The United States Supreme Court has agreed to determine whether the whistleblower protections of the Sarbanes-Oxley Act (“SOX” or the “Act”) extend to employees of privately-held contractors or subcontractors because they do business with publicly-traded companies.

In the first SOX case it has accepted, the Court will review the First Circuit’s decision in Lawson v. FMR, LLC, No. 12-3. The appeals court ruled that employees of privately-held companies are not covered by the Section 806 whistleblower protections of SOX even if their employer does business with a publicly-traded company. 

The Department of Labor’s Administrative Review Board, however, reached the opposite conclusion in Spinner v. David Landau & Associates, LLC, ARB Nos. 10-111, 10-115 (May 31, 2012). Seeking to expand SOX’s reach, the ARB held that Section 806 applies to employees of privately-held companies if they have contracts with publicly-traded companies. 

The Supreme Court’s review of Lawson presents three important concerns: 

  1. whether Section 806 extends to employees of private companies who have contracts with public companies; 
  2. how much deference federal courts should afford interpretations of the Department of Labor; and 
  3. whether the Section 806 issue currently is ripe for review by the Supreme Court. 

Whistleblower Protection under Section 806

SOX applies to publicly-traded companies. Through Section 806, Congress created a private cause of action for individuals who have suffered retaliation after reporting fraud or violations of securities regulations. The section provides that no company covered by SOX 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 providing information of a potential violation of the Act. 18 U.S.C. §1514A(a) (2013) (emphasis added). The dispute between the First Circuit and the DOL turns on whether an employee of a private employer can invoke the SOX whistleblower provision against that private company, solely because the private company is a contractor of a SOX-covered entity.

First Circuit’s Decision in Lawson and ARB Decision in Spinner

Lawson involved two former employees of privately-held companies providing investment advice and fund management services to publicly-held mutual funds. They claimed their employer had retaliated against them for reporting alleged improper registration statements and accounting practices in violation of SOX. Determining that this case did not fall within the protections of Section 806, the First Circuit court rejected the plaintiffs’ contention that an “employee” afforded whistleblower protection under SOX includes not only the employees of public companies, but also the employees of that company’s contractors and subcontractors. See Lawson v. FMR LLC, 670 F.3d 61, 67-68 (1st Cir. 2012). Further, the court found the meaning of “employee” to be unambiguous within the context of Section 806 and that, under the Chevron case, the court therefore owed no deference to a contrary DOL interpretation. (The Supreme Court ruled in Chevron that agency interpretations of ambiguous statutes will be upheld so long as they are reasonable.) (For further information regarding Lawson, please see our article, SOX Whistleblower Protection Does Not Extend to Employees of Privately Held Contractor Organizations.)

In contrast, Spinner considered whether the plaintiff, an employee of a privately-held internal auditing firm offering services to publicly-traded companies, was entitled to protection under Section 806. Finding in favor of the plaintiff and rejecting the First Circuit’s interpretation in Lawson, the ARB announced that “accountants employed by private accounting firms, who in turn provide SOX compliance services to publicly traded corporations, are covered as employees of contractors under Section 806.” (For further information regarding Spinner, please see our article, DOL Finds Sarbanes-Oxley’s Whistleblower Protections Applicable to Employees of Contractors.)

Petition to Supreme Court

In an amicus brief filed on behalf of the government, the Solicitor General of the United States argues that a proper interpretation of Section 806 favors inclusion of employees of private contractors within its protection of whistleblowers and that the First Circuit’s construction is contrary to the text and purpose of the whistleblower provision. The government next contends that interpretations of the DOL are entitled to Chevron deference. Nevertheless, noting the lack of a circuit split on the question, the Solicitor General went on to argue that Supreme Court review is improper at this time and to claim that it would be more appropriate to allow the issue to be addressed first by the various courts of appeals.

The National Whistleblower Center also filed an amicus brief. 

Implications

A Supreme Court ruling that Section 806 applies to employees of private contractors would expand the scope of the provision’s whistleblower protection greatly, while a contrary ruling will act as a restraint on the current ARB/DOL, which many consider to be seeking to expand the application of SOX. The Court likely will take this opportunity to decide whether federal courts should defer to the DOL’s construction of SOX, clarifying the proper relationship between federal courts and the DOL regarding interpretation of Section 806. Employers should continue to limit their exposure to retaliation claims by implementing strong internal reporting mechanisms and taking whistleblower complaints seriously.