Kohn, Kohn & Colapinto’s Stephen Kohn (Photo: Diego M. Radzinschi / NLJ)
Editor’s Note: This story was originally published on March 4 by CLI sister publication Supreme Court Brief.
The U.S. Supreme Court on Tuesday significantly expanded legal protection for corporate whistleblowers, making it clear for the first time that thousands of workers in the mutual-fund industry and other private companies are protected from retaliation for reporting fraud.
A splintered majority in Lawson v. FMR LLC found that the whistleblower-protection provision of the Sarbanes-Oxley Act of 2002 covers not only employees of publicly traded companies, but the private companies and contractors that work with them. The expansion may have the biggest impact on the mutual-fund industry because, as Justice Ruth Bader Ginsburg wrote for the majority, most public mutual-fund companies “have no employees,” instead relying on private contractors and advisers for their operations.
“Our reading avoids insulating the entire mutual fund industry” from whistleblower antiretaliation lawsuits, Ginsburg said. She added that to exclude this sector would be a “glaring gap” undermining the purpose of Sarbanes-Oxley—namely, avoiding “another Enron debacle.” The industry, she noted, manages $14.7 trillion in funds for nearly 94 million investors.
“The court has closed a major loophole” that allowed mutual-fund entities to avoid retaliation suits, said Stephen Kohn of Kohn, Kohn & Colapinto, who filed a brief in the case for the National Whistleblower Center. “It has been a shell game” until now, Kohn said. “The industry structured itself without ‘direct employees’ and then argued that their ‘investment advisers’ lacked whistleblower protection.”
As news of the decision spread on Tuesday, employment lawyers geared up for what some said would be a new wave of litigation by employees aimed at small businesses that have rarely dealt with whistleblower protection issues before.
Connie Bertram, co-head of Proskauer Rose’s whistleblowing and retaliation group, said the decision expands employee protection “from approximately 5,000 publicly traded companies to the over 6 million private contractors and subcontractors of those companies. These newly covered employers will need to develop comprehensive policies and programs to identify and address the concerns and potential claims of whistleblowers.”
Edward Ellis, co-head of Littler Mendelson’s whistleblower practice, said many private companies will be well advised to establish hotlines and complaint procedures in light of the decision.
“It is an enormous expansion of what people thought Sarbanes-Oxley covered,” Ellis said. He predicted “years of litigation over what is a contractor. … The history of these statutes is that if there is a potential remedy, people will go for it.”
The majority, Ellis said, did not impose a limiting principle on the liability contractors now face. U.S. Solicitor General Donald Verrilli Jr. suggested in his brief and during oral argument that the whistleblower protection could be confined to those who claim that a contractor committed fraud in its role with the public company, not in other relationships. But, Ginsburg noted, Verrilli also suggested the court did not have to delineate the limits of the protection, because the case before the court was a “mainstream” application of the law. Ginsburg agreed and stopped short of drawing boundaries around the decision.
That open-ended view led Justice Sonia Sotomayor to dissent, asserting that the majority had given Sarbanes-Oxley “stunning reach.” Under the court’s interpretation, Sotomayor said, a babysitter could “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.” Justices Anthony Kennedy and Samuel Alito Jr. joined her dissent.
But Ginsburg dismissed talk of lawsuits by babysitters and litigation floodgates opening. The U.S. Department of Labor has interpreted the law to cover contractors for nearly a decade, she said, and there is “scant evidence” of a flood of litigation.
At Skadden, Arps, Slate, Meagher & Flom, securities partner Matthew Matule also saw the possibility that the Lawson ruling won’t open the door to whistleblower lawsuits by babysitters and gardeners.
“In some ways, this decision is an obvious and uncontroversial outcome, which the court arrived at by evaluating the plain words of the statute and applying a reasonable dose of common sense,” Matule said, invoking a concurrence in the Lawson case written by Justice Antonin Scalia. Scalia, joined by Justice Clarence Thomas, said the law plainly “protects employees of private contractors from retaliation when they report covered forms of fraud.”
The case originated with actions taken against two employees of a private subcontractor that advised the mammoth Fidelity mutual-fund group. Jackie Lawson resigned under pressure in 2007 after she told her superiors and then the U.S. Securities and Exchange Commission about irregularities in Fidelity’s calculation of expenses, which affected the fees Fidelity could charge clients. Jonathan Zang was fired in 2005 after complaining about misleading statements Fidelity was making to the SEC.
The U.S. Court of Appeals for the First Circuit ruled that the two were not protected by the whistleblower provision. Their antiretaliation lawsuits are now revived. Eric Schnapper, professor at the University of Washington School of Law, argued the case at the high court on their behalf last November. Mark Perry of Gibson, Dunn & Crutcher argued for the employer.
Contact Tony Mauro at firstname.lastname@example.org.