SCOTUS Holds SOX Whistleblower Law Protects Employees of Private Contractors; Yet Full Scope Remains Unclear

05 March 2014 Publication
Author(s): Bryan B. House

Legal News Alert: Whistleblower Developments

On March 4, 2014, the United States Supreme Court held in Lawson v. FMR LLC, 571 U.S. __ , Case No. 12-3 (Mar. 4, 2014), that §806 of the Sarbanes-Oxley Act of 2002 (“SOX”) provides a cause of action for employees of private contractors and subcontractors that are retaliated against for whistleblowing activities. The plaintiffs in the case were former employees of private companies that provided investment advisory services to the Fidelity family of mutual funds. The plaintiffs alleged that they had blown the whistle on fraud at the mutual funds and had been terminated by their employers as a result. The mutual funds themselves, while “public” companies for purposes of the statute, have no employees. The Court reversed the First Circuit Court of Appeals’ determination that the plaintiffs were not protected by the statute because they were not employees of the public company funds. The majority opinion, written by Justice Ginsburg, and the dissenting opinion, written by Justice Sotomayor, reflect deep disagreements regarding statutory interpretation, as well as what Congress intended when it enacted §806. The dissent said the expanded scope of the statute leads to “absurd results,” pointing out that the Court’s decision would allow a SOX claim made by a babysitter against his employer, who happened to work at Walmart (a public company), if the parent had fired the babysitter after he expressed concern that the parent’s teenage son had participated in an Internet purchase fraud. While the Court refused to indulge such “fanciful visions of whistleblowing babysitters,” it declined to determine the potential reach of the statute.

Section 806 of SOX (18 U.S.C. §1514A) provides in pertinent part: “[n]o [public] company … or any officer, employee, contractor, subcontractor, or agent of such company … may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee … because of [whistleblowing activities].” (emphasis added). The question for the Court was simple enough: “Does §1514A shield only those employed by the public company itself, or does it shield as well employees of privately held contractors and subcontractors – for example, investment advisers, law firms, accounting enterprises – who perform work for the public company?” The answer to the question was far less simple, and both sides acknowledged imperfections in their respective interpretations.

The Court first looked at the key words of the statute and noted that, had Congress intended to restrict the statute’s application to an employee “of a public company,” it could easily have done so. Absent any qualification in the statute, the Court concluded that a contractor could not retaliate against its own employees for engaging in protected whistleblowing activities. The Court rejected the contrary interpretation that the statute bars contractors from retaliating against public company employees because (notwithstanding George Clooney’s ax-wielding character in the movie “Up in the Air”) contractors would not ordinarily be in a position to take adverse action against such employees. The Court also relied on other portions of the statute that focus on an employer-employee relationship between the retaliator and the whistleblower, including the remedies provision of the statute, which entitles a successful claimant to reinstatement and back pay – remedies that a contractor or subcontractor presumably could not provide an employee of a public company.

The Court acknowledged that its interpretation means that the statute, grammatically, protects all employees of public company officers and employees from retaliation. The dissent seized on this point in its charge that the majority opinion gave the statute “a stunning reach” that “encompasses any household employee of the millions of people who work for a public company and any employee of the hundreds of thousands of private businesses that contract to perform work for a public company.” In addition to the “whistleblowing babysitter” hypothetical, the dissent imagined a claim against a small company that contracted to clean the local Starbucks (a public company) brought by an employee demoted after reporting that another nonpublic company client had mailed the cleaning company a fraudulent invoice. The majority countered that these concerns were “likely more theoretical than real” because “[f]ew housekeepers … are likely to come upon and comprehend evidence of their employer’s complicity in fraud.” In any event, the majority viewed this problem as outweighed by the compelling arguments against the contrary view that the term “employee” refers only to public company employees.

The statutory heading – “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud” – also drew divergent views. The Court said, where a statute, like SOX, is “complicated and prolific,” headings should be given little weight. The Court also noted other instances in which the statute’s heading could be considered under-inclusive. The dissent believed that the statutory heading should be given more weight when it “decisively” favors one interpretation over another, as the dissent obviously felt was the case here.

Perhaps the decisive debate involved the Enron scandal, the event that Justice Ginsburg and Justice Sotomayor agreed largely drove SOX’s passage. Citing Congressional investigations and news reports, Justice Ginsburg wrote that Congress was keenly focused on the role of Enron’s accountants and lawyers in the fraud. Repeated concerns regarding outside professionals retaliating against their own employees who raised concerns about Enron led Justice Ginsberg to conclude that the statute was designed to encourage whistleblowing by contractor employees who suspect fraud involving the public companies with whom they work. The dissent countered that Congress’s concern about accountants and lawyers was specifically addressed by SOX, but through regulatory authority that would address the problem. Specifically, the Public Company Accounting Oversight Board was created to regulate accountants and punish them when appropriate. And the SEC was required to establish rules of professional conduct for attorneys and granted power to punish wrongdoers. Justice Ginsberg acknowledged these provisions, but responded that none of them would further Congress’ purpose of protecting accountants and lawyers from retaliation for blowing the whistle on their corporate clients. Notably, while concurring with the Court’s conclusion based on the language of the statute and its context, Justice Scalia and Justice Thomas disagreed with their colleagues’ attempt to divine Congressional intent from “the swamps of legislative history.”

The specific facts of Lawson, no doubt, contributed at least in part to the result. The majority noted that its interpretation avoided “insulating the entire mutual fund industry” from the statute’s reach. The Court said that the fact that investment advisers are regulated separately under the Investment Company Act of 1940, the Investment Advisers Act of 1940, and elsewhere in SOX misses the point because none of these provisions protect investment management employees from whistleblower protection. The Court found it implausible that Congress intended to leave such a “glaring gap” for employees managing money on behalf of tens of millions of investors.

The Court’s decision undeniably raises serious concerns about the potential breadth of the SOX whistleblower provision. The Court sought to respond to the concerns of the dissent (and numerous amici groups supporting the defendant) that including contractor employees in the protected class would provide causes of action for employees with no exposure to investor-related activities. The Court called concerns that “babysitters, nannies, gardeners and the like” would bring whistleblower claims “hypothetical” and noted that it was aware of no case brought by a private contractor that was unrelated to shareholder fraud. The Court further suggested that overbreadth problems could be resolved by “limiting principles,” including limitations on who is considered to be a “contractor” and the extent to which the whistleblowing relates to the contractor’s work for a public company. The Court, however, avoided determining §806’s bounds because the plaintiffs sought only a “mainstream application” of the statute’s protections.

Whether the Court’s decision “threatens to subject private companies to a costly new front of employment litigation,” as the dissent fears, remains to be seen. What is undisputed is that millions of people are now protected by SOX that were not protected by the First Circuit’s interpretation of the statute. The Court concedes that clarity may be needed, whether from Congress or from further litigation. Given the proliferation of whistleblower litigation in recent years, it is safe to assume that Lawson will be just the beginning of the debate regarding the scope of SOX’s whistleblower protection.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Bryan House
Milwaukee, Wisconsin