On Monday the U.S. Supreme Court agreed to consider the scope of the Sarbanes-Oxley Act of 2002 (SOX) whistleblower protections. Specifically, in Lawson v. FMR LLC, the Court will decide whether an employee of a privately held contractor or subcontractor of a public company is protected from retaliation under SOX.

The two plaintiffs in this case worked for privately held companies that operated a family of mutual funds. Mutual funds generally do not have their own employees, but rather contract with “investment advisors” that manage the funds, including “making day to day investment decisions, performing a range of management and administrative tasks, and preparing reports for shareholders and the SEC. Employees in the mutual fund industry ordinarily work for mutual fund adviser or sub-advisers, not for a mutual fund itself.”

The mutual fund company is subject to the provisions of the Sarbanes-Oxley Act of 2002 (SOX). The plaintiffs sued their individual private companies for retaliation after complaining about a variety of perceived fraudulent financial activity, including alleged improper fee retention, and inaccurate and illegal pay calculations. Section 806 of SOX, codified at 18 U.S.C. § 1514A, offers whistleblower protections for employees who are retaliated against for reporting fraud. Specifically, § 1514A: Civil action to protect against retaliation in fraud cases, states that no publicly traded 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” the employee has disclosed information or assisted in any investigation involving fraud.

The district court found that these whistleblower protections extended to employees of private agents, contractors, and subcontractors to public companies, so long as the reported violations related to fraud against shareholders. On appeal, the U.S. Court of Appeals for the First Circuit came to a different conclusion:

We conclude that only the employees of the defined public companies are covered by these whistleblower provisions; 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 and so does not violate the rule against rendering superfluous any statutory language.

If we are wrong and Congress intended the term "employee" in § 1514A(a) to have a broader meaning than the one we have arrived at, it can amend the statute. We are bound by what Congress has written.

It will now be up to the Supreme Court to determine the reach of these whistleblower protections. According to the plaintiffs in their petition for Supreme Court review, “this case presents a question of pivotal importance to the integrity of the securities markets and to the preservation of investor confidence.” In contrast, the defendants in this matter warn of “the adverse practical consequences of imposing massive liability and costs on private businesses that Congress expressly sought to avoid,” and that “extending whistleblower protection to the employees of privately held companies doing business with public companies would extend protection far beyond the scope envisioned by Congress.”