By Lawrence Hurley
WASHINGTON (Reuters) - Supreme Court justices on Tuesday signaled they may have some difficulty deciding whether employees at private firms that contract with public companies are subject to whistleblower protections.
The justices appeared conflicted as they considered whether two whistleblowers are legally protected against retaliation after they raised concerns to their employer, Fidelity Investments parent FMR LLC, about how some mutual funds were being managed. Whistleblowers at public companies already are protected from employer retaliation.
Although Fidelity's mutual funds are public companies and are required to file reports with the U.S. Securities and Exchange Commission, management services are provided by private companies under contract with the funds, including Fidelity Brokerage Services LLC.
Several of the nine justices voiced concern at how the court could define what type of private companies or conduct would be covered by a potential ruling in favor of the whistleblowers. On the other hand, other justices signaled they thought that at least some cases involving contractors, including the one before them, should trigger the protections.
Plaintiffs Jackie Lawson and Jonathan Zang asked the court to decide whether the Sarbanes-Oxley Act, which contains the provision preventing public companies from retaliating against whistleblowers, applies to private companies serving under contract as advisers to public companies.
Sarbanes-Oxley was enacted in 2002 after accounting problems brought down energy company Enron Corp and communications provider WorldCom Inc.
Fidelity has argued it should be exempt from the law because the funds themselves technically have no workers apart from their boards of directors and instead hire private management companies to invest the funds' money.
The case is being closely watched by employers, who have urged the court not to extend protections to private companies. Such a move would subject small businesses to "burdensome and expensive whistleblower litigation," lawyers for the U.S. Chamber of Commerce wrote in a friend-of-the-court brief filed in support of the companies. By contrast, the plaintiffs' attorney, Eric Schnapper, told the justices that a wide range of conduct should be subject to the law's protections.
Justices peppered both sets of lawyers with questions over the scope of a potential ruling. Justice Stephen Breyer raised concerns that "every mom and pop shop in the country" would be covered, but later in the argument appeared confident some kind of compromise could be reached.
"It seems to me there are many ways to skin that cat," Breyer said.
Justice Anthony Kennedy, often a key swing vote on the court, seemed unconvinced by the argument made by the Justice Department, which backs the plaintiffs. He had a lengthy debate with government lawyer Nicole Saharsky after she said that the court could decide the case in favor of the plaintiffs quite easily. A ruling that they would be subject to protection was a "mainstream application" of the law, she said.
Her response appeared not to contain the detail that Kennedy wanted.
"Do we write in the opinion, this is a mainstream case and therefore it is so confined?" Kennedy said. "That doesn't make any sense."
Justice Antonin Scalia raised similar concerns during Saharsky's 15-minute part of the one-hour argument.
"I'm not inclined to go along with your broad interpretation of the statute," he told Saharsky.
The Enron collapse and how that prompted Congress to enact the Sarbanes-Oxley law loomed large over Tuesday's argument as several justices noted that companies that did work with Enron, including now-defunct accountancy firm Arthur Anderson, could be viewed as contractors.
"What happens if another Enron situation comes along and the corporation's accounting firm retaliates against an employee of the accounting firm because that employee wants to report illegal activity by the corporation?" Justice Samuel Alito asked Fidelity's lawyer, Mark Perry.
Perry argued that, contrary to the Justice Department's position, accounting firms and law firms are not covered by the provision at issue in the case because they are referenced specifically elsewhere in the Sarbanes-Oxley law. According to Perry, the SEC and the Public Company Accounting Oversight Board have jurisdiction over lawyers and accountants respectively in respect to whistleblower issues.
Fidelity is the second-largest mutual fund company in the United States after Vanguard Group, overseeing $1.9 trillion in managed assets.
Lawson, who worked at Fidelity from 1993 until 2007, complained that she alerted supervisors to problems, including alleged improper accounting practices, only to be passed over for a promotion and threatened with punishment for insubordination.
Zang, who ran several mutual funds from 1998 to 2005, alleged Fidelity gave him poor reviews and fired him in retaliation for his complaint that a new pay plan for Fidelity portfolio managers inaccurately and illegally described how pay was calculated.
In a 2012 ruling, the 1st U.S. Circuit Court of Appeals in Boston sided with Fidelity. A Supreme Court ruling is due by the end of June.
The case is Lawson v. FMR, U.S. Supreme Court, No. 12-3.
(Reporting by Lawrence Hurley; Editing by Howard Goller and Eric Walsh)