Supreme Court Expands Whistleblower Protections Under Sarbanes-Oxley

The first-ever Sarbanes-Oxley whistleblower case to be heard by the U.S. Supreme Court concluded with the court broadly expanding the scope of whistleblower protections under the Act.

Sarbanes-Oxley was passed in 2002 in response to the Enron scandal to protect employees of public companies who report such corporate wrongdoing. In the case Lawson v FMR, however, the question posed to the High Court was whether contractors and subcontractors of publicly traded companies are shielded by the whistleblower anti-retaliation provision under the Act.

In a 6-3 vote, the court ruled March 3 that whistleblower protections established under Sarbanes-Oxley do apply to employees of private firms that contract with publicly traded companies.

“With this decision, the Supreme Court has expanded the universe of companies regulated by the SOX whistleblower provision from roughly 5,000 public companies to potentially six million private ones, including even the smallest mom-and-pop businesses,” says Lloyd Chinn, a partner and co-head of whistleblowing and retaliation group of law firm Proskauer.

The case stemmed from a lawsuit filed by two former employees of investment advisers for Fidelity mutual funds, who claimed they were retaliated against after they reported allegations of fraud affecting Fidelity funds. 

In a 56-page opinion authored by Chief Justice Ruth Bader Ginsburg, the High Court concluded that Sarbanes-Oxley “shelters employees of private contractors that serve public companies, just as it shelters the public companies' own employees.” The decision overturns a lower-court ruling, which found that whistleblower protections under Sarbanes-Oxley apply only to employees of public companies, and not employees of private companies that contract with public companies. 

Stephen Kohn, executive director of the National Whistleblower Center, praised the decision. “The Supreme Court closed a potentially devastating loop hole in corporate whistleblower protection,” he says. By ruling that employees of contractors and subcontractors of publicly traded companies are protected by the whistleblower anti-retaliation provision of Sarbanes-Oxley, “the court has put an end to the popular shell game, which large companies use try to silence whistleblowers.”

Legal experts, on the other hand, said the decision is bad news for companies. The decision is a “radical expansion of the statute's coverage and arguably contrary to the intended scope of the Act,” says Chinn. “Employers of every size and type will have to prepare themselves for potential Sarbanes-Oxley whistleblower claims, merely because they are a contractor or subcontractor of a publicly traded company.”  

The practical outcome of the decision could pose “enormous costs and undue burdens,” says Gregory Keating, co-chair of the whistleblowing and retaliation practice of law firm Littler Mendelson. Furthermore, the decision, could “lead to an avalanche of litigation, and force small and mid-size companies with limited resources to learn unfamiliar securities laws,” adds Keating, who filed an amicus brief on behalf of the Society for Human Resource Management in support of Fidelity.