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
  2. Login with your existing username and password
    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. 

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions