In Lawson v FMR LLC(1) the Supreme Court held that the whistleblower provision of the Sarbanes-Oxley Act 2002 (SOX) extends to employees of contractors of public companies, such as accounting firms, mutual fund investment advisers and other privately held companies that provide services to public companies. This is the first Supreme Court decision interpreting the whistleblower provision of the act.
Section 806 of SOX, codified at 18 USC § 1514A, is titled "Protection For Employees of Publicly Traded Companies" and provides in part 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 plaintiffs in Lawson - former employees of FMR LLC, a privately held investment adviser providing investment advising services to the Fidelity family of publicly traded mutual funds - asserted violations of Section 1514A against FMR LLC and other related private companies. The employees claimed that they had been retaliated against after disclosing potential securities law violations related to the publicly traded funds for which their employers performed services. FMR argued that the listing of 'contractor' and 'subcontractor' in the act indicates merely that such entities are barred from retaliating against employees of public companies, but that the act's protections do not extend to employees of private contractors. The plaintiffs asserted that both the employees of the public companies and the employees of those public companies' contractors and subcontractors were protected under SOX.
The US Court of Appeals for the First Circuit had held that SOX's whistleblower protection is limited to employees of publicly traded companies.(2) In reversing, the Supreme Court resolved a conflict between the First Circuit's view and that expressed by the Department of Labour's Administrative Review Board in Spinner v David Landau & Assocs LLC.(3) In Spinner the plaintiff - an accountant with David Landau & Associates (DLA), which provides internal audit services - alleged that he was discharged for reporting internal control and reconciliation problems at one of DLA's publicly traded clients. The Administrative Review Board relied on the language of the statute, the Department of Labour regulations and legislative history to conclude that Congress intended SOX to protect "employees of private firms that work with, or contract with, publicly traded companies when such employees blow the whistle on fraudulent corporate practices".
The Supreme Court's six-to-three decision based its conclusion on the statute's text, together with the purpose of the act. The opinion pointed to the language in Section 1514A that "no... contractor... may discharge... an employee", determining that "[t]he ordinary meaning of 'an employee' in this proscription is the contractor's own employee". Because "[c]ontractors are not ordinarily positioned to take adverse actions against employees of the public company with whom they contract", the court reasoned that a contrary interpretation of the statute "would shrink to insignificance the provision's ban on retaliation by contractors". The court stated that its reading was consistent with the legislature's purpose in enacting SOX – to "ward off another Enron debacle". The court further found that:
"[a]lso clear from the legislative record is Congress' understanding that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron's contractors."
A vigorous dissent, authored by Justice Sonia Sotomayor (and joined by Justices Anthony Kennedy and Samuel Alito), considered the statute's text "ambiguous" and expressed the view that the majority's ruling would produce absurd results:
"The Court's interpretation gives § 1514A a stunning reach. As interpreted today, the Sarbanes-Oxley Act authorizes 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. And it opens the door to 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."
Notably, the court's opinion referenced certain "limiting principles" offered by the plaintiffs and the solicitor general in this case – that the term 'contractor' would be limited to a party whose performance of a contract occurs "over a significant period of time", and that Section 1514A protects contractor employees only to the extent that their whistleblowing relates to the contractor "fulfilling its role as a contractor for the public company, not the contractor in some other capacity". The majority sidestepped such questions based on the fact that, in the case at hand, the plaintiffs' complaints implicated public company accounting that was related to the contract with the non-public employer: "[W]e need not determine the bounds of § 1514A today, because plaintiffs seek only a 'mainstream application' of the provision's protections."
Although the Supreme Court's decision explicitly avoided opining on the extent to which protection is afforded to employees of publicly traded companies' contractors (eg, whether SOX protects reports of alleged wrongdoing unrelated to work performed for public companies), private companies that provide services to publicly held companies should expect a new wave of SOX litigation that tests these bounds. In the meantime, the Supreme Court's decision has vast implications for the perhaps millions of private companies that provide contracting services to public companies. Employers which do business with public companies must familiarise themselves with their obligations and potential liabilities under the whistleblower protections of SOX and implement or assess their whistleblower policies and practices. Additionally, employers should encourage internal reporting of concerns of suspected fraud or other improper conduct that could be covered by SOX and ensure that employees have clear and accessible avenues for reporting such misconduct. Training should be provided to those responsible for receiving reports about improper conduct and care should be taken to prevent retaliation against employees who make a report. Where the employer learns of actual misconduct, appropriate disciplinary and remedial action must be taken.
For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100), fax (+1 212 715 8000) or email (email@example.com or firstname.lastname@example.org). The Kramer Levin Naftalis & Frankel LLP website can be accessed at www.kramerlevin.com.