On March 4, 2014, the U.S. Supreme Court issued its decision in Lawson v. FMR LLC, et al., holding that the whistleblower protections of the Sarbanes-Oxley Act (SOX) extend to employees of privately-held contractors and subcontractors serving public companies. The plaintiffs in Lawson, former employees of privately-held service providers to the Fidelity funds, brought separate actions claiming that they were discharged in retaliation for raising concerns about cost accounting practices used for the funds and supposed inaccuracies in a draft SEC registration statement concerning the funds. The plaintiffs argued that the SOX whistleblower provision protected them as employees of a contractor for the funds, which are public companies. The defendants argued that the plaintiffs did not have a claim under the SOX whistleblower provision, because that provision protects only employees of public companies.
SOX prohibits retaliation against employees of public companies who report to federal authorities or designated persons of authority at the employer, or otherwise assist in an investigation of, certain types of allegedly unlawful conduct. At issue in Lawson was whether SOX similarly protects employees of private contractors and subcontractors providing services to public companies, including, among others, fund advisers, lawyers and accountants. At the time in question, the applicable section of SOX read as follows:
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].
In the 6-3 decision, the majority, focusing on statutory construction and legislative history, found that the term “employee” includes employees of a contractor to a public company. The opinion notes that Congress had enacted SOX in the wake of Enron’s collapse and that Congress had focused on the role played by Enron’s outside contractors, including that the primary deterrent to the employees of Enron’s contractors reporting fraud was fear of retaliation. The opinion also highlights that, since funds do not have their own employees, the majority’s interpretation “avoids insulating the entire mutual fund industry” from the whistleblower provision. The opinion notes that a narrow reading of SOX’s whistleblower provision would fail to protect the only firsthand witnesses to fraud in the fund industry.
The opinion acknowledges that the Dodd-Frank Act established a whistleblower reward program, which prohibits any employer from retaliating against a whistle¬blower for providing information to the SEC, participating in an SEC proceeding, or making disclosures required or protected under SOX and certain other securities laws. The opinion notes, however, that the Dodd-¬Frank whistleblower provision focuses primarily on reporting to federal authorities, whereas the SOX whistleblower protections extend to employees who provide information to any person with supervisory authority over the employee.