On March 4, 2014, the United States Supreme Court in Lawson v. FMR LLC held that SOX’s whistleblower protection extends to employees of a publicly traded company’s contractors and subcontractors. Lawson v. FMR LLC, 572 U.S. __ (2014). Notably, this is the first time the Supreme Court has decided a case under SOX’s whistleblower-protection provision (Section 806).
Section 806 of SOX, codified at 18 U.S.C. § 1514A, states that no public company (i.e., registers securities under Section 12 of the Securities Exchange Act of 1934, required to file reports under Section 15(d) of the Securities Exchange Act of 1934 or certain subsidiaries thereof) or “officer, employee, contractor, subcontractor, or agent…of such company” may “discriminate against an employee” for engaging in a protected activity. 18 U.S.C. § 1514A(a).
Two former employees, Jackie Hosang Lawson and Jonathan M. Zang, brought separate suits alleging unlawful retaliation under § 806 of SOX against FMR LLC and other related private companies (“FMR”) that provide, pursuant to contract, investment advising services to the Fidelity family of mutual funds. The Fidelity mutual funds were not parties to either suit and are investment companies organized under the Investment Company Act of 1940. The Fidelity mutual funds are not owned, controlled by or affiliated with FMR.
The Supreme Court’s Ruling
In a 6-3 decision delivered by Justice Ginsburg, the Court held that SOX’s whistleblower protection extends to employees of a public company’s contractors and subcontractors. Lawson v. FMR LLC, 572 U.S. __ (2014). The majority held that expanding protection to public companies’ contractors and its employees is “consistent with the text of the statute and with common sense” because “[c]ontractors are in control of their own employees, but are not ordinarily positioned to control someone else’s workers.” Notably, the majority chose to ignore titles and headings within Sarbanes-Oxley itself that make it plain that the statute reaches only “employees of publicly traded companies.”
The majority also that held including private contractor employees within SOX’s whistleblower provision was consistent with the statute’s purpose of preventing “another Enron debacle”. In so doing, the majority did not give any weight to the fact that Sarbanes-Oxley separately (and explicitly) addresses the role of “contractors” such as attorneys and accountants in other substantive provisions of the statute.
Sotomayor’s Vigorous Dissent
In a vigorous dissent, Justice Sotomayor expressed the view that “the Court’s interpretation gives § 1514A a stunning reach.” Unlike the majority, the dissent found that § 1514A is “deeply ambiguous” and that SOX’s whistleblower provision “does not unambiguously cover the employees of private businesses that contract with public companies or the employees of individuals who work for public companies.” Rather, “if Congress had really wanted § 1514A to impose liability upon broad swaths of the private sector, it would have said so more clearly.”
With this decision, the Supreme Court has expanded the universe of companies regulated by the SOX whistleblower provision from roughly 5,000 public companies to potentially 6 million private ones, including even the smallest “Mom and Pop” businesses. This is quite obviously a dramatic expansion of the statute’s coverage and arguably contrary to the intended scope of the Act. Employers of every size and type will have to prepare themselves for potential Sarbanes-Oxley whistleblower claims, merely because they are a contractor or subcontractor of a publicly traded company.To the extent that private company employers have not previously implemented codes of conduct, whistleblower policies and the like, this decision may well suggest that it is time to consider doing so.