United States: U.S. Supreme Court Extends Sarbanes-Oxley Whistleblower Protections To Employees Of Private Contractors

Employees of private companies that serve as contractors to public companies are covered by the whistleblower protection provisions of the Sarbanes-Oxley Act of 2002 ("SOX"), the United States Supreme Court ruled recently. Jones Day participated as amicus curiae on behalf of the U.S. Chamber of Commerce in the U.S. Supreme Court and in earlier proceedings in the U.S. Court of Appeals for the First Circuit, arguing on behalf of employers against expansive coverage.

The Court's decision in Lawson v. FMR LLC, No. 12-3, slip op. (March 4, 2014), substantially broadens the scope of SOX's whistleblower protections, leaving many employers who once thought they fell outside of SOX's coverage now subject to whistleblower claims under the law's anti-retaliation provisions. At the same time, employers who frequently face retaliation claims under SOX or other whistleblower laws may seize upon points raised by the Court's dissenting justices to argue that decisions issued by the Department of Labor's Administrative Review Board ("ARB") are not entitled to deference.

Justice Ginsburg delivered the opinion of the Court, joined by Chief Justice Roberts and Justices Breyer, Kagan, Scalia, and Thomas. The decision resolved a conflict between lower tribunals. The U.S. Court of Appeals for the First Circuit previously held that the term "employee" in the statute referred only to employees of public companies, not employees of private contractors of public companies. Several months after the First Circuit's decision, the ARB reached the opposite conclusion, holding that whistleblower protection extends to employees of private contractors that provide services to public companies.

The statutory provision at issue specifically provides, in relevant part, that "No [public] company ..., or any officer, employee, contractor, subcontractor, or agent of such company, may [retaliate] against an employee in the terms and conditions of employment because of [whistleblowing activity]." The petitioners who brought suit are former employees of private companies that advise and manage mutual funds. The mutual funds are public companies with no employees of their own. After the petitioners raised concerns about possible fraud relating to the funds, they were fired by their respective employers. The petitioners then filed administrative complaints with the Secretary of Labor, alleging retaliation in violation of SOX. In response, the employers argued that they were private companies not covered by SOX. After 180 days passed without a final decision by the Secretary of Labor, the petitioners exercised their statutory right to file suit in federal court.

In ruling for the petitioners, the Supreme Court relied on the statute's unqualified use of the word "employees," explaining that the ordinary meaning of "an employee" within the context of the statute means the contractor's own employee. The Court expressly rejected the employers' argument that Congress included "contractors" in the statute simply to prevent public companies from making an end-run around the law by hiring private entities known as "ax-wielding specialists" to "effectuate retaliatory discharges" of a public company's employees. In the Court's view, Congress' goal was broader: to "safeguard investors in public companies and restore trust in the financial markets following the collapse of the Enron Corporation."

The Court also downplayed the potentially absurd results of its ruling, which the employers argued could result in whistleblower protection for personal employees (e.g., housekeepers or gardeners) of company officers. Calling this possibility "more theoretical than real," the Court concluded that the statute's plain language and purpose trumped any concerns about the law's scope. The Court also placed little weight on the statute's caption, "Whistleblower Protection for Employees of Publicly Traded Companies," which in the Court's view does "no more than indicate the provisions in a most general matter" and cannot be substituted for the statute's otherwise clear language. Finally, the Court noted that its broad reading of SOX was consistent with previous decisions of the ARB holding that a similar whistleblower provision in the Wendell H. Ford Aviation Investment and Reform Act, also known as AIR21, protects employees of both contractors and subcontractors of air carriers.

Because the Court agreed with the ARB's broad interpretation of the SOX whistleblower provision, the majority did not examine the related question of whether that decision was entitled to deference under Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). In dissent, however, Justice Sotomayor, joined by Justices Kennedy and Alito, expressed a view that the ARB decision was not entitled to deference under the Court's Chevron analysis, both because the ARB had not been delegated policymaking authority under the statute, and because its decision was not an exercise of that authority. Under some whistleblower statutes, such as SOX, claims are commenced at an investigating agency (such as the Occupational Safety and Health Administration), proceed from there to a de novo review at the Office of Administrative Law Judges, from which they are subject to ARB review before proceeding to a federal Court of Appeals. Employers who urge courts of appeals to overturn an ARB's unfavorable interpretation of federal law can at this point seize upon the dissent's analysis.

Immediately, however, the Court's Lawson ruling will have a significant effect on many private employers. Although the enactment of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act expanded employee protections by prohibiting employers from retaliating against whistleblowers who provide information to federal agencies, the Court's ruling in Lawson goes one step further by prohibiting private contractors from retaliating against employees who engage in other activities protected by SOX, such as making internal complaints to supervisors. In light of these enhanced protections, employers should take several steps:

  • First, employers should review their contractual relationships and know who they are doing business with. If a private employer performs services for a public company, it is now subject to retaliation claims from its own employees who report allegations of fraud at the public company.
  • Employers should also ensure that their anti-retaliation policies are broad enough to encompass reports of fraud and other activities protected by SOX.
  • Managers and supervisors should be trained on SOX's broad scope and the activities protected by the statute.
  • Employers should maintain a robust documentation system, which includes all disciplinary actions against an employee with accompanying explanations for any discipline. Such documentation often allows employers to counter allegations that an employee engaged in protected activity or was disciplined in retaliation for protected activity.
  • Finally, before taking disciplinary action against any employee whom the employer has reason to suspect may bring such retaliation claims, employers should review comparator employee information to ensure that its policies have been uniformly enforced.

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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James S. Urban
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