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.
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