If you have never heard of the Sarbanes–Oxley Act of 2002, you very likely own or work for a private company that is not publicly traded. Until recently, you had no reason to concern yourself with the Act.

However, after the U.S. Supreme Court’s recent decision in Lawson v. FMR, LLC (134 S. Ct. 1158, March 4, 2014), you need to familiarize yourself with the Act and its protections for whistleblowers. Earlier this year, the nation’s highest court held that the Act’s whistleblower protections extend to employees of private contractors and subcontractors, expanding the universe of who may bring a whistleblower claim under the Act.

Background: the fall of Enron

Everyone remembers the fall of Enron. After years of misrepresenting and fudging the numbers, and after engaging in an active cover-up of those activities, Enron Corporation collapsed. The collapse impacted every employee of the company, but the collapse became infamous in the way that it impacted investors who had invested millions in a failing company based upon Enron’s active inflation of its earnings estimates. It cost investors and retirees millions.

In the wake of the Enron calamity, Congress took steps to prevent similar events, perhaps the most prominent of which was the enactment of Sarbanes–Oxley. Sarbanes-Oxley aims to “prevent and punish corporate and criminal fraud, protect the victims of such fraud, preserve evidence of such fraud, and hold wrongdoers accountable for their actions.” The whistleblower protections encourage individuals to report wrongdoing and protects them when they do so. In fact, the federal agency charged with enforcing the Act will actually pay a bounty for whistleblowing activity that results in a significant enforcement action.

The Act states that “No [public] company …, or any … contractor [or] subcontractor … of such company, may discharge, demote, suspend, threaten, harass, or … discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity].” 18 U.S.C. § 1514A(a). However, until a couple of months ago, Sarbanes-Oxley was thought to only reach employees of publicly traded companies. That all changed with the court’s Lawson decision.

Lawson factual background

In Lawson, the whistleblower plaintiffs were employees of private companies (i.e., companies that were not publicly traded companies). The whistleblowers claimed in their lawsuit that they blew the whistle on potential fraud pertaining to mutual funds they advised and were retaliated against by their private company employer. The private company argued that its employees could not sue under Sarbanes-Oxley because the Act’s whistleblower provision only protected employees of publicly traded companies.

Supreme Court expands whistleblower protection

The Supreme Court began its analysis by looking first to the text of the statute, concluding that the ordinary meaning of the statute prohibited retaliation against “the contractor’s own employee.” Contractors, it observed, could not ordinarily take adverse actions against the employees of public companies they work for, so a narrower construction of “employee” would “shrink to insignificance” the ban on contractor retaliation.

After then analyzing the purpose of the Act, the court found more support for extending whistleblower protection to employees of private contractors. The court noted that “Congress installed whistleblower protection in the Sarbanes-Oxley Act to ward off another Enron debacle.” The court focused on the role of outside contractors in facilitating fraud. “Congress enacted [the whistleblower protections] aiming to encourage whistleblowing by contractor employees who suspect fraud involving the public companies with whom they work.”

Ultimately, the court held that the Act’s whistleblower protection includes employees of a public company’s private contractors and subcontractors, expanding the protection of the Act to reach individuals who might not have otherwise been entitled to protection.

What you should do

While time will tell as to the true impact of the Supreme Court’s decision, Lawson clearly expands the universe of employers affected by the whistleblower protections in Sarbanes-Oxley. The Act now reaches any employer who has a business relationship with a public company (or the contractor of a public company). In light of this change, consider the following:

  • Identify your pool of clients and customers that are publicly traded companies and identify employees working for such companies;
  • Become informed and train human resources professionals and supervisors regarding employees’ rights and employers’ obligations under Sarbanes-Oxley and other state and federal laws that provide protection to whistleblowers; and
  • Review handbooks, policies and procedures pertaining to the reporting and investigating of wrongdoing and have clear policies prohibiting retaliation for such reports.