Why it matters: Exposing a broad range of businesses to potential liability, a new decision from the U.S. Supreme Court expanded the scope of whistleblower protections under the Sarbanes-Oxley Act, holding that the statute applies to private contractors and subcontractors of public companies. Two employees of private companies contracted to manage mutual funds filed suit under SOX alleging retaliation after reporting concerns about possible securities fraud. In a 6-to-3 decision, the Court determined that Section 1514A shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by contractors and subcontractors.” Speaking on behalf of employers facing potential liability under the statute, a dissenting opinion said the decision gives SOX a “stunning reach” and could lead to hypothetical suits like “a cause of action against a small business that contracts to clean the local Starbucks (a public company) if an employee is demoted after reporting that another nonpublic company client has mailed the cleaning company a fraudulent invoice.”
Jackie Lawson and Jonathan Zang both worked for subsidiaries of a private company that came to be known as FMR LLC. Lawson and Zang were responsible for advisory and management services to Fidelity mutual funds. Both alleged that after expressing concerns about possible securities fraud, they faced retaliation in the workplace.
A federal district court in Massachusetts declined to dismiss their Sarbanes-Oxley complaints. The First U.S. Circuit Court of Appeals reversed, dismissing the suits and holding that the statute did not apply to employees of private companies.
But in an opinion authored by Justice Ruth Bader Ginsburg, the Court reversed dismissal.
Section 1514A provides that “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].”
The majority looked to the history of SOX – specifically the Enron scandal – to emphasize Congress’s recognition that contractors and subcontractors who tried to report wrongdoing also faced retaliation.
“We hold, based on the text of Section 1514A, the mischief to which Congress was responding, and earlier legislation that Congress drew upon, that the provision shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors,” Justice Ginsburg wrote. “Given Congress’s concern about contractor conduct of the kind that contributed to Enron’s collapse, we regard with suspicion construction of Section 1514A to protect whistleblowers only when they are employed by a public company, and not when they work for the public company’s contractor.”
FMR’s interpretation of the text “requires insertion of ‘of a public company’ after ‘an employee,’” the Court said. But in other parts of the statute, Congress explicitly used the phrase “an employee of a public company,” demonstrating that lawmakers knew how to use the phrase when they wanted.
A contrary ruling would leave “a huge hole,” the majority added. “Contractors’ employees would be disarmed; they would be vulnerable to retaliation by their employers for blowing the whistle on a scheme to defraud the public company’s investors,” leaving mutual fund advisers and managers, as well as “legions” of accountants and lawyers, without the protections of Section 1514A.
Statutory headings – like “Whistleblower Protection for Employees of Publicly Traded Companies” – were not dispositive of the actual statutory text, Justice Ginsburg wrote, dismissing one of FMR’s contentions. She also said that the dissent’s concerns about personal employees of company officers bringing suit – like housekeepers or gardeners – were overstated and “more theoretical than real.” Such floodgates arguments could be tempered by “limiting principles” like a recognition that the term “contractor” does not extend to every fleeting business relationship, the Court added.
In her dissent, Justice Sonia Sotomayor, joined by Justices Anthony Kennedy and Samuel Alito, said the majority failed to recognize that Section 1514A “is deeply ambiguous” and therefore should be read narrowly to avoid “absurd results” and “impose costly litigation burdens on any private business that happens to have an ongoing contract with a public company.”
To read the opinion in Lawson v. FMR LLC, click here.