The U.S. Supreme Court on Tuesday 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 advisors, 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 National Federation of Independent Business criticized the decision, saying in a statement that it gave plaintiffs' lawyers "additional incentives to pursue aggressive litigation" against employers.
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.
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Lawyers representing employers warned that the ruling expands the scope of the provision from roughly 5,000 companies to several million, including small businesses.
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 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 reach of the ruling could hinge on another legal question that was not directly before the high court: whether whistleblower protections apply only to allegations of shareholder fraud or more broadly to other types of fraud claims. Since 2011, the Department of Labor has embraced the latter approach, lawyers familiar with the issue say.
Focusing on the claims in the case, which did relate to alleged shareholder fraud, Ginsburg said there was no need for the court to decide that question.
Eric Schnapper, the lawyer who represented the whistleblowers, agreed with Ginsburg that future claims will still focus on shareholder fraud.
"That's where the real impact is going to be," he said.
The court ruled that two whistleblowers were legally protected against retaliation after they raised concerns to their employer, FMR LLC, the parent company of Fidelity Investments, about how some mutual funds were being managed.