SEC headquarters in Washington. Credit: Diego M. Radzinschi

Updated at 12:09 p.m.

The U.S. Supreme Court on Wednesday narrowed the scope of whistleblower protection under the Dodd-Frank Act, ruling unanimously that employees must first report alleged securities violations to the U.S. Securities and Exchange Commission.

The decision in Digital Realty v. Somers stated that simply complaining of wrongdoing within the employee's company does not trigger the protections of the law, thereby insulating securities firms from at least some whistleblower lawsuits.

Adhering to the language of the Dodd-Frank law, Justice Ruth Bader Ginsburg, writing for the court, said, “To sue under Dodd-Frank's anti-retaliation provision, a person must first 'provid[e]' … information relating to a violation of the securities laws to the commission.”

During arguments Nov. 28, most justices were skeptical that a broader interpretation was possible because of the wording of the statute.

“How much clearer could [Congress] possibly have been?” asked Justice Neil Gorsuch, emphasizing the reporting requirement “to the commission.”

Daniel Geyser of the Dallas firm Stris & Maher, counsel to whistleblower Paul Somers, argued Dodd-Frank should be read in context with the Sarbanes-Oxley Act of 2002.

“The entire point that Congress had made in this statute [Dodd-Frank], and consistent again with every piece of modern, major whistleblowing legislation is to protect internal whistleblowing,” he told the justices. “This is the ordinary progression of getting information to the government. You first give the corporation a chance for self-governance. If they refuse to do it, then you go to the government.”

The U.S. solicitor general's office also argued that a narrow interpretation of whistleblower protections would fail to protect certain employees, including attorneys, who are required in some instances to first report misconduct internally.

“Our reading shields employees in these circumstances, however, as soon as they also provide relevant information to the commission,” Ginsburg wrote. “True, such employees will remain ineligible for Dodd-Frank's protection until they tell the SEC, but this result is consistent with Congress' aim to encourage SEC disclosures.”

The decision is a win for Kannon Shanmugam, a partner at Williams & Connolly who argued the case for Digital Realty. By coincidence, Shanmugam was in the courtroom Wednesday morning to argue another case, Dahda v. United States.

Two federal appeals courts reached opposite conclusions: the Fifth Circuit said tipsters must first to go the SEC, and a divided Second Circuit found protections for those employees who first reported misconduct to company officials. The ruling Wednesday overturned a Ninth Circuit decision.

Leaders of the SEC's whistleblower program have questioned the wisdom of the industry's challenge. Jane Norberg, chief of the SEC's whistleblower office, said last year that the agency's broad view of whistleblower protections should be favored by companies for making corporate insiders more comfortable reporting misconduct internally.

Jason Zuckerman, a whistleblower lawyer in Washington, said Wednesday's ruling could drive corporate insiders who might otherwise report internally to go more quickly to the SEC.

“No doubt this is actually a very big loss for corporate America. They won on this issue, but if you look at the big picture, this is a huge loss,” he said. “It is in the interest of large corporations to get employees to blow the whistle early, perform an investigation into the problem and halt it. As a result of this opinion, employees are likely to blow the whistle directly to the SEC because of the huge risk of reprisal and, because of the Dodd-Frank Act, there is a significant financial incentive to blow the whistle.”

C. Ryan Barber contributed reporting from Washington. This report was updated with comment about the Supreme Court ruling.

The Supreme Court's ruling is posted in full below: