Supreme Court Expands Sarbanes-Oxley Whistleblower Provision

The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Robin D. Fessel, Julia M. Jordan, Theodore O. Rogers, Christina Andersen.

In Lawson v. FMR LLC, No. 12-3 (Mar. 4, 2014), the U.S. Supreme Court clarified the scope of whistleblower protection provided by the Sarbanes-Oxley Act of 2002 (“SOX”), holding that employees of private contractors and subcontractors of public companies are protected by the whistleblower provision set forth in 18 U.S.C. § 1514A of the Act. The Court, acknowledging that the language of the Act is ambiguous, interpreted it to allow persons employed by non-public contractors to public companies—such as lawyers or accounting firms—to bring whistleblower claims under the Act. In a strong dissent, Justice Sotomayor objected to the “stunning reach” of this interpretation. The majority opinion, responding to that criticism, cited “various limiting principles” proposed by the plaintiffs and Solicitor General, which employers will need to rely on in the future. Among other things, the “limiting principles” include that the types of contractors whose employees could make use of SOX are those “whose performance will take place over a significant period of time,” and that an employee of a contractor would only be able to invoke SOX as to complaints arising out of the contractor’s “fulfilling its role as contractor for the public company, not the contractor in some other capacity.” Ultimately, however, the Court declined to address the precise bounds of § 1514A, finding that the whistleblower claims at issue fell squarely within the “mainstream application” of the statute, as both plaintiffs claimed retaliation after reporting allegedly fraudulent activity that plainly implicated mutual funds’ shareholders.

Sarbanes-Oxley Whistleblower Provision

Section 1514A of the Sarbanes-Oxley Act protects employees from retaliation for making certain types of complaints:

No [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 in the terms and conditions of employment because of [whistleblowing or other protected activity].

The statute’s language is ambiguous as to whether the term “an employee” refers to an employee of public companies, which are the subject of SOX, or whether the term encompasses an employee of any of the types of entities which are prohibited from taking retaliatory action.

The First Circuit, the judgment of which the Supreme Court reversed and remanded, held that the SOX whistleblower provision applied only to employees of public companies, not to employees of their contractors, dismissing the claims of plaintiffs Jackie Lawson and Jonathan Zang. 670 F.3d 61 (2012). Lawson and Zang were employees of privately held companies that provide advisory and management services to Fidelity mutual funds, which are public companies for purposes of SOX. Lawson alleged that she suffered a series of adverse actions amounting to constructive discharge after raising concerns about certain cost accounting methodologies her employer, FMR LLC, used; Zang alleged that he was fired in retaliation for raising concerns about inaccuracies in a draft SEC registration statement concerning certain Fidelity funds.

The First Circuit’s decision conflicted with a decision of the U.S. Department of Labor’s Administrative Review Board, which held that employees of contractors that render services to public companies may be protected whistleblowers under SOX. Spinner v. David Landau & Assoc., LLC, ALJ No. 2010-SOX-029 (May 31, 2012).

Supreme Court’s Opinion

In a 6-to-3 decision delivered by Justice Ginsburg, the Supreme Court held, “based on the text of [SOX], the mischief to which Congress was responding, and earlier legislation Congress drew upon,” that the SOX whistleblower provision “shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.” (Slip Op. at 2.)

The majority, joined in a concurring opinion by Justices Scalia and Thomas, reasoned that a “common sense” reading of the text of the whistleblower provision supported the conclusion that employees of contractors to public companies are protected. (Id. at 2.) The Court found it implausible that Congress would have intended to protect an employee of a public company from retaliation by a contractor to that company but not to protect the contractor’s own employees from retaliation by their direct employer.

Of particular importance to the majority was the fact that the Lawson petitioners’ situation presented graphic justification for their holding—mutual fund companies generally have no employees and instead “contract with investment advisers . . . to handle their day-to-day operations, which include making investment decisions, preparing reports for shareholders, and filing reports with the SEC.” (Id. at 7.)

Given SOX’s focus on protecting investors, the majority reasoned that excluding employees of such contractors from whistleblower protection would not accord with Congress’s intent.

Apart from its textual analysis, the Court invoked Congress’s purpose in passing SOX (in the wake of Enron’s collapse) to support its interpretation that whistleblower employees of contractors are protected. The Court stated that it was “clear from the legislative record” that Congress understood “that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron’s contractors,” which included accounting firms, law firms and business consulting firms. (Id. at 17.)

The dissenting justices (Justice Sotomayor, who authored the dissenting opinion, and Justices Alito and Kennedy) argued that the broader interpretation of § 1514A was contrary to the intent of Congress and would lead to absurd results. Justice Sotomayor wrote, “The majority’s interpretation transforms [the whistleblower provision] into a sweeping source of litigation that Congress could not have intended. As construed by the majority, the Sarbanes-Oxley Act regulates employment relationships between individuals and their nannies, housekeepers, and caretakers, subjecting individual employers to litigation if their employees claim to have been harassed for providing information regarding any of a host of offenses.” (Id. at 12 (Sotomayor, J., dissenting).) The dissent also emphasized that the SOX whistleblower provision reaches allegations beyond those related to securities fraud, including mail, wire and bank fraud. The Court’s interpretation, according to the dissent, “threatens to subject private companies to a costly new front of employment litigation.” (Id. at 14.)

The majority opinion remarked that plaintiffs and the Solicitor General had identified “various limiting principles” that would resolve the dissent’s “fanciful” “overbreadth problems.” First, the plaintiffs noted that the term “contractor” would “not extend to every fleeting business relationship,” but instead to “a party whose performance of a contract will take place over a significant period of time.” Second, the Solicitor General maintained that § 1514A “protects contractor employees only to the extent that their alleged whistleblowing relates to” the contractor’s activities as a contractor for the public company, not to any other activity. And, third, the Court agreed with the Solicitor General that it need not determine the precise bounds of § 1514A at present, because plaintiffs Lawson and Zang sought only a “mainstream application” of the provision’s protections. (Id. at 24.) Both plaintiffs had alleged retaliation based on the reporting of alleged fraudulent practices that plainly impacted shareholders of the mutual funds.


Potential Increase in SOX Whistleblower Claims

The decision obviously may well result in a significant expansion in the number of whistleblower claims brought under SOX. As the dissent warned, imaginative employees of private firms that do business with public companies could use the language of the majority decision to try to fit all manner of complaints into SOX. The majority’s approving citation of the Department of Justice’s proposed limitation to complaints relating to work that the contractor actually does for the public company may give employers a means of defending against broader claims. Also, employers of contractors for public companies may wish to prepare themselves for such potential whistleblower claims by including non-retaliation provisions in their employment policies, as well as considering implementing codes of conduct and whistleblower policies if such policies have not already been implemented.

Meaning of “Contractor”

Future litigation following Lawson may include a focus on the meaning of “contractor” under SOX, including the limitations the Court indicated as possibilities. It is unclear what contract duration or scope of retention would qualify a private employer as a contractor under the whistleblower provision. The majority opinion focused on formal contracting relationships relating to the public company’s business activities, such as mutual fund advisors, accounting firms and law firms. The dissenting opinion, however, in objecting to the breadth of the majority’s decision, described more attenuated examples that conceivably could fall under the definition of contractor as interpreted by the majority: “a construction worker could file a . . . suit against her employer (that has a long-term contract with a public company) if the worker is demoted after reporting that another client has mailed the company a false invoice”; or “a babysitter can bring a . . . retaliation suit against his employer if his employer is a checkout clerk for the local PetSmart (a public company), but not if she is a checkout clerk for the local Petco (a private company).” Employers may need to rely on the majority’s assertions that the dissent’s speculations are not justified, as well as the “limiting principles” the majority outlined.

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