LEL Hot Topic | March 2014
A Publication of the American Bar Association Section of Labor and Employment Law

U.S. Supreme Court Extends SOX's Whistleblower Protection to Employees of Publicly Traded Company's Contractors

This Hot Topic was prepared by the ABA Section of Labor and Employment Law, Employment Rights and Responsibilities (ERR) Committee, with the assistance of Lloyd Chinn of Proskauer Rose LLP in New York, New York, representing employers in employment matters, Gerard Waites of O'Donoghue & O'Donoghue LLP in Washington, D.C., representing Unions and employees and Jason Zuckerman of Zuckerman Law in Washington, D.C., representing employees in employment matters.

On March 4, 2014, the United States Supreme Court decided Lawson v. FMR LLC, holding that SOX's whistleblower protection extends to employees of a publicly traded company's contractors and subcontractors. Lawson v. FMR LLC, 571 U.S. __ (2014). Notably, this is the first time the Supreme Court has decided a case under Section 806 of the Sarbanes-Oxley Act of 2002 ("SOX").

Background

Section 806 of SOX, codified at 18 U.S.C. § 1514A, prohibits retaliation against employees of public companies who report certain types of allegedly unlawful conduct. Section 1514A(a) provides that no public company (i.e., registers securities under Section 12 of the Securities Exchange Act of 1934, required to file reports under Section 15(d) of the Securities Exchange Act of 1934 or certain subsidiaries thereof) or "officer, employee, contractor, subcontractor, or agent…of such company" may "discriminate against an employee" for engaging in a protected activity. 18 U.S.C. § 1514A(a).

Two former employees, Jackie Hosang Lawson and Jonathan M. Zang brought separate suits alleging unlawful retaliation under § 806 against FMR LLC and other related private companies ("FMR") that provide, pursuant to contract, investment advising services to the Fidelity family of mutual funds. The Fidelity mutual funds were not parties to either suit and are investment companies organized under the Investment Company Act of 1940. The Fidelity mutual funds are not owned, controlled by or affiliated with FMR.

After initially filing complaints with the Occupational Safety & Health Administration ("OSHA"), Lawson and Zang commenced de novo actions in federal district court. FMR moved to dismiss Plaintiffs' claims, arguing they were not "covered employees" under § 1514A(a) because the statute does not protect employees of private subsidiaries of public companies. FMR maintained that the listing of "contractor" and "subcontractor" (along with other possible actors) merely identifies those who are barred from retaliating against employees of public companies, but does not extend protection to the employees of those contractors and subcontractors. Plaintiffs took the position that both the employees of public companies and those who are the employees of those public companies' contractors and subcontractors are protected employees under the SOX whistleblower provisions. Following the district court's denial of its motion to dismiss on this basis, FMR successfully petitioned for an interlocutory appeal to the Plaintiffs to the First Circuit Court of Appeals.

The First Circuit's Decision

On February 3, 2012, as the first (and only) court of appeals to address this issue, the First Circuit reversed the district court's interpretation of § 1514A(a), holding that SOX's whistleblower protection is limited to employees of publicly traded companies and does not extend to employees of a publicly traded company's contractors and subcontractors. Lawson v. FMR LLC, 670 F.3d 61 (1st Cir. 2012). First, the court examined the text of the statute and found that FMR's interpretation was "the more natural reading" because no evidence suggested that Congress intended the list of agents barred from discriminating to also define those protected from discrimination. The court considered the title of SOX § 806 and the caption of § 1514A(a), both of which referred to "employees of publicly traded companies," not private companies. The court found that the wording of the title and caption of the statute was a clear signal that the protection should be limited to employees of publicly traded companies. The court also examined similar statutory provisions in SOX and other acts, and found that when Congress desired to provide for broader coverage than just public company employees, it was explicit when it did so. Finally, the court explained that the legislative history of SOX specifically showed that the protection of § 1514A(a) was intended for employees of publicly traded companies, given that it was enacted in the wake of the demise of Enron--a public company. In that same vein, it also relied upon Congress's rejection of a proposed amendment to § 1514A that would have expressly provided for coverage of employees of investment advisers to mutual funds. And the First Circuit pointed out supportive legislative history accompanying the Dodd-Frank amendment to § 1514A bringing certain non-publicly traded subsidiaries of public companies within its coverage. And, finally, the First Circuit declined to defer to contrary agency views, as expressed in Department of Labor regulations and in amicus briefs filed by the Department of Labor and the SEC.

Supreme Court Proceedings

On June 28, 2012, plaintiff employees filed a petition for certiorari with the United States Supreme Court. In their petition, Plaintiffs relied on the current Administrative Review Board's ("ARB") decision in Spinner v. Landau & Assocs. LLC, 2012 WL 2073374 (ARB May 31, 2012), issued less than four months after the First Circuit's decision. The ARB had never before directly addressed the question of coverage for employees of contractors and subcontractors to public employers. In Spinner, the ARB reached the opposite conclusion from the First Circuit and extended SOX protections to employees of privately held contractors or subcontractors of a public company. Plaintiffs argued that, because the ARB will apply its decision in Spinner to administrative claims arising in every circuit other than the First Circuit, the Supreme Court should resolve the issue. The Court granted their petition for certiorari on May 20, 2013.

The Supreme Court's Ruling

In a 6-3 decision delivered by Justice Ginsburg, the Court reversed the First Circuit's decision, holding that SOX's whistleblower protection extends to employees of a public company's contractors and subcontractors. Lawson v. FMR LLC, No. 12-3, slip op. at 2 (U.S. Mar. 4, 2014). Purporting to rely on the text of SOX's whistleblower provision, a majority of the Court ruled that to address "the mischief to which Congress was responding, and earlier legislation Congress drew upon, . . . the provision shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors." The majority stated that its reading of the SOX whistleblower provision was consistent with the purpose of SOX, i.e., the protection of the investing public from fraud by public companies and preventing "another Enron debacle."

In its decision, the majority cast aside any concerns regarding its potentially unlimited application of the statue. For example, the parties (as well as the Department of Labor) all recognized a glaring inconsistency in the statute's application if employees of private contractors were to be covered. That is because the parties and the DOL agreed that employees of public company "employees" and "officers" should not be covered by the statute. As FMR pointed out, given that terms "contractor" and "subcontractor" appear in a series with the terms "officer" and "employee," the various terms should be given consistent interpretations. The majority's answer to this conundrum was simply to eliminate it by taking the position that employees of public company "employees" and "officers" are covered by the statute as well. The majority took notice of, but was unaffected by concerns expressed in the dissent that its interpretation was potentially extending the coverage of SOX to gardeners and nannies. The Court referred any such issues back to Congress and noted that if the ruling opens the floodgates for such claims, "Congress can easily fix the problem by amending § 1514A to remove personal employees of public company officers and employees from the provision's reach."

The majority also declined to adopt "limiting principles" offered by the Plaintiffs and the Solicitor General during oral argument, the first limiting the concept of "contractor" to a party whose performance of a contract occurs "over a significant period of time," the second limiting the protection of contractor employees only to the extent the contractor was "fulfilling its role as a contractor for the public company." Although the majority recited these limitations and did not expressly reject them, it found that they were unnecessary to decide because Lawson represented a "mainstream application" of the statute.

Interestingly, while many had been hoping that the Supreme Court would address whether and to what degree courts should defer to ARB interpretations of SOX, the majority expressly declined to answer that question. Instead, the majority simply stated, based on its own analysis, it generally agreed with the ARB's decision in Spinner.

The Dissent

In a vigorous dissent, Justice Sotomayor disapproved of the majority's interpretation finding that such a reading improperly "transforms § 1514A into a sweeping source of litigation that Congress could not have intended." Justice Sotomayor expressed the view that "the Court's interpretation gives § 1514A a stunning reach." Unlike the majority, the dissent found that § 1514A is "deeply ambiguous." Further, contrary to the majority opinion, the dissent found that SOX's whistleblower provision "does not unambiguously cover the employees of private businesses that contract with public companies or the employees of individuals who work for public companies" and that "if Congress had really wanted § 1514A to impose liability upon broad swaths of the private sector, it would have said so more clearly."

Implications

Management Perspective

With this decision, the Supreme Court has expanded the universe of companies regulated by the SOX whistleblower provision from roughly 5,000 public companies to potentially six million private ones, including even the smallest "Mom and Pop" businesses. Indeed, the majority opinion even swept personal employees of public company officers and employees within the reach of SOX. The Court declined even to adopt any of the potential "middle ground" approaches that were presented to it during briefing and oral argument. This is quite obviously a dramatic expansion of the statute's coverage and arguably contrary to the intended scope of SOX. Employers of every size and type will have to prepare themselves for potential SOX whistleblower retaliation claims, merely because they are a contractor or subcontractor of a publicly traded company.

The Court's expansion of SOX is particularly troubling for employers when paired with the DOL's Administrative Review Board's broad view of protected activity. See, e.g., Sylvester v. Parexel International, LLC, ARB Case No. 07-123 (May 25, 2011). In Sylvester, the ARB reversed its prior precedent (and diverged from the decisions of a number of federal courts) and held that to engage in protected activity, a SOX plaintiff need not complain of conduct amounting to shareholder fraud. While this view is hardly the "law of the land," it has been approved by one circuit court of appeals in Lockheed Martin Corp. v. ARB, 717 F.3d 1121 (10th Cir. 2013). Combining the Lawson decision with the ARB's expansive view of protected activity divorces completely a SOX whistleblower claim from SOX's stated purpose of "encourag[ing] and protect[ing] employees who report fraudulent activity that can damage innocent investors in publicly traded companies." If the protected activity question ever reaches the Supreme Court, employers can only hope that the Court will recognize the need for some reasonable limitation on the applicability of the statute.

Union Perspective

With this decision, the Supreme Court follows well established precedent for giving broad interpretation to anti-retaliation laws and provides important protection for whistleblowers in the financial sector. A fundamental purpose of whistleblower provisions is of course to prevent unfair employment discrimination. In addition, they serve an essential law enforcement function for the "host" statutes in which they are included, in this case, the Sarbanes-Oxley Act. The Lawson decision respects and promotes this double barrel protection provided to whistleblowers and clarifies the broad scope of Sarbanes-Oxley's whistleblower protection provision.

Prohibiting unfair discrimination has always been a core value for unions but they have also historically supported various types of laws for the benefits they provide to larger society, whether the public interest served is the environment, consumer protection, retirement security or a host of other issues. It's safe to say that Labor supports strong, honest financial markets for their general public policy benefits, and also because Labor has billions of dollars of very hard-earned pension savings invested on Wall Street. The Lawson decision should be applauded because it will encourage those on the inside of financial markets to speak out when they see illicit practices that imperil these markets and hurt investors. The fact that the Great Recession--which occurred in the midst of widespread and systematic fraud in U.S. financial institutions--literally took our country to the brink of economic collapse provides ample basis for encouraging more, not less, whistleblowing on Wall Street.

For good reason, there is a strong tradition in federal jurisprudence of interpreting anti-retaliation laws broadly. The Supreme Court pointedly recognized this principle when it gave a very broad interpretation to the National Labor Relations Act's anti-retaliation provision, because it found the need to protect the free flow of employee information to the National Labor Relations Board essential for the proper operation of the Act, observing that "[c]omplete freedom is necessary . . . 'to prevent the Board's channels of information from being dried up by employer intimidation . . . .'"1 The anti-retaliation/whistleblower protection provision was thus viewed as vital to effectuating the intent of the underlying statute passed by Congress. Numerous whistleblower provisions of other federal laws have been interpreted broadly according to this same rationale and quite sound reasoning.2

Likewise, when the Lawson Court interpreted Sarbanes-Oxley's anti-retaliation provision in light of the Act's underlying purpose--to protect U.S. financial markets by protecting those employees who are best-positioned to expose fraud within them--it was implicitly recognizing the importance of the dual purpose whistleblower protection provisions serve. It protected the Plaintiff employees' right to be free from unfair discrimination in order to promote exposure of violations of the Sarbanes-Oxley law. Therefore, it held that employees of contractors who provide services to publicly-held corporations must be protected to effectuate the intent of Congress, even though the service providers themselves may be privately-held companies. Without broadly-construed protections for those employees, the Court recognized that the key public policy goal of the statute–protecting the sanctity of our financial markets from fraud and other illicit practices--would not be fully served.

Plaintiff's Perspective

The decision correctly applies the plain meaning and intent of SOX, and is not a dramatic expansion of the scope of SOX coverage. Nearly two years ago, the Administrative Review Board held in Spinner that SOX protects employees of contractors of publicly-traded companies, and Spinner did not spur any significant increase in SOX litigation. And Lawson does not transform SOX into a whistleblower protection state covering any corporate employee that reports any wrongdoing or illegal conduct. Instead, SOX protected conduct is limited to providing information that an employee reasonably believes constitutes mail fraud, wire fraud, bank fraud, or a violation of any SEC rule or regulation or any federal law relating to shareholder fraud. The majority was correct to mock the dissent's prediction that babysitters and landscapers performing work for employees of publicly-traded companies will flood the Department of Labor with SOX claims.

Moreover, the decision is a common sense approach to statutory interpretation that prevents companies from using shell games to avoid liability for whistleblower retaliation. If the Court had adopted Fidelity's interpretation of the statute, employees in the mutual fund industry, an industry that is entrusted with the retirement savings of millions of Americans, would not be protected from retaliation when they disclose shareholder fraud because the investment companies that file reports with the SEC do not have employees and instead are operated by the employees of investment advisors.

Protecting whistleblowers employed at contractors of publicly-traded companies is a critical bulwark to prevent shareholder fraud. As described at length in Section III of Lawson, contractors of Enron, including law firms and accountants, were complicit in perpetuating Enron's fraud on shareholders and in covering it up. And "Congressional investigators discovered ample evidence of contractors demoting or discharging employees they have engaged who jeopardized the contractor's business relationship with Enron by objecting to Enron's financial practices." To avoid another Enron, employees of contractors of publicly-traded companies, who are most likely to uncover evidence of wrongdoing, must be protected against retaliation.

As for concerns about the current ARB's Sylvester decision defining the scope of SOX protected conduct, Sylvester simply applies the plain meaning of the statute and correctly rejects the prior ARB's brazen and improper attempts to rewrite the statute to create new barriers for whistleblowers. Disclosures of shareholder fraud are only one category of protected conduct and there was nothing unusual about the ARB declining to ignore the remaining forms of protected conduct enumerated in the statute.

1NLRB v. Scrivener, 405 U.S. 117, 122-24 (1972) (quoting John Hancock Mut. Life Ins. Co. v. NLRB, 191 F.2d 483, 485 (1951)).

2Fair Labor Standards Act: Lambert v. Ackerley, supra (en banc) (collecting cases). Surface Transportation Act: Clean Harbors Environmental Services v. Herman, 146 F.3d 12 (1st Cir. 1998). 1969 Federal Mine Safety Act: Baker v. Board of Mine Operations Appeals, 595 F.2d 746 (D.C. Cir. 1978); Munsey v. Morton, 507 F.2d 1202 (D.C. Cir. 1974); Phillips v. Board of Mine Operations Appeals, 500 P.2d 772, 781-782 (D.C. Cir. 1974), cert. denied, 420 U.S. 938 (1974). OSHA: Donovan v. Peter Zimmer America, Inc., 557 F. Supp 642 (D. S.C. 1982); Dunlop v. Hanover Shoe Farms Inc., 441 F. Supp. 385 (M.D. Pa. 1976).

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