United States: Supreme Court "SOX" It To Employers By Extending Statute's Whistleblower Provision To Private Contractors Of Public Companies

Last Updated: March 17 2014
Article by S. Jeanine Conley and A. Mackenna Mosier

On March 4, 2014, the U.S. Supreme Court issued a decision in Lawson v. FMR LLC expanding the class of persons protected under the anti-retaliatory provisions set forth in the Sarbanes Oxley Act of 2002 ("SOX"). The Court held that the whistleblowing protections contained in 18 U.S.C. § 1514 applied to employees of private contractors and subcontractors of public companies as well as the employees of public companies. Although SOX and other laws regulate the conduct of investment advisors, auditors, lawyers, and accountants who work with public companies, only § 1514 protects such individuals from retaliation by their employers for complying with the reporting requirements of SOX.

Plaintiffs worked for different parts of privately held FMR LLC, which provided management and advisory services to the Fidelity family of mutual funds. Plaintiffs sued FMR in federal court for violation of their whistleblower rights claiming FMR retaliated against them after they raised concerns regarding the management of the funds, including cost-accounting methodologies and SEC disclosures. Section 1514(A), at the time relevant to this decision, instructed: "No [public] company . . ., or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity]."

The district court denied FMR's motion to dismiss, ruling that § 1514(A) protections applied to employees of private companies contracting with public companies. The First Circuit disagreed, instead electing a narrow interpretation of the statute which would apply only to employees of public companies. In a 6-3 decision, the Supreme Court overturned the First Circuit decision, relying heavily on the congressional intent behind SOX. Passed in the wake of the Enron scandal -- where employees of the private accounting firm Arthur Andersen assisted Enron executives in covering up their fraud -- SOX was intended to "ward off another Enron debacle" by allowing employees to speak up in such situations without fear of retaliation. The Court ruled that it was clear that Congress believed that "outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract...[and] are often the only firsthand witnesses to shareholder fraud." The Court further held that without protection these employees "would be vulnerable to retaliation by their employers for blowing the whistle on a scheme to defraud the public company's investors. . . ." Congress borrowed § 1514(A)'s language from the anti-retaliation provisions in the Aviation Investment and Reform Act, which has commonly been read to include both employees of air carriers as well as contractors and subcontractors. Because the statutes had similar language and similar objectives, the Court held that Congress must have also intended § 1514(A) to have a similar application.

A key consideration, according to Justice Ginsburg, who authored the opinion, was the negative impact that a narrow interpretation of these protections would have on the mutual fund industry. The Fidelity family of mutual funds, per standard industry practice, were public companies with no employees of their own. Rather, they relied on contractor and subcontractor investment advisors to handle the funds' day-to-day operations, including making investment decisions, preparing shareholder reports, and filing SEC reports. The Court reasoned that, if subcontracted employees, like Plaintiffs, were denied whistleblower protections, the entire mutual fund industry would be completely insulated from liability for fraud. Mutual funds are required to file reports under the Securities Exchange Act of 1934, bringing them within the ambit of § 1514(A), therefore, Congress surely did not intend for them to be excluded from the provision.

FMR, the dissenting minority, and other opponents of this decision have voiced concern that such a broad interpretation will "cas[t] a wide net" of protection to employees -- down to the babysitter or the gardener -- "who have no exposure to investor-related activities and thus could not possibly assist in detecting investor fraud." But the majority declined to give weight to these concerns, instead finding that the Department of Labor has been operating under a broad interpretation of § 1514(A) for over a decade with no such "parade of horribles" ensuing. Employers who are contractors or subcontractors of publicly traded companies should revisit and strengthen their anti-retaliation policies and practices based on the Court's confirmation of additional exposure.

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.

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