United States: Who Is Protected By The Sarbanes-Oxley And Dodd-Frank Whistleblower Anti-Retaliation Provisions?

Last Updated: March 17 2014
Article by Jennifer L. Farer

The Sarbanes-Oxley Act ("Sarbanes-Oxley") and Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") whistleblower anti-retaliation provisions have been the subject of great debate as to what categories of individuals and activities are protected. These issues have developed significantly in recent weeks with the Supreme Court's decision in Lawson v. FMR LLC, involving the application of Sarbanes-Oxley's anti-retaliation provision to employees of the private contractors of public companies, and the SEC's submission of an amicus brief in Liu Meng-Lin v. Siemens AG, addressing Dodd-Frank's anti-retaliation protections for employees who report internally. These developments serve as a reminder that government regulators and the courts take retaliation very seriously, and companies should ensure that they have appropriate policies and processes in place to address whistleblower complaints.

Does Sarbanes-Oxley's Anti-Retaliation Provision Protect Employees of Privately Held Contractors or Subcontractors Who Work for Public Companies?

On March 4, 2014, in a 6-3 decision, the United States Supreme Court decided its first case under Sarbanes-Oxley's whistleblower protection provision, Section 806. In Lawson v. FMR LLC, 572 U.S. __ (2014), the Court held that Sarbanes-Oxley's whistleblower anti-retaliation protection, which prohibits public companies or any officer, employee, contractor, subcontractor, or agent of such companies from retaliating against an employee because of whistleblowing or other protected activity, extends to employees of the public companies' contractors and subcontractors.

The plaintiffs/petitioners in Lawson are former employees of private companies that advised or managed public mutual funds. They filed separate suits against their employers claiming unlawful retaliation under Sarbanes-Oxley's anti-retaliation provision after they reported concerns of potential fraudulent practices. The district court denied the defendant/respondent employers' motion to dismiss, rejecting their argument that the provision applies only to the employees of public companies. The United States Court of Appeals for the First Circuit reversed the district court's decision, acknowledging that contractors are prohibited from retaliating against employees, but holding that an "employee" refers only to employees of public companies, not the contractors' employees. Months later, in an unrelated case, the Administrative Review Board of the Department of Labor, which administers this whistleblower provision, issued an opinion disagreeing with the court of appeals' decision on this issue.

The Supreme Court reversed the court of appeals, ruling that the text and structure of the anti-retaliation provision, the text and purpose of parallel statutes, and the statutory purpose to "ward off another Enron debacle," favored a broader reading of the provision to extend to the employees of the contractors and subcontractors of public companies. Justice Sotomayor (joined by Justices Kennedy and Alito) issued the dissenting opinion, describing the majority decision as "a stunning reach" that would produce "absurd results."

Do Dodd-Frank's Anti-Retaliation Provisions Protect Individuals Who Report Internally?

On February 20, 2014, the SEC filed an amicus brief in the United States Court of Appeals for the Second Circuit in support of whistleblowers who report actual or potential violations internally. In Liu Meng-Lin v. Siemens AG, the district court dismissed the suit of an employee of a U.S. company's Chinese subsidiary who claimed that he was unlawfully terminated under Dodd-Frank's anti-retaliation provision for reporting possible FCPA violations to the subsidiary's CFO. Even though the district court dismissed the case on other grounds, the court discussed the issue surrounding whether individuals who report internally are protected under the anti-retaliation provision, identifying the tension in the statutory language. The district court noted that other courts have found that internal reporting is protected activity, and this interpretation is consistent with the SEC's interpretation of the statute it is charged with enforcing.

In its brief, the SEC urged the court to defer to its interpretation of Dodd-Frank's whistleblower provision. Under the SEC's interpretation, the anti-retaliation protections extend to any individual who engages in protected whistleblowing activities, including internal reporting, regardless of whether the individual makes a separate report to the SEC. The SEC argued that protecting internal reporting is important for deterring, detecting, and stopping unlawful conduct that may harm investors and supports the core overall objective of the whistleblower provisions and rulemaking — to avoid disincentivizing individuals from reporting internally first. The SEC stressed that "if internal compliance and reporting procedures are not utilized or working, our system of securities regulation will be less effective," and protecting internal reporting enhances the SEC's ability to bring enforcement actions when employers take adverse employment actions for reporting securities law violations internally.

Notably, in its brief, the SEC rejected the Fifth Circuit's decision in Asadi v. GE Energy, 720 F.3d 620 (5th Cir. 2013), which held that the anti-retaliation protection of Dodd-Frank's whistleblower provision creates a private right of action only for individuals who report violations to the SEC. If the Second Circuit reaches this issue and agrees with the SEC's interpretation, its decision would create a circuit split with the Fifth Circuit. However, even in the likely event that Liu is resolved on other grounds, the increasing divergence among the lower courts suggests that the issue may eventually make its way to the Supreme Court.

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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