U.S. Supreme Court extends whistleblower laws to sub-contractors of public companies

March 25, 2014 by

Whistleblower Practice AreaThe U.S. Supreme Court has 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 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.

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, Ginsburg added.

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 coffee shop, could be swept up, Sotomayor wrote.

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.

The Lawson opinion has some immediate impacts:

1.The decision benefits the millions of Americans who invest their retirement savings in mutual funds in that employees in the mutual fund industry will now be protected against retaliation when they complain about or object to securities law violations, such as false disclosures to shareholders.

2. The decision will also benefit employees at law firms and accounting firms that prepare SEC filings and disclosures for publicly-traded companies.  As we know from Arthur Anderson’s role in the Enron fiasco, protecting these gatekeepers is critical to prevent shareholder fraud.

3. The business community was hoping that the Supreme Court would decline to defer to the ARB’s decision in Spinner broadly construing SOX coverage, just as the Court declined to defer to EEOC guidance in Nassar last June.  That did not happen, and indeed the Court quoted Spinner’s holding that “Congress plainly recognized that outside professionals-accountants, law firms, contractors, agents, and the like-were complicit in, if not integral to, the shareholder fraud and subsequent cover-up [Enron] officers . . . perpetrated.” I anticipate that federal courts will continue to defer to the current ARB’s broad interpretation of SOX protected conduct, as articulated in Sylvester.

4. Section III of the opinion contains a great discussion of the history of Sarbanes-Oxley’s whistleblower protection provision and why it is crucial to provide whistleblower protection to employees of contractors and subcontractors of publicly-traded companies.

Steve Larson
An experienced trial lawyer who handles both hourly and contingent fee cases, Steve has expertise in class actions, consumer cases, antitrust litigation, securities litigation, corporate disputes, intellectual property disputes, unfair competition claims, employment matters, and disputes involving family wealth. Steve regularly represents individuals and businesses in federal and state court and has obtained class-wide recovery in multiple class actions. A veteran practitioner, Steve's clients value his creative approach to resolving complex litigation matters.

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