Justices to Consider Whether Employees Of Contractors Have Whistleblower Protection

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By Lawrence E. Dubé  

The U.S. Supreme Court May 20 agreed to review whether the Sarbanes-Oxley Act provides whistleblower protection to employees who work for a publicly owned company's contractors or subcontractors, rather than for the public firm itself (Lawson v. FMR LLC, U.S., No. 12-3, cert. granted 5/20/13).

The U.S. Court of Appeals for the First Circuit held 2-1 that while SOX applied to publicly owned Fidelity mutual funds, the act did not provide the same protection to employees of an investment advisory firm that managed the funds ( 670 F.3d 61, 33 IER Cases 457 (1st Cir. 2012); 30 HRR 159, 2/13/12).

Former employees Jackie Hosang Lawson and Jonathan M. Zang filed a petition for high court review in June 2012. FMR LLC, the parent corporation of a group of companies that provided advisory services to the mutual funds, opposed the petition.

Solicitor General Donald B. Verrilli filed an amicus brief on behalf of the United States, also opposing the employees' petition. The solicitor general argued that while the First Circuit erred in its interpretation of Sarbanes-Oxley, Supreme Court review of the SOX issue would be premature and should await further “percolation” in the appellate courts.

SOX Protection Claimed Through Mutual Fund Link

According to the First Circuit decision, Lawson and Zang filed separate SOX whistleblower complaints with the Labor Department against their former employers, which provided investment advisory services to Fidelity mutual funds.

Lawson filed her lawsuit against FMR LLC and its subsidiary Fidelity Brokerage Services LLC doing business under the name Fidelity Investments. Zang named FMR LLC and another subsidiary, Fidelity Management & Research Co.

Lawson alleged she was harassed and ultimately forced to quit because she provided Fidelity managers with information on inappropriate expense reporting, retention of investment company fees, and methodologies for reporting or accounting for mutual fund expenses and operations. Zang contended he was fired for informing Fidelity management that disclosures that were being prepared for submission to the Securities and Exchange Commission did not accurately reflect the details of some fund managers' compensation.

The two former employees eventually filed a SOX action in the U.S. District Court for the District of Massachusetts. The trial court denied a motion to dismiss ( 724 F. Supp. 2d 141, 30 IER Cases 966 (D. Mass. 2010); 28 HRR 386, 4/12/10) and later decided to certify an immediate appeal of its order to the First Circuit (28 HRR 861, 8/9/10).

The appeals court 2-1 reversed the district court and directed it on remand to dismiss the whistleblower claims, concluding Section 806 of SOX does not cover the employees of private companies that contract with the defined public companies covered by the federal statute.

Conflict With ARB Ruling

In their petition for Supreme Court review, Lawson and Zang cited a conflict between the First Circuit decision and the DOL Administrative Review Board's decision in Spinner v. David Landau and Associates, DOL ARB, No. 10-111, 5/31/12 (30 HRR 637, 6/11/12).

In Spinner, Lawson and Zang wrote, a three-member panel of the administrative board found that SOX did protect employees of contractors and subcontractors of a public company.

Unless the conflict between ARB and the First Circuit is resolved, the employees argued, “[a]n employer will as a practical matter be subject to different standards depending on where an employee worked or resided at the time of the alleged retaliation, a difference that is particularly problematic because many of the affected firms are national employers.”

Opposing the petition for Supreme Court review, FMR argued “courts of appeals are in agreement that the text of Section 806 limits the private cause of action to employees of public companies.”

FMR wrote that “petitioners have not cited a single case in which this Court has granted certiorari to review a conflict between a court of appeals decision and a decision of an administrative tribunal like the ARB, and we are aware of none.”

Contending that extending SOX coverage to the employees of private contractors would expose businesses to a “particularly expensive and potentially destructive form of civil liability,” FMR urged the justices to deny the petition for Supreme Court review.