United States: U.S. Supreme Court Extends SOX's Whistleblower Protection To Employees Of Publicly Traded Company's Contractors

On March 4, 2014, the United States Supreme Court decided Lawson v. FMR LLC, holding that SOX's whistleblower protection extends to employees of a publicly traded company's contractors and subcontractors. Lawson v. FMR LLC, 571 U.S. __ (2014). Notably, this is the first time the Supreme Court has decided a case under Section 806 of the Sarbanes-Oxley Act of 2002 ("SOX").

Background

Section 806 of SOX, codified at 18 U.S.C. § 1514A, prohibits retaliation against employees of public companies who report certain types of allegedly unlawful conduct. Section 1514A(a) provides that no public company (i.e., registers securities under Section 12 of the Securities Exchange Act of 1934, required to file reports under Section 15(d) of the Securities Exchange Act of 1934 or certain subsidiaries thereof) or "officer, employee, contractor, subcontractor, or agent...of such company" may "discriminate against an employee" for engaging in a protected activity. 18 U.S.C. § 1514A(a).

Two former employees, Jackie Hosang Lawson and Jonathan M. Zang brought separate suits alleging unlawful retaliation under § 806 of SOX against FMR LLC and other related private companies ("FMR") that provide, pursuant to contract, investment advising services to the Fidelity family of mutual funds. The Fidelity mutual funds were not parties to either suit and are investment companies organized under the Investment Company Act of 1940. The Fidelity mutual funds are not owned, controlled by or affiliated with FMR.

After initially filing complaints with the Occupational Safety & Health Administration ("OSHA"), Lawson and Zang commenced de novo actions in federal district court. FMR moved to dismiss Plaintiffs' claims, arguing they were not "covered employees" under § 1514A(a) because the statute does not protect employees of private subsidiaries of public companies. FMR maintained that the listing of "contractor" and "subcontractor" (along with other possible actors) merely identifies those who are barred from retaliating against employees of public companies, but does not extend protection to the employees of those contractors and subcontractors. Plaintiffs took the position that both the employees of public companies and those who are the employees of those public companies' contractors and subcontractor are protected employees under the SOX whistleblower provisions. Following the district court's denial of its motion to dismiss on this basis, FMR successfully petitioned for an interlocutory appeal of § 1514A(a)'s applicability to the Plaintiffs to the First Circuit Court of Appeals.

The First Circuit's Decision

On February 3, 2012, as the first (and only) court of appeals to address this issue, the First Circuit reversed the district court's interpretation of § 1514A(a), holding that SOX's whistleblower protection is limited to employees of publicly traded companies and does not extend to employees of a publicly traded company's contractors and subcontractors. Lawson v. FMR LLC, 670 F.3d 61 (1st Cir. 2012). First, the court examined the text of the statute and found that FMR's interpretation was "the more natural reading" because no evidence suggested that Congress intended the list of agents barred from discriminating to also define those protected from discrimination. The court considered the title of SOX § 806 and the caption of § 1514A(a), both of which referred to "employees of publicly traded companies", not private companies. The court found that the wording of the title and caption of the statute to be a clear signal that the protection should be limited to employees of publically traded companies. The court also examined similar statutory provisions in SOX and other acts, and found that when Congress desired to provide for broader coverage than just public company employees, it was explicit when it did so. Finally, the court explained that the legislative history of SOX specifically showed that the protection of § 1514A(a) was intended for employees of publicly traded companies, given that it was enacted in the wake of the demise of Enron – a public company. In that same vein, it also relied upon Congress's rejection of a proposed amendment to § 1514A that would have expressly provided for coverage of employees of investment advisers to mutual funds. And the First Circuit pointed out supportive legislative history accompanying the Dodd-Frank amendment to § 1514A bringing certain non-publicly traded subsidiaries of public companies within its coverage. And, finally, the First Circuit declined to defer to contrary agency views, as expressed in Department of Labor regulations and in amicus briefs filed by the Department of Labor and the SEC.

Supreme Court Proceedings

On June 28, 2012, plaintiff employees filed a petition for certiorari with the United States Supreme Court. In their petition, Plaintiffs relied on the current Administrative Review Board's ("ARB") decision in Spinner v. Landau & Assocs. LLC, 2012 WL 2073374 (ARB May 31, 2012), issued less than four months after the First Circuit's decision. The ARB had never before directly addressed the question of coverage for employees of contractors and subcontractors to public employers. In Spinner, the ARB reached the opposite conclusion from the First Circuit and extended SOX protections to employees of privately held contractors or subcontractors of a public company. Plaintiffs argued that, because the ARB will apply its decision in Spinner to administrative claims arising in every circuit other than the First Circuit, the Supreme Court should resolve the issue. The Court granted their petition for certiorari on May 20, 2013.

The Supreme Court's Ruling

In a 6-3 decision delivered by Justice Ginsburg, the Court reversed the First Circuit's decision, holding that SOX's whistleblower protection extends to employees of a public company's contractors and subcontractors. Lawson v. FMR LLC, No. 12-3, slip op. at 2 (U.S. Mar. 4, 2014). Purporting to rely on the text of SOX's whistleblower provision, a majority of the Court ruled that to address "the mischief to which Congress was responding, and earlier legislation Congress drew upon, . . . the provision shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors." The majority asserted that its reading of the SOX whistleblower provision was consistent with the purpose of SOX, i.e., the protection of the investing public from fraud by public companies and preventing "another Enron debacle."

In a sweeping decision, the majority summarily cast aside any concerns regarding its potentially unlimited application of the statue. For example, the parties (as well as the Department of Labor) all recognized a glaring inconsistency in the statute's application if employees of private contractors were to be covered. That is because the parties and the DOL agreed that employees of public company "employees" and "officers" should not be covered by the statute. As FMR pointed out, given that terms "contractor" and "subcontractor" appear in a series with the terms "officer" and "employee", the various terms should be given consistent interpretations. The majority's answer to this conundrum was simply to eliminate it by taking the truly remarkable position that employees of public company "employees" and "officers" are covered by the statute as well. The majority practically mocked the concerns (expressed forcefully in the dissent) that its interpretation was potentially extending the coverage of SOX to gardeners and nannies. The Court deflected any such issues back to Congress and noted that if the ruling opens the floodgates for such claims, "Congress can easily fix the problem by amending § 1514A to remove personal employees of public company officers and employees from the provision's reach."

The majority even declined to adopt "limiting principles" offered by the Plaintiffs and the Solicitor General during oral argument, the first limiting the concept of "contractor" to a party whose performance of a contract occurs "over a significant period of time," the second limiting the protection of contractor employees only to the extent the contractor was "fulfilling its role as a contractor for the public company."  Although the majority recited these limitations and did not expressly reject them, it found that they were unnecessary to decide Lawson because Lawson represented a "mainstream application" of the statute.

Interestingly, while many had been hoping that the Supreme Court would address whether and to what degree courts should defer to ARB interpretations of SOX, the majority expressly declined to answer that question. Instead, the majority simply stated, based on its own analysis, it generally agreed with the ARB's decision in Spinner.

The Dissent

In a vigorous dissent, Justice Sotomayor disapproved of the majority's interpretation finding that such a reading improperly "transforms § 1514A into a sweeping source of litigation that Congress could not have intended."   Justice Sotomayor expressed the view that "the Court's interpretation gives § 1514A a stunning reach." Unlike the majority, the dissent found that § 1514A is "deeply ambiguous." Further, contrary to the majority opinion, the dissent found that SOX's whistleblower provision "does not unambiguously cover the employees of private businesses that contract with public companies or the employees of individuals who work for public companies" and that "if Congress had really wanted § 1514A to impose liability upon broad swaths of the private sector, it would have said so more clearly."

Implications

With this decision, the Supreme Court has expanded the universe of companies regulated by the SOX whistleblower provision from roughly 5,000 public companies to potentially 6 million private ones, including even the smallest "Mom and Pop" businesses. Indeed, the majority opinion even swept personal employees of public company officers and employees within the reach of SOX. The Court declined even to adopt any of the potential "middle ground" approaches that were presented to it during briefing and oral argument. This is quite obviously a dramatic expansion of the statute's coverage and arguably contrary to the intended scope of SOX. Employers of every size and type will have to prepare themselves for potential SOX whistleblower retaliation claims, merely because they are a contractor or subcontractor of a publicly traded company.

The Court's expansion of SOX is particularly troubling for employers when paired with the DOL's Administrative Review Board's broad view of protected activity. See, e.g., Sylvester v. Parexel International, LLC, ARB Case No. 07-123 (May 25, 2011). In Sylvester, the ARB reversed its prior precedent (and diverged from the decisions of a number of federal courts) and held that to engage in protected activity, a SOX plaintiff need not complain of conduct amounting to shareholder fraud. While this view is hardly the "law of the land", it has been approved by one circuit court of appeals in Lockheed Martin Corp. v. ARB, 717 F.3d 1121 (10th Cir. 2013). Combining the Lawson decision with the ARB's expansive view of protected activity divorces completely a SOX whistleblower claim from SOX's stated purpose of "encourag[ing] and protect[ing] employees who report fraudulent activity that can damage innocent investors in publicly traded companies."  If the protected activity question ever reaches the Supreme Court, employers can only hope that the Court will recognize the need for some reasonable limitation on the applicability of the statute.

To listen to Proskauer's webinar on this decision, follow the instructions below: 

REPLAY:

  1. Go to https://university2.learnlive.com/proskaueronlineevents
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    1. If you do not have a username and password, please select Register for an Account to create a new account.
    2. You will need to enter the Proskauer Company Code: 9736529
  3. Click on Catalog at the top of the page. Click on View to the right of the session ID 2237402: Webinar: Private Companies, Welcome To Sarbanes-Oxley Whistleblower Claims: The Landscape Post-Lawson
  4. Click on the green Enroll button.
  5. Click on Launch to open the course and begin watching. Please be sure to allow pop-ups and click the boxes that appear on the screen to receive CLE credit. 

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