On March 4, 2014, the U.S. Supreme Court ruled in Lawson v. FMR LLC that the Sarbanes-Oxley Act's (“SOX”) whistleblower protection extends to employees of privately held contractors and subcontractors who work for publicly traded companies. As a result of this ruling, a company doing work for a publicly-traded company now has another layer of internal investigations, corporate compliance, and whistleblower risks with respect to employee complaints and terminations.
SOX was enacted in 2002 as a mechanism to encourage employees to report internal corporate wrongdoing by their publicly-traded employers. The high court’s recent opinion in Lawson broadly interprets SOX’s anti-retaliation provision, which states, “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]." 18 U.S.C. § 1514A(a). This provision was intended to prohibit retaliation of employees of public companies, yet, the plain language does not specify whether employees of private contractors or subcontractors receive the same anti-retaliation protections under SOX.
The Lawson case arose under a somewhat uncommon scenario. The two plaintiff petitioners in Lawson were former employees of private companies, collectively FMR, that contracted to provide services to mutual funds. The mutual funds managed by FMR are publicly-traded companies with no employees. Both plaintiffs filed suits alleging violations of the SOX anti-retaliation provision after they reported alleged fraud relating to the mutual funds. At the district court, FMR sought to dismiss the case, arguing that the plaintiffs could not state a claim since the anti-retaliation provision protects only employees of public companies, and not employees of private employers such as FMR that contract with public companies. On appeal, the First Circuit agreed and held the term "employee" in SOX's whistleblowing provision refers only to employees of public companies.
The US Supreme Court reversed, holding that SOX protects private contractors’ employees from retaliation when they blow the whistle on public companies who are alleged to have engaged in certain acts of fraud or violations of SEC rules. The plurality of the Court held it would not make sense to interpret SOX's whistleblower provision as prohibiting contractors from retaliating against employees of the public company, while failing to protect the contractors’ own employees if they report the same corporate fraud. Writing for the Court, Justice Ginsburg “resist[ed] attributing” such a narrow purpose to Congress. In addition, the Court noted that the reporting obligations that SOX places on outside professionals, such as accountants and lawyers, would only make sense if these private employees were also shielded from retaliation for reporting certain acts of fraud. The anti-retaliation provision in SOX must then extend to these professionals; otherwise, they could face retaliation merely for complying with the letter of the law.
Planning Tip: In light of Lawson, private companies should take the following actions:
- Assess whether there is a relationship with a U.S. publicly traded company that could expose the company to liability under the SOX anti-retaliation clause; and
- Ensure they have written anti-retaliation policies that cover SOX whistleblowers and provide for adequate internal reporting avenues for employees.