The issue of how courts interpret protections for employees who expose employer fraud has been in the spotlight since a pair of 2014 Supreme Court decisions: Lane v. Franks, 134 S. Ct. 1533 (2014) and Lawson v. FMR LLC, 134 S. Ct. 1158 (2014). In Franks, a case about alleged retaliation against a government employee who was fired after testifying about corruption at a grand jury hearing, the Court ruled that the First Amendment “protects a public employee who provided truthful sworn testimony, compelled by subpoena, outside the course of his ordinary job responsibilities.” In Lawson, the Court held that employees of a mutual fund, traditionally outside the coverage of Sarbanes-Oxley Act (SOX), are nonetheless protected by its whistleblower provision. And, in a case of first impression, the US District Court for the Eastern District of Pennsylvania recently issued a ruling on another key issue concerning whistleblower protections. It held that an employee of a private company that contracted with a publicly traded company was not entitled to SOX’s whistleblower protections. Gibney v. Evolution Mktg. Research, LLC, No. 14-1913,2014 WL 2611213 (E.D. Pa. June 11, 2014).

In that case, the terminated employee, Leo Gibney, sued his former employer, Evolution Marketing Research. He alleged that his termination violated SOX because he was fired after blowing the whistle on Evolution’s alleged fraud in overbilling a publicly traded company. The District Court concluded that, even though Gibney had been working under a contract for a publicly traded company, he was actually employed by a private firm and that it was the private firm — not the public company — that had allegedly engaged in the fraud. Thus, the Court ruled that the firing fell outside the scope of SOX’s whistleblower protections, and it dismissed the case.

Evolution, a privately held marketing and consulting company, employed Gibney on a contracted project for Merck & Co., a publicly traded company subject to SOX. After working on the project, Gibney informed Evolution’s general counsel and CEO that he believed that Evolution was double-billing Merck under the contract. Evolution allegedly instructed him not to change its billing practices and terminated Gibney two days later.

After exhausting his administrative remedies, Gibney sued Evolution, alleging that it had terminated him in retaliation for exposing fraud. He claimed that he was entitled to sue Evolution under 18 U.S.C. § 1514A, the whistleblower provision of SOX, which prohibits an employer from terminating an employee for exposing fraud of a publicly traded company. Although Gibney conceded that Evolution was not a publicly traded company (and, therefore, not subject to SOX), he argued that — as an employee of a contractor to a publicly traded company, and in light of the Supreme Court’s recent decision in Lawson — his activities were protected under § 1514A.

In Lawson, two former employees of private companies that had contracted to advise or manage Fidelity mutual funds brought separate actions against their former employers, alleging that the employers unlawfully retaliated against them in violation of § 1514A. The defendants contended that § 1514A was limited to protecting employees of a publicly traded company from retaliation by the company’s private contractors or subcontractors. Writing for a 6-3 majority, Justice Ruth Bader Ginsburg rejected this contention, holding instead that “based on the text of § 1514A, the mischief to which Congress was responding, and earlier legislation Congress drew upon, [§ 1514A] shelters employees of private contractors and subcontractors [of publicly traded companies], just as it shelters employees of the public company served by the contractors and subcontractors.” Id. at 1161.

The three dissenting Justices complained that the majority’s broad reasoning would give § 1514A “a stunning reach” because it would “authorize[] a babysitter to bring a federal case against his employer — a parent who happens to work at the local Walmart (a public company) — if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud.” Id. at 1178 (Justice Sonia Sotomayor, dissenting). But the majority’s analysis repeatedly relied upon the unique fact that the plaintiffs in Lawson were, in effect, employees of mutual funds, which generally have no employees of their own. Indeed, as the Court explained, if the Lawson plaintiffs were not covered by § 1514A, this would “insulat[e] the entire mutual fund industry from § 1514A,” because “[v]irtually all mutual funds are structured so that they have no employees of their own; they are managed, instead, by independent investment advisers.” Id. at 1171. But given the vital role that mutual funds play in filing reports with the SEC, the Supreme Court concluded that such insulation could not have been Congress’ intent in enacting § 1514A.

In seeking to distinguish the broad language of Lawson, Evolution relied upon that case’s unique facts by arguing that the “Lawson decision does not support extending SOX protection to employees of private companies who, as here, report overbilling ‘fraud’ neither committed by the public company nor having any connection to fraud on shareholders.” Gibney, 2014 WL 2611213, at *6. Evolution also argued that because “Plaintiff does not allege that Evolution was assisting or otherwise involved with fraud committed by Merck, Plaintiff’s Complaint should be dismissed as outside of SOX’s scope.” Id.

The District Court agreed. In distinguishing Lawson, Chief Judge Petrese B. Tucker explained that Gibney’s case is fundamentally different in that it does not implicate the peculiar structure of the mutual fund industry. In addition, in enacting Sarbanes-Oxley, Congress was specifically concerned with preventing shareholder fraud either by the public company itself or through its contractors. Gibney, however, had not alleged that he blew the whistle on fraud committed byMerck (whether acting on its own or through contractors like Evolution). Rather, Gibney alleged that Evolution committed fraud against Merck. Thus, based on Gibney’s allegations, Merck was the victim of fraud, rather than its perpetrator.

Turning to the text of § 1514A, the district court held that Sarbanes-Oxley was not intended to encompass every situation in which any party indirectly harms the revenue of a publicly traded company, and by extension decreases the value of a shareholder’s investment — and thatLawson was not to the contrary. Rather, the Court ruled that the specific shareholder fraud contemplated by Sarbanes-Oxley is when a public company — acting on its own or through its contractors — makes material misrepresentations about its financial outlook in order to deceive its shareholders. Therefore, the District Court concluded that Sarbanes-Oxley does not reach retaliation for exposing fraudulent conduct between two companies that are parties to a contract simply because one of them is publicly held.

Gibney is significant in two respects. First, it is one of the first cases to meaningfully analyze the scope of the Supreme Court’s Lawson decision — and it applies that decision quite narrowly. Second, it is a case of first impression concerning the applicability of Sarbanes-Oxley to employees of non-publicly traded companies arising out of their contractual relationships with publicly traded companies. For both of these reasons, it is unlikely to be the last word on the subject — but should serve as an important precedent at least in the near term.