Are your employees covered by the Sarbanes-Oxley Act's
whistleblower protection simply because your company contracts with
a public company? The Supreme Court made clear this week that the
answer to that question is "yes," thus expanding
protection to vast numbers of employees and contractors not
previously thought to be covered. In general, the Sarbanes-Oxley
Act protects covered employees from workplace retaliation, such as
termination or demotion, because they have reported fraud,
accounting abuses, or violations of the securities laws by publicly
traded companies.
In Lawson v. FMR LLC, the Supreme Court addressed who is a
covered employee under the Act and held that whistleblower
protection extends not only to employees of the public company
itself, but also to employees of private contractors and
subcontractors retained by the public company. The plaintiffs in
the case were former employees of privately held companies
(collectively, FMR) that contracted to advise or manage the
Fidelity family of mutual funds. They had sued their former
employers alleging that, in violation of 18 U.S.C. § 1514A
(the whistleblower provision), they reported suspected fraud
relating to certain Fidelity mutual funds and, as a result,
experienced retaliation. FMR moved to dismiss the lawsuits, arguing
that § 1514A protects only employees of public companies who
"blow the whistle." The district court denied the motions
to dismiss, but a divided panel of the First Circuit
reversed on appeal, agreeing with FMR that only employees of
public companies were afforded protection by the Act.
In a 6-3 decision, the Supreme Court sided squarely with the former
employees. The Court took a broad view of the Act's
whistleblower protections, reasoning that many of the Act's
provisions control the conduct of accountants, auditors, lawyers,
and others who contract with public companies, and that Congress
understood the need to prevent the fear of retaliation from
deterring these external employees from reporting fraud. Reading
§ 1514A narrowly to exclude employees of contractors and
others, the Court feared, would risk "another Enron
debacle."
The dissenting Justices raised a number of hypothetical
whistleblowing scenarios that underscore the dramatically expansive
reach of the decision and should cause any employer significant
concern. For example, they raised the possibility that a parent who
is a checkout clerk for the local Wal-Mart (a public company) could
face a retaliation suit if the parent fires his babysitter for
alleging that the child she babysits is involved in Internet
purchase fraud. The dissenting Justices also suggested that a
cleaning company that contracts with Starbucks (a public company)
could face liability under the Act if it demotes an employee who
reports that another nonpublic company client mailed a fraudulent
invoice to the cleaning company.
The Court dismissed this parade of horribles as
"hypothetical." The Court, however, declined to provide
any significant guidance as to how broadly its interpretation of
the whistleblower provision might extend because the case at hand
"f[e]ll squarely within Congress' aim in enacting §
1514A." In other words, the alleged fraud reported by the
plaintiffs implicated the mutual funds' shareholders.
Determining the limits to the broad reach of the Court's
holding will have to wait for another day. Nevertheless, all
companies should take the opportunity to review and tune up their
anti-retaliation policies and training procedures to minimize the
risk of liability under this new decision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.