Supreme Court Rules that Employees of Private Contractors Can Qualify as Whistleblowers Under Sarbanes-Oxley

On March 4, 2014, the U.S. Supreme Court issued its much anticipated decision in Lawson v. FMR LLC, resolving a dispute over the scope of the whistleblower provision of the Sarbanes-Oxley Act, 15 U.S.C. § 7201, et seq. (“SOX”). Private contractors and subcontractors of public companies should give their attention to this decision. Although SOX is generally thought of as a statute that regulates public companies and their employees, the Lawson decision extends SOX’s whistleblower provisions to cover private companies and their employees as well.

Enacted in 2002, SOX implemented new financial and conflict of interest disclosure requirements and greater corporate and criminal fraud accountability for public companies. SOX also includes a whistleblower provision protecting from retaliation employees who report or cooperate in investigations of violations of the federal securities laws or the regulations of the Securities & Exchange Commission (“SEC”). 18 U.S.C. § 1514A (“section 1514A”). In Lawson, the Supreme Court, by a 6 to 3 vote, held that section 1514A not only protects employees of public companies, but also makes it unlawful for private companies to retaliate against their own employees when the private company is a contractor or subcontractor of a public company.

Background

In relevant part, section 1514A prohibits retaliation against an “employee” carried out by a public company “or any officer, employee, contractor, subcontractor, or agent of such company.” The plaintiffs in Lawson were former employees of private companies under contract to advise and manage mutual finds. The mutual funds were public companies and, as is common in the industry, had no employees of their own. Plaintiff Lawson claimed she was constructively discharged by her employer after she raised concerns that certain accounting methodologies resulted in the overstatement of expenses. Plaintiff Zeng alleged he was fired after he raised concerns about inaccuracies in a draft SEC registration statement. Both plaintiffs brought suit in federal district court under section 1514A.

The district court denied the defendant-employers’ motions to dismiss brought on the grounds that section 1514A was not intended to protect the plaintiffs as employees of private companies. The court, however, concluded that there was substantial ground for a difference of opinion on this issue and certified the issue for immediate appeal under 28 U.S.C. § 1292(b). 724 F. Supp.2d 167 (D. Mass. 2010). The U.S. Court of Appeals for the First Circuit, in a 2 to 1 decision, rejected the district court’s interpretation of the statute and held that section 1514A was not intended to apply to employees of private companies. 670 F.3d 61 (1st Cir. 2012). The Court of Appeals concluded: “the clause ‘officer, employee, contractor, subcontractor, or agent of such company’ goes to who is prohibited from retaliating or discriminating, not to who is a covered employee . . . .” In so ruling, the court relied, in part, on the fact that section 1514A(a) bears the caption: “Whistleblower protection for employees of publicly traded companies.”

The Supreme Court’s Opinion

In an opinion by Justice Ginsberg, the Supreme Court held, based on the text of section 1514A as well as SOX’s legislative history, that Congress intended to afford whistleblower protection to the employees of private contractors and subcontractors. With regard to the statutory language itself, the Court noted the word “employee” was unqualified by any reference to any specific class of employer, and thus appears to cover any employer, whereas the interpretation advanced by the defendant-employers would require the insertion of the words “of a public company” after the word “employee.” The Court rejected the Court of Appeals reliance on the caption to 1514A(a), finding that the caption was merely a short-hand reference “not meant to take the place of the detailed provisions of the text.” As evidence that the caption is underinclusive of the statute’s text, the Court noted that the text itself expressly protects employees of companies that file reports with the SEC, even if those companies are not public. With regard to SOX’s legislative history, the Court observed that the statute was enacted in response to the Enron debacle and noted Congress’ concern with Enron’s outside professionals, who retaliated against their employees who threatened their employers’ business relationship with Enron by reporting fraudulent activity. The Court thus concluded that Congress intended section 1514A “to encourage whistleblowing by contractor employees who suspect fraud by public companies.”

In addition, the Court rejected the defendant-employers’ argument that the “contractors” referenced in section 1514A should be limited to the type of “ax-wielding” contractor embodied by George Clooney in the film, Up in the Air, i.e. the contractor brought in specifically to terminate employees. In the Court’s view, targeting such ax-wielding contractors would be superfluous, since the ultimate authority for the termination decisions would reside with the public company. The Court could not think of a real world situation in which a contractor would have authority to take action against a public company’s employees.

What is lacking in the Lawson decision is a precise description of the types of contractors and subcontractors whose employees are afforded the protections of section 1514A. For example, the Court acknowledged that under the literal reading given to the statute by the Court, the housekeepers or gardeners of “officers” of public companies would be “contractors” of those officers entitled to the statute’s protection. Yet, the Court expressly declined to delineate (a) the outer boundaries of the types of contractors covered by the statue in terms of the nature and extent of their relationship to the public company, (b) the extent to which the statute protects reporting by private company whistleblowers of wrongdoing beyond securities fraud, such as bank, mail and wire fraud, crimes also referenced in section 1514a, or (c) whether section 1514A also prohibits a contractor from retaliating against employees of any of the other entities governed by the statute. The Court reasoned that it need not reach those issues given that the cases before it required only a “mainstream application” of the statute and that the two plaintiffs were “firsthand witnesses” to the type of securities fraud Congress anticipated section 1514A would protect.

Significance of the Decision

Companies that have contractual relationships with public companies or their contractors must now take care when their own employees make allegations of wrongdoing by such entities. If the allegations relate to securities fraud, actions taken against the whistleblowing employee might be viewed as retaliatory and may well give rise to a whistleblower claim under section 1514A. Moreover, given that the Court in Lawson declined to determine the precise bounds of section 1514A, employers should carefully consider their response to any claim of wrongdoing made by their employees against public companies and make sure that any subsequent actions taken against such employees are supported by legitimate business reasons.

For answers to any questions regarding this blog or with regard to whistleblower or retaliation issues generally, please feel free to contact an attorney in the Gibbons Employment & Labor Law Department.

Richard S. Zackin is a Director in the Gibbons Employment & Labor Law Department.
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