Supreme Court limits protections for corporate whistleblowers

The Supreme Court sharply limited the legal protections for corporate whistleblowers on Wednesday, ruling they are not shielded from being fired under a federal law unless they have reported a potential fraud to the Securities and Exchange Commission.

The justices conceded their ruling might gut the whistleblower protections that were adopted after the Wall Street collapse in 2008.

Lawmakers had said they wanted to break the “corporate code of silence” that prevented employees from revealing wrongdoing inside their companies.

But the high court, in an unanimous decision, said the Dodd-Frank Act of 2010 defined a protected whistleblower as someone who reported a potential fraud “to the commission,” referring to the SEC.

Justice Ruth Bader Ginsburg said Congress may have wanted to broadly protect whistleblowers, including those who only reveal problems internally to the company’s top executives or its corporate board. But “Dodd-Frank delineates a more circumscribed class” when it defined who was protected from retaliation, she said.

The court’s decision in Digital Realty Trust vs. Somers throws out most of a lawsuit brought by a San Francisco executive who says he was fired as a vice president of a real estate investment trust after he filed a complaint with top executives about hidden cost overruns in an Asian branch office. He did not take his complaint to the SEC before he was fired.

While the decision is a victory for employers, legal experts said it may backfire on them.

Companies often urge their auditors, lawyers and other employees to report problems internally if they see signs of wrongdoing. “Yet, today’s ruling confirms that whistleblowers who report internally are not protected from retaliation. What is now abundantly clear is that employees should get a lawyer and go straight to the SEC,” said Chicago attorney James Barz.

Washington attorney Sean McKessy, who headed the SEC whistleblower office for five years, said “this is a case where corporate America should have been careful about what it wished for. It’s a bad day for whistleblowers. However, it’s also a bad day for corporate America, particularly for those who have created strong internal compliance systems because now individuals who suspect a securities violation would be well advised to report directly to the SEC lest they forfeit fundamental anti-retaliation protections.”

Other lawyers noted that a separate provision in the Sarbannes-Oxley Act of 2002 protects whistleblowers. It requires employees to file a complaint with the Labor Department within 180 days of being terminated.

After the Dodd-Frank Act became law, the SEC adopted regulations that broadly protected corporate whistle-blowers from suffering retaliation, including those who revealed wrongdoing to a supervisor or the company’s board.

Based on those regulations, a federal judge and the 9th Circuit Court said Paul Somers could proceed with this suit.

In the Supreme Court, Trump administration lawyers joined the case on the side of the plaintiff. They said the court should not “depart from the usual understanding of the term ‘whistleblower.’” Doing so “would undermine Congress’s effort to promote more rigorous and effective internal compliance programs,” they added.

But the justices reversed the 9th Circuit and rejected the SEC’s regulations.

“We find the statute’s definition of ‘whistleblower’ clear and conclusive,” Ginsburg said. Its “unambiguous whistleblower definition, in short, precludes the commission from more expansively interpreting that term.”

Wednesday’s ruling shows how the justices — both liberal and conservative — are increasingly devoted to what the late Justice Antonin Scalia called “textualism.” This refers to deciding cases based on a close reading of the text of the law and without regard to Congress’ broader aims in passing the law.

While Congress may have aimed to broadly protect company whistleblowers to ferret out fraud, the text of the statute included a narrow definition of who qualified for protection.

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david.savage@latimes.com

On Twitter: DavidGSavage

UPDATES:

12:15 p.m.: This article was updated with comments from McKessy.

This article was originally published at 8:35 a.m.