Last week, the US Supreme Court issued an important decision
addressing whether Section 806 of the Sarbanes-Oxley Act of 2002
(SOX) (codified at 18 U.S.C. § 1514A) limits protection from
retaliation to the employees of public companies, or if it also
covers employees of contractors to a public company. Lawson v.
FMR LLC, No. 12-3 (March 4, 2014). In a 6-3 ruling, the Court
held that Section 1514A whistleblower protection extends to
employees of contractors and subcontractors of public companies,
including investment advisers, law firms, and accounting
firms.
Section 1514A created a private cause of action for whistleblowers
who are alleged to have been retaliated against for reporting
possible violations of the federal securities laws and other
specified laws. In the pertinent part, Section 1514A provides that:
18 U.S.C. § 1514A (emphasis added).
Justice Ruth Bader Ginsburg's opinion said that the text of
Section 1514A, other considerations such as legislative intent, and
the Department of Labor's interpretation and similar prior
whistleblower protection legislation that Congress drew on when
drafting Section 1514A, all weighed in favor of interpreting the
SOX whistleblower protection to cover employees not just of the
public company itself, but of any officer, employee, contractor,
subcontractor, or agent of a public company. The Court reasoned
that the ordinary meaning of "an employee" in this
context was the contractor's own employee. Slip Op. at
9 (emphasis added). Further, the Court reasoned that Congress did
not intend to stop contractors from retaliating against
whistleblowers employed by the public companies they served, yet
permit them to retaliate against their own employees. Id.
at 2. (Justices Antonin Scalia and Clarence Thomas joined in the
opinion only to the extent it was based on the language of the
statute itself.)
Petitioners Jackie Lawson and Jonathan Zang were employed by
private company contractors that provided investment advisory
services to a mutual fund complex. The petitioners brought SOX
retaliation claims, asserting that they were terminated because
they reported alleged fraud by the funds. Mutual funds file reports
with the Securities and Exchange Commission, but typically do not
have employees; rather, the funds are managed by employees of
investment advisers. The Lawson decision means that such
employees are protected by Section 1514A. The decision's scope
is not limited to employees of mutual fund contractors but also
extends to employees of other contractors to public companies, such
as law firms and accounting firms.
Justice Sonia Sotomayor's dissent argued that the
majority's holding gave the law a "stunning reach."
Dissenting Op. at 2. A babysitter, for example, could bring a
Section 1514A claim against his employer, merely because that
employer was an employee of a public company. Id. Justice
Ginsburg's opinion discounted the dissent's "fanciful
visions of whistleblowing babysitters" and noted that
"[f]ew housekeepers or gardeners... are likely to come upon
and comprehend evidence of their employer's complicity in
fraud." Slip Op. at 14-15.
Lawson's ultimate scope could hinge on legal
questions under the law that remain unresolved. One such issue,
which the Court identified but did not decide, is whether the law
protects employees of contractors only to the extent the
whistleblowing relates to the contractor fulfilling its role as a
contractor for the public company, or extends to activities by the
contractor that relate to non-public companies. Slip Op. at 23-24.
Another issue is whether whistleblower protections apply broadly to
a variety of fraud claims, or simply to allegations of shareholder
fraud. The statute applies to "any conduct which the employee
reasonably believes constitutes a violation of section 1341 [mail
fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities
fraud], any rule or regulation of the Securities and Exchange
Commission, or any provision of Federal law relating to fraud
against shareholders...." 18 U.S.C. § 1514A(1). Some have
argued that the predicate legal violations should be limited to
claims of shareholder fraud. The Department of Labor Administrative
Review Board, however, has held that SOX whistleblower protection
"does not require that [] mail fraud or wire fraud pertain to
a fraud against the shareholders." Brown v. Lockheed
Martin Corp., ARB No. 10-050, Slip Op. at 9 (Feb. 28, 2011)
(citations omitted).
Lawson resolved an open question, and did so in a manner
that interprets the scope of whistleblower protection expansively.
Investment advisers to mutual funds, and indeed any private
companies, law firms, or accounting firms that contract with public
companies, should be mindful of the broad reach of Section 1514A.
Retaliation taken against employees of such organizations for
reporting possible public company misconduct may be actionable
under SOX. These organizations might consider revisiting their
internal policies and procedures to ensure that they comply with
Section 1514A. For a more detailed discussion about mitigating the
retaliation risks associated with whistleblowers, see Don't
Tread on Whistleblowers: Mitigating and Managing Retaliation Risks
— Part II SEC. REG. & LAW REP., 46 SRLR 167 (Jan.
27, 2014) available
here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.