Supreme Court declines to broaden whistleblower protections

[February 22, 2018]  By Andrew Chung

WASHINGTON (Reuters) - The U.S. Supreme Court on Wednesday refused to broaden protections for corporate insiders who call out misconduct, ruling they must take claims of wrongdoing to the Securities and Exchange Commission in order to be shielded against retaliation.

The justices ruled 9-0 in favor of Digital Realty Trust Inc, throwing out a lawsuit brought against the California-based real estate trust by a fired former employee who had reported alleged wrongdoing only internally and not to the SEC.

The 2010 Wall Street reform law known as the Dodd-Frank Act is unambiguous in offering no protection from retaliation such as firing or demotion to employees who report claims of securities law violations only in-house, the court ruled.

"The plain-text reading of the statute undoubtedly shields fewer individuals from retaliation than the alternative," said Justice Ruth Bader Ginsburg, writing for the court.

The ruling could inhibit employees from trying to resolve complaints of wrongdoing without involving the SEC and impede retaliation suits filed by workers fired after making in-house complaints.

Whistleblowers not covered under Dodd-Frank still may have protections under another federal law, the Sarbanes-Oxley Act of 2002, but it offers a shorter time frame for filing a whistleblower lawsuit.

Digital Realty, a publicly traded San Francisco-based company that owns and develops data centers, had appealed a lower court ruling in favor of a fired executive, Paul Somers, after he informed senior management about alleged violations by his supervisor but never reported the matter to the SEC.

The case required the justices to decide who should be considered a whistleblower deserving of protection from corporate retaliation. The Dodd-Frank law explicitly defines whistleblowers as any individual or group of employees who provide "information relating to a violation of the securities laws" to the SEC.

"Somers did not provide information 'to the Commission' before his termination ... so he did not qualify as a 'whistleblower,'" Ginsburg wrote.

The U.S. Supreme Court building is pictured in Washington, DC, U.S., November 15, 2016. REUTERS/Carlos Barria/File Photo

Digital Realty senior vice president of investor relations, John Stewart, said in an email, "We welcome the court's decision on this important legal issue and the clarity it provides employers." An attorney for Somers declined to comment.

Somers, a Digital Realty portfolio-management vice president from 2010 to 2014, sued the company, saying he was dismissed because he reported internally that his supervisor had hidden major cost overruns, eliminated internal controls and granted unsubstantiated payments to friends, according to court filings.

The SEC adopted rules in 2011 to prohibit corporate employers from retaliating against whistleblowers who try to report allegations of securities law violations or fraud.

Backed by President Donald Trump's administration, Somers argued that whistleblower protections must extend to those who speak up internally in order to encourage people to report misconduct without fear of being fired.

The San Francisco-based 9th U.S. Circuit Court of Appeals last year upheld a federal judge's decision that the law covered a wide array of disclosures by whistleblowers, not just those who report to the SEC. Digital Realty appealed that ruling to the high court.

(Reporting by Andrew Chung; Editing by Will Dunham)

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