Back in January of 2013, we included a whistleblower case in our annual list for The Top 10 Executive Risks Court Awards & Settlement for Financial Service Firms from the previous year that we believed would influence liability in the coming year and beyond. There have been recent, further developments from the U.S. Supreme Court that make our prediction of increased liability arising out of whistleblower actions especially likely to be true.
On March 14, 2014, in a 6-3 decision, the Supreme Court held that employees at a private company that provided services to a public company are protected under Sarbanes-Oxley’s whistleblower protections primarily applicable to U.S. public companies.
The decision begins with the statements that:
To safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation, Congress passed the Sarbanes-Oxley Act of 2002. One of the Act’s provisions protects whistleblowers; at the time relevant here, that provision instructed: 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].
What the Court Read This to Mean
Notable to the majority of the Court was that this provision prohibits retaliation by public companies and any of their contractors, against employees, and “where Congress meant ‘an employee of a public company,’ it said so.”
Congress, it follows, must have assumed an employer-employee relationship between the organization and the whistleblowing employee when it prohibited firing, demotion, suspension, harassment and discrimination in employment – and it therefore intended to prohibit retaliation by private company contractors.
The Court believes that its “reading fits §1514A’s aim to ward off another Enron debacle.”
The Minority Anticipates Absurd Results
The minority disagreed with this interpretation and instead focused on the core purpose of Sarbanes-Oxley (SOX), which it viewed as to “safeguard investors in public companies” as well as on the title of the whistleblower provision under review, “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.”
With this in mind, the three dissenting Justices saw the majority’s position as a sweeping extension of SOX’s reach, possibly leading to absurd results:
…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.
The role of the whistleblower is one that we have continued to examine, including as recently as our December 2013 Newsletter. This new decision, widely expanding the reach of SOX anti-retaliation whistleblower protections is an important one for both whistleblowers and the public companies where the wrongful conduct has allegedly occurred.
However, it still remains unclear, as we noted in our January 2014 Alert on The Top 10 Court Awards and Settlements from 2013, as to the global reach of Dodd-Frank’s whistleblower bounty program: the next big battle ground issue.