United States: Supreme Court Extends SOX Whistleblower Protection To Employees Of Privately Owned Companies

The Supreme Court today held that the whistleblower protection provisions of Section 806 of the Sarbanes-Oxley Act of 2002 (SOX), 18 U.S.C. §1514A, shield not only employees of publicly traded companies, but also employees of privately held contractors and subcontractors—for example, investment advisors, law firms, and accounting firms— who perform work for a public company.1 The ruling may surprise privately held businesses that may have believed that they are not subject to any aspect of SOX, but that now are clearly subject to the SOX whistleblower protection provisions.

The plaintiffs were employees of privately held companies that provided advice and management services to a mutual fund. As is typical of the industry, the mutual funds are public companies with no employees of their own. Both plaintiffs alleged that they blew the whistle on alleged fraud relating to the mutual funds and, as a consequence, suffered retaliation by their employer.

In the decision below, the United States Court of Appeals for the First Circuit held that the language in §1514A prohibiting discrimination "against an employee" protects only employees of public companies.2 The majority opinion, authored by Justice Ginsburg, reverses the First Circuit and states that §1514A "shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors."3 The Court stated that its reading of §1514A avoids insulating the entire mutual fund industry from §1514A, because virtually all mutual funds are structured so that they have no employees of their own but are managed by independent investment advisors. The Court's interpretation of §1514A protects the employees of investment advisors, who "are often the only firsthand witnesses to shareholder fraud involving mutual funds."4

However, the Court's holding extends far beyond the mutual fund industry to cover other contractors, including law and accounting firms. The opinion discusses in detail the legislative history of SOX, including many references to the collapse of Enron: "Indeed, the Senate Report demonstrates that Congress was as focused on the role of Enron's outside contractors in facilitating the fraud as it was on the actions of Enron's own officers."5 The Court declined to address whether the SOX whistleblower provisions protect employees of contractors or subcontractors when the subject matter of their whistleblowing does not deal with fraud against shareholders, but relates to other forms of fraud referred to in §1514A (i.e., mail, wire, and bank fraud).6

A vigorous dissent, written by Justice Sotomayor, focused on the following language of §1514A: "No [public] company..., or any officer [or] employee... of such company... may in any manner discriminate against an employee...." The dissent argued that the Court's ruling "encompasses any household employee of the millions of people who work for a public company..." because the ruling arguably applies to employees of "officers" and "employees" of publicly traded companies. The majority deflected that criticism. Without expressly holding that household employees of "officers" and "employees" of publicly traded companies are covered by §1514A, the Court stated that "Congress can easily fix the problem by amending §1514A explicitly to remove personal employees of public company officers and employees from the provision's reach."7

This ruling has significant practical consequences for privately owned businesses that, until now, may have believed that they were not subject to SOX in any respect. In particular, the following measures should be considered:

  • Privately owned companies that have contracts or subcontracts with publicly traded companies may wish to consider revising any policies against retaliation to include protection for employees who raise concerns about shareholder fraud at the publicly traded companies to which services are provided by the private company.
  • Human resources or legal personnel at privately owned businesses may wish to train management about the ruling to ensure that negative personnel actions are not based on retaliation for raising concerns pursuant to such revised policies.
  • Privately owned companies should be aware of the remedies available under §1514A, particularly reinstatement. Unlike most federal and state employment legislation, the preferred remedy under §1514A is reinstatement of employment, which can be ordered after an administrative investigation by the federal Occupational Safety and Health Administration, and before a full hearing on the merits before an Administrative Law Judge from the U.S. Department of Labor.

Thus, the new protection extended to employees of privately owned businesses who contract or subcontract with public companies, coupled with the unique remedies available under §1514A, suggest that privately owned businesses should take seriously any employees who raise concerns that may be covered under the SOX whistleblower provisions.

Footnotes

1 Lawson v. FMR LLC, No. 12-3, 571 U.S. __ (2014).

2 670 F.3d 61 (1st Cir. 2012).

3 571 U.S. __, slip op. at 1-2.

4 Id., slip. op. at 21 (citing S. Rep. No. 107–146, p. 10 (2002)).

5 Id., slip op. at 17.

6 Id., slip op. at 24.

7 Id., slip op. at 23.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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Jeremy B. Merkelson
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