On March 4, the U.S. Supreme Court ruled 6 to 3 that the anti-retaliation provision of the Sarbanes-Oxley Act (SOX) protects whistleblowers employed by private companies that contract with publicly traded businesses covered by SOX. See Lawson v. FMR LLC, No. 12-3, opinion available here. This decision is significant for employers in a range of industries, including investment advising, accounting, and law.
The alleged whistleblowers in the case, Jackie Hosang Lawson and Jonathan Zang, are former employees of FMR LLC, a private company that contracts with publicly traded Fidelity mutual funds to provide management and advising services. As is typical in the mutual fund industry, the Fidelity mutual funds have no employees. Lawson and Zang sued FMR, alleging that the company retaliated against them after they complained about alleged accounting irregularities and misstatements in the mutual funds’ draft SEC filings.
In moving to dismiss the lawsuit, FMR argued that SOX’s anti-retaliation provision only protects workers employed by a public company. The U.S. Court of Appeals for the First Circuit agreed.
In reversing the First Circuit, the Supreme Court analyzed the following language from SOX: “No [public] company . . ., or any . . . contractor [or] subcontractor
. . . [may retaliate] against an employee . . . because of [whistleblowing activity].” 18 U.S.C. § 1514A(a). The Supreme Court held that the plain language of this statute prohibits a contractor from retaliating against its own employees if they engage in whistleblowing activities.
In so holding, the Supreme Court rejected FMR’s argument that the statute merely prohibits private contractors from retaliating against employees of publicly traded companies. First, the Court found that such an interpretation required inappropriately reading “of a public company” into the statute after the phrase “an employee.” Second, the Court reasoned that because contractors normally do not have the authority to discharge a publicly traded company’s employees, FMR’s interpretation would “shrink to insignificance” the “ban on retaliation by contractors.” Finally, the Court found that its interpretation of the statute has the virtue of not exempting the entire mutual fund industry from SOX’s anti-retaliation protections given that mutual funds typically have no employees of their own.
In addition to the plain language of the statute, the Court found further support for its interpretation in SOX’s legislative history. The Court explained that SOX was enacted in response to the Enron scandal, and that Congress crafted the law, in part, to combat the “corporate code of silence” followed by Enron’s outside lawyers, advisors, and accountants. The Court also noted that Congress modeled the SOX anti-retaliation provision on the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, an airline industry whistleblower statute, and that courts have interpreted that statute to protect employees of private contractors.
The three dissenters consisted of the relatively unusual combination of Justices Sotomayor, Kennedy, and Alito. The dissenting opinion, authored by Justice Sotomayor, concluded that the scope of SOX’s anti-retaliation provision was ambiguous, and that the majority’s expansive interpretation of SOX produced the absurd consequence of protecting a babysitter who works for an employee of a public company. The majority opinion dismissed this possibility as “fanciful” and denied that its decision would open the “floodgate[s]” of litigation.
Notably, Justices Thomas and Scalia joined the majority’s judgment and opinion in substantial part, but issued a dissent (separate from Justice Sotomayor’s) taking issue with the majority’s reliance on legislative history and other extra-statutory material to support its decision.
The Supreme Court’s decision signals a clear expansion of the scope of SOX’s protections. Private employers who may be affected by this ruling should consider reviewing their internal complaint and investigative procedures to ensure that they are equipped to address potential whistleblower claims. Such employers should also ensure that their human resources and compliance personnel are up to speed on SOX’s substantive and procedural provisions.