds served by FMR are public companies with no employees.

The majority of the Supreme Court disagreed. It concluded that the legislative history of Sarbanes-Oxley suggests that the statute was intended to encourage whistleblowing by contractor employees who suspect fraud involving the public companies with whom they work.

“It is common ground that Congress installed whistleblower protection in the Sarbanes-Oxley Act as one means to ward off another Enron debacle,” Justice Ruth Bader Ginsburg wrote.  “Also clear from the legislative record is Congress’ understanding that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron’s contractors,” she added.

In a strongly worded dissent, Justices Sonia Sotomayor, Anthony M. Kennedy, and Samuel A. Alito Jr. argued that the majority went too far, potentially exposing businesses to an influx of frivolous suits.

“As interpreted today, the Sarbanes-Oxley Act authorizes a babysitter to bring a federal case against his employer—a parent who happens to work at the local Walmart (a public company)—if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud. And it opens the door to a cause of action against a small business that contracts to clean the local Starbucks (a public company) if an employee is demoted after reporting that another nonpublic company client has mailed the cleaning company a fraudulent invoice,” Justice Sotomayor wrote.

If you have any questions about this case or would like to discuss your company’s whistleblower procedures, please contact me, Christine Vanek, or the Scarinci Hollenbeck attorney with whom you work.