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On Tuesday, March 4th, the Supreme Court, in Lawson v. FMR LLC, et al., clarified a long-standing open question by ruling that the whistleblower protections of the Sarbanes-Oxley Act (“SOX”) cover not just employees of publicly traded companies, but also the employees of their non-public contractors and subcontractors. As a result, the employees of the private contractors, including accounting and law firms that provide services to public companies, may raise whistleblower and retaliation claims under SOX. This clarification by the Supreme Court will potentially result in a significant increase of whistleblower and retaliation claims brought under SOX.
Congress passed the Sarbanes-Oxley Act in 2002 following a wave of corporate scandals (recall Enron), a precipitous stock market decline, and a resulting loss of investor confidence that chief executive officers and boards of directors were adequately fulfilling their responsibilities concerning corporate financial and securities matters. The purpose of SOX is to protect investors, deter corporate fraud, and improve the accuracy of corporate disclosures by imposing criminal penalties on those who violate federal securities laws. The Act’s most basic provisions cover corporate governance, reliability of financial controls, personal accountability for CEOs and CFOs, and enhanced disclosures.
SOX also provides federal protection to employees who engage in whistleblowing by reporting corporate misconduct to supervisors, federal regulatory agencies, or members of Congress. The Act protects whistleblowers from adverse or discriminatory employment action by providing a right to sue when their employment status is threatened or is adversely affected because they have provided information regarding securities, mail or bank fraud or other federal law violations involving shareholder fraud.
In the Supreme Court’s opinion, written by Justice Ginsburg, the issue was whether SOX’s whistleblower protections “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 advisors, law firms, accounting enterprises – who perform work for the public company?” According to Justice Ginsburg, the answer is yes.
The net result of this decision is that private contractors providing services to publicly traded companies must be prepared to identify and properly respond to whistleblower claims by their employees who complain of matters arising out of work performed for publicly traded companies. Most importantly, it means that both publically traded companies, as well as private contractors that perform services for them, must ensure that they have adequate policies addressing not just employment discrimination and harassment claims, but also potential whistleblower claims by their employees. Along with written policies, such employers must ensure they have adequate internal complaint procedures and that supervisors and managers have been trained to identify and properly respond to whistleblower complaints.