United States: U.S. Supreme Court Rules Employees Of Private Companies May Bring Claims For Whistleblower Retaliation Under Sarbanes-Oxley

Last Updated: March 5 2014
Article by Marc James Ayers and R. Aaron Chastain

Today, in an opinion issued in Lawson v. FMR LLC, Case No. 12-3, the United States Supreme Court held that the Sarbanes-Oxley Act of 2002 provides whistleblower protections for employees of private contractors performing work for public companies. The expansive interpretation of the statute was based on the Court's reading of the statutory text and its understanding of the congressional purpose behind the Act.

Section 806 of the Sarbanes-Oxley Act, codified at 18 U.S.C. § 1514A, provides

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 any lawful act done by the employee—

"(1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of [various criminal statutes], any rule or regula¬tion of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by [a federal agency, Congress, or supervisor] . . . ."

The question presented to the Court was whether Section 806 extends to provide a private cause of action for employees of privately held contractors that performed work for public companies who claimed that they had been retaliated against due to their whistleblower activity.

The Petitioners, Jackie Hosang Lawson and Jonathan Zang, had worked for entities affiliated with Fidelity, the mutual fund. Lawson and Zang each claimed that they had suffered adverse employment action in retaliation for raising concerns about purportedly unlawful practices in which their employer had engaged. After Lawson and Zang filed administrative complaints with the Department of Labor's Occupational Safety and Health Administration – the regulatory entity with the responsibility of administering the Sarbanes-Oxley Act's whistleblower regulations – they brought suit in the U.S. District Court for the District of Massachusetts. The Respondents moved to dismiss the suits, arguing that Lawson and Zang had failed to state a claim for relief under 18 U.S.C. § 1514A because their employers were private contractors, not public companies regulated by the statute.

The District Court rejected the defendants' interpretation of the statute and denied the motions to dismiss, but certified the question of the proper interpretation of the statute for interlocutory review. On appeal, a divided First Circuit reversed and directed the District Court to grant dismissal. The majority of the Court of Appeals read the statute's reference to "an employee" as referring only to employees of public companies and not to a private contractor's own employee. The dissenting judge argued that the majority's reading of the statute "impose[d] an unwarranted restriction on the intentionally broad language of the Sarbanes-Oxley Act" and "bar[red] a significant class of potential securities-fraud whistleblowers from any legal protection." Lawson v. FMR LLC, 670 F.3d 61, 83 (1st Cir. 2012) (Thompson, J., dissenting).

The Supreme Court granted certiorari and reversed. Writing for the majority, Justice Ginsburg began by analyzing the text of the Sarbanes-Oxley Act, noting that the ordinary reading of the words "an employee" in § 1514A referred to a contractor's own employee, not "an employee of a public company." Slip Op. at 9. The Court reasoned that contractors "are not ordinarily positioned to take adverse actions against employees of the public company with whom they contract," which means that a narrow reading of "an employee" would "shrink to insignificance the provision's ban on retaliation by contractors." Id. at 10. The Court held that its reading of the statute was consistent with congressional purpose in enacting the whistleblower protection provision of the Sarbanes-Oxley Act, which was to provide "one means to ward off another Enron debacle." Id. at 17. The Court noted that congressional investigators had "discovered ample evidence of contractors demoting or discharging employees they ha[d] engaged who jeopardized the contractor's business relationship with Enron by objecting to Enron's financial practices." Id. at 17-18. Because the Court concluded that the statutory text was not ambiguous, it did not reach the question of whether an interpretation of the statute previously given by the Department of Labor's Administrative Review Board was due any deference.

Justice Scalia (with Justice Thomas joining) concurred in the principal part of the majority opinion and the judgment, but expressed reservations about relying on the statute's legislative history to arrive at the final conclusion. Justice Scalia noted, as an example of the weaknesses of using legislative history, that the Court omitted the piece of legislative history most damaging to its conclusion: a quote from Senator Sarbanes, the titular co-sponsor of the Act, stating that the Act "applies exclusively to public companies" and "is not applicable to private companies." Slip Op., Scalia Concurrence, at 2.

Justice Sotomayor dissented, and Justices Kennedy and Alito joined her opinion. The dissent criticized the majority for giving too little weight to the caption Congress assigned Section 806 of the Sarbanes-Oxley Act when it was passed: "Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud." Slip Op., Sotomayor Dissent, at 1. The dissent found that wording of the statute was ambiguous, and that a narrow reading of "an employee" better comported with its purpose and practical application, as well as the wording of the caption provided by Congress.

The impact of the Lawson decision is difficult to predict. On its face, the decision appears to greatly expand the scope of the whistleblower protections provided under the Sarbanes-Oxley Act, putting lawyers, accountants, and financial providers hired by public companies on notice that they may not act adversely against their own employees in retaliation for protected whistleblower activity. On the other hand, the majority opinion rejected the Respondents' suggestion that its broad interpretation of the statute would open the floodgates to new retaliation claims, noting that the Department of Labor's regulations had interpreted § 1514A as protecting contractor employees for almost a decade. Privately held companies that perform work as contractors for public companies would nonetheless be wise to note that the Supreme Court has now given its imprimatur to Sarbanes-Oxley Act whistleblower actions by contractor employees; they may want to review their human resources policies to ensure that there are safeguards against whistleblower retaliation.

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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