United States: Whistleblowers And Sarbanes-Oxley: District Court Limits SOX Protections To Public Company Employees, But Denies Them To Private Contractor Employees

Last Updated: July 18 2014
Article by Michael Stevens, Joshua Fowkes and Karen S. Vladeck

The issue of how courts interpret protections for employees who expose employer fraud has been in the spotlight since a pair of 2014 Supreme Court decisions: Lane v. Franks, 134 S. Ct. 1533 (2014) and Lawson v. FMR LLC, 134 S. Ct. 1158 (2014). In Franks, a case about alleged retaliation against a government employee who was fired after testifying about corruption at a grand jury hearing, the Court ruled that the First Amendment "protects a public employee who provided truthful sworn testimony, compelled by subpoena, outside the course of his ordinary job responsibilities." In Lawson, the Court held that employees of a mutual fund, traditionally outside the coverage of Sarbanes-Oxley Act (SOX), are nonetheless protected by its whistleblower provision. And, in a case of first impression, the US District Court for the Eastern District of Pennsylvania recently issued a ruling on another key issue concerning whistleblower protections. It held that an employee of a private company that contracted with a publicly traded company was not entitled to SOX's whistleblower protections. Gibney v. Evolution Mktg. Research, LLC, No. 14-1913,2014 WL 2611213 (E.D. Pa. June 11, 2014).

In that case, the terminated employee, Leo Gibney, sued his former employer, Evolution Marketing Research. He alleged that his termination violated SOX because he was fired after blowing the whistle on Evolution's alleged fraud in overbilling a publicly traded company. The District Court concluded that, even though Gibney had been working under a contract for a publicly traded company, he was actually employed by a private firm and that it was the private firm — not the public company — that had allegedly engaged in the fraud. Thus, the Court ruled that the firing fell outside the scope of SOX's whistleblower protections, and it dismissed the case.

Evolution, a privately held marketing and consulting company, employed Gibney on a contracted project for Merck & Co., a publicly traded company subject to SOX. After working on the project, Gibney informed Evolution's general counsel and CEO that he believed that Evolution was double-billing Merck under the contract. Evolution allegedly instructed him not to change its billing practices and terminated Gibney two days later.

After exhausting his administrative remedies, Gibney sued Evolution, alleging that it had terminated him in retaliation for exposing fraud. He claimed that he was entitled to sue Evolution under 18 U.S.C. § 1514A, the whistleblower provision of SOX, which prohibits an employer from terminating an employee for exposing fraud of a publicly traded company. Although Gibney conceded that Evolution was not a publicly traded company (and, therefore, not subject to SOX), he argued that — as an employee of a contractor to a publicly traded company, and in light of the Supreme Court's recent decision in Lawson — his activities were protected under § 1514A.

In Lawson, two former employees of private companies that had contracted to advise or manage Fidelity mutual funds brought separate actions against their former employers, alleging that the employers unlawfully retaliated against them in violation of § 1514A. The defendants contended that § 1514A was limited to protecting employees of a publicly traded company from retaliation by the company's private contractors or subcontractors. Writing for a 6-3 majority, Justice Ruth Bader Ginsburg rejected this contention, holding instead that "based on the text of § 1514A, the mischief to which Congress was responding, and earlier legislation Congress drew upon, [§ 1514A] shelters employees of private contractors and subcontractors [of publicly traded companies], just as it shelters employees of the public company served by the contractors and subcontractors." Id. at 1161.

The three dissenting Justices complained that the majority's broad reasoning would give § 1514A "a stunning reach" because it would "authorize[] a babysitter to bring a federal case against his employer — a parent who happens to work at the local Walmart (a public company) — if the parent stops employing the babysitter after he expresses concern that the parent's teenage son may have participated in an Internet purchase fraud." Id. at 1178 (Justice Sonia Sotomayor, dissenting). But the majority's analysis repeatedly relied upon the unique fact that the plaintiffs in Lawson were, in effect, employees of mutual funds, which generally have no employees of their own. Indeed, as the Court explained, if the Lawson plaintiffs were not covered by § 1514A, this would "insulat[e] the entire mutual fund industry from § 1514A," because "[v]irtually all mutual funds are structured so that they have no employees of their own; they are managed, instead, by independent investment advisers." Id. at 1171. But given the vital role that mutual funds play in filing reports with the SEC, the Supreme Court concluded that such insulation could not have been Congress' intent in enacting § 1514A.

In seeking to distinguish the broad language of Lawson, Evolution relied upon that case's unique facts by arguing that the "Lawson decision does not support extending SOX protection to employees of private companies who, as here, report overbilling 'fraud' neither committed by the public company nor having any connection to fraud on shareholders." Gibney, 2014 WL 2611213, at *6. Evolution also argued that because "Plaintiff does not allege that Evolution was assisting or otherwise involved with fraud committed by Merck, Plaintiff's Complaint should be dismissed as outside of SOX's scope." Id.

The District Court agreed. In distinguishing Lawson, Chief Judge Petrese B. Tucker explained that Gibney's case is fundamentally different in that it does not implicate the peculiar structure of the mutual fund industry. In addition, in enacting Sarbanes-Oxley, Congress was specifically concerned with preventing shareholder fraud either by the public company itself or through its contractors. Gibney, however, had not alleged that he blew the whistle on fraud committed by Merck (whether acting on its own or through contractors like Evolution). Rather, Gibney alleged that Evolution committed fraud against Merck. Thus, based on Gibney's allegations, Merck was the victim of fraud, rather than its perpetrator.

Turning to the text of § 1514A, the district court held that Sarbanes-Oxley was not intended to encompass every situation in which any party indirectly harms the revenue of a publicly traded company, and by extension decreases the value of a shareholder's investment — and that Lawson was not to the contrary. Rather, the Court ruled that the specific shareholder fraud contemplated by Sarbanes-Oxley is when a public company — acting on its own or through its contractors — makes material misrepresentations about its financial outlook in order to deceive its shareholders. Therefore, the District Court concluded that Sarbanes-Oxley does not reach retaliation for exposing fraudulent conduct between two companies that are parties to a contract simply because one of them is publicly held.

Gibney is significant in two respects. First, it is one of the first cases to meaningfully analyze the scope of the Supreme Court's Lawson decision — and it applies that decision quite narrowly. Second, it is a case of first impression concerning the applicability of Sarbanes-Oxley to employees of non-publicly traded companies arising out of their contractual relationships with publicly traded companies. For both of these reasons, it is unlikely to be the last word on the subject — but should serve as an important precedent at least in the near term.

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
 
In association with
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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