Decision: In Lawson v. FMR LLC, former employees of private companies that provide advisory and management services to mutual funds, sued under the Sarbanes-Oxley Act, alleging that their former employers retaliated against them for reporting improper business practices in the operation of the public mutual funds. The district court denied the employers’ motion to dismiss the complaint, concluding that whistleblower protections extend to employees of private contractors and subcontractors that provide services to public companies. On interlocutory appeal, however, a divided panel of the First Circuit reversed.

The Supreme Court reversed the First Circuit, holding that Sarbanes-Oxley whistleblower protection “extends to employees of contractors and subcontractors.” In doing so, the Court looked to the Act’s legislative history and context, including the Enron collapse where Congress recognized that “outside professionals … were complicit in, if not integral to, the shareholder fraud and subsequent cover-up,” in part because of “fear of retaliation.” The Court noted that mutual funds are structured so that they have no employees of their own, so, “if the whistle is to be blown on fraud detrimental to mutual fund investors, the whistleblowing employee must be on another company’s payroll.” Thus, “affording whistleblower protection to mutual fund investment advisers is crucial to Sarbanes-Oxley’s endeavor” of “ward[ing] off another Enron debacle.”

Impact: The Supreme Court’s decision considerably expands the number of employees who may bring suit under Sarbanes-Oxley's whistleblower protection. The breadth of the decision also has the potential to expand the scope of protected activity under the Act because, as the dissent indicated, it may “subject[] a multitude of individuals and private businesses to litigation over fraud reports that have no connection to, or impact on, the interests of public company shareholders” that Sarbanes-Oxley was designed to protect.