Justices Says SOX Whistle-Blower Provisions Protect Employees of Private Contractors

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By Jay-Anne B. Casuga  

March 4 --The whistle-blower protections of Section 806 of the Sarbanes-Oxley Act apply to employees of privately held companies that are contractors or subcontractors of a public company covered by the law, the U.S. Supreme Court held 6-3 March 4 (Lawson v. FMR LLC, 2014 BL 57958, U.S., No. 12-3, 3/4/14).

With Justice Ruth Bader Ginsburg writing for the majority, the court reversed and remanded a U.S. Court of Appeals for the First Circuit decision that Section 806 (18 U.S.C. § 1514A(a)) did not protect Jackie Lawson and Jonathan Zang, two former employees of private companies that advised and managed Fidelity mutual funds within SOX's scope ( 670 F.3d 61, 33 IER Cases 457 (1st Cir. 2012); 30 HRR 159, 2/13/12).

The majority found that SOX's plain text and legislative history, as well as comparisons to other whistle-blower laws, support its conclusion. It said its interpretation of Section 806 “avoids insulating the entire mutual fund industry” from SOX's whistle-blower protections, and is unlikely to open any “floodgates” for whistle-blower litigation.

The majority declined, however, to address various “limiting principles” suggested by the employees and the solicitor general to resolve any “overbreadth problems” regarding covered contractors. The present case “fall[s] squarely within Congress' aim in enacting” Section 806 to “safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corp,” it explained.

Chief Justice John G. Roberts and Justices Stephen G. Breyer and Elena Kagan joined in the majority opinion.

Justices Antonin Scalia and Clarence Thomas concurred in principal part and in the judgment of the majority regarding its analysis of the statutory text. But they disagreed with the majority's reliance on legislative history and intent, and its comparison to another whistle-blower law.

Justice Sonia Sotomayor wrote for the dissent, which included Justices Anthony M. Kennedy and Samuel A. Alito. Sotomayor asserted that SOX's text is “deeply ambiguous” and that its headings and statutory context support a narrow interpretation of Section 806 as applying to only employees of public companies.

Sotomayor wrote that the majority's ruling gives “stunning reach” to Section 806 and would lead to “absurd results,” such as allowing 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.”

'Big Win' for Whistle-Blowers

Stephen M. Kohn, an attorney trustee of the National Whistleblowers Center in Washington, D.C., which filed an amicus brief in the case, called the ruling a “big win” for whistle-blowers.

“This decision closed a dangerous loophole,” Kohn told Bloomberg BNA March 4. “If it had gone the other way, everyone who works for mutual funds would have been denied whistle-blower protection. It would have had a devastating impact.”

Kohn said the majority's ruling highlighted the fact that the investment advising industry manages $14.7 trillion on behalf of nearly 94 million investors.

By interpreting Section 806's protections as including contractors' employees, Kohn said the majority has provided an “added level of security” for those 94 million investors.

Eric Schnapper of the University of Washington School of Law in Seattle, who represented Zang and Lawson, shared a similar take on the ruling, which he described as “straightforward.”

“I think it's a good thing for the integrity of and confidence in public markets,” he told Bloomberg BNA.

Ruling 'Significantly Expands' Coverage

Edward Ellis, a management attorney with Littler Mendelson in Philadelphia and co-chair of the firm's whistle-blowing and retaliation practice, said the majority's decision “significantly expands” the coverage of Section 806 beyond publicly traded companies to, “at least in theory, anyone who contracts with a publicly traded company.”

Littler Mendelson filed an amicus brief in the case on behalf of the Society for Human Resource Management. The ruling “expands the number of potential covered companies by hundreds of thousands, maybe even millions,” Ellis told Bloomberg BNA March 4.

One practical impact of the decision, he said, will be that “many” companies will have to examine their internal compliance practices as well as their systems for investigating whistle-blower complaints, and provide training to human resources personnel on issues involving fraud.

Ellis said privately held companies also will have to determine if they have contracts or subcontracts with publicly traded companies covered by SOX Section 806.

“This has the potential to have a big impact on compliance systems and whistle-blower litigation,” he said. “That can't be underestimated.”

Ellis said one of the “big issues going forward” will be whether courts will impose limitations on the contractors covered by Section 806, pointing to discussions in the majority and the dissent opinions about whistle-blower protections potentially extending to personal employees of public company officers and employees, such as babysitters or gardeners.

“We don't really know from this opinion whether the Supreme Court would hold there was coverage in those situations,” Ellis said.

Rae T. Vann, general counsel of the Equal Employment Advisory Council, which filed an amicus brief in the case, said the management group is “extremely disappointed” with what it views as a “breathtakingly broad construction” of Section 806.

She described the ruling as “surprising,” given the composition of the majority and those who dissented, with some traditionally conservative justices embracing the broad interpretation of Section 806 and one traditionally liberal justice advocating for a narrower approach.

“We're still trying to digest and appreciate what the long-term implications of the ruling are for future SOX cases,” she told Bloomberg BNA March 4. “We just have to see how it plays out.”

Vincent G. Loporchio, a senior vice president of Fidelity Investments, told Bloomberg BNA that the company agreed with the First Circuit's narrow interpretation of Section 806.

He emphasized that there has been no determination of the merits of Zang's or Lawson's whistle-blower claims.

“The allegations were unfounded when they were made, and they continue to be unfounded today,” Loporchio said.

District Court, First Circuit Disagree

Zang in 2005 and Lawson in 2006 filed separate SOX whistle-blower complaints with the Labor Department against their former employers, which provided investment advising services to Fidelity mutual funds. These private management companies are subsidiaries of FMR LLC. The mutual funds are public companies with no employees.

Zang and Lawson alleged they were actually or constructively discharged for raising concerns, respectively, about cost accounting methodologies and inaccuracies in federal filings. They each eventually sought review of their SOX claims in the U.S. District Court for the District of Massachusetts.

The district court addressed the cases together because the two employees sued a common defendant, and denied the companies' motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure ( 724 F. Supp. 2d 141, 30 IER Cases 966 (D. Mass. 2010); 28 HRR 386, 4/12/10).

The district court found, among other things, that SOX Section 806 protects employees of “private agents, contractors, and subcontractors to public companies,” that Lawson and Zang sufficiently alleged that their employers were contractors of mutual funds covered by SOX and that their complaints about accounting and federal filing inaccuracies constituted protected activity.

The First Circuit 2-1 reversed the denial and remanded the case to the district court, finding that Section 806 does not protect employees of privately held companies that are contractors or subcontractors of a publicly traded company covered by SOX.

The appeals court said its conclusion is supported by the plain language, title, and caption of the statutory provision; comparisons to other provisions within SOX as well as other federal whistle-blower statutes; and pre- and post-enactment legislative history.

In addition, the court said it owed no deference to Labor Department and Securities and Exchange Commission positions that Section 806's whistle-blower protections extend to the employees of contractors for public companies.

The dissent criticized the majority for engaging in a “faulty statutory interpretation exercise” and disregarding agency views entitled to deference in order to “impose an unwarranted restriction on the intentionally broad language of [SOX]” and “bar a significant class of potential securities-fraud whistleblowers from any legal protection.”

Lawson and Zang filed a petition for Supreme Court review. The justices in October 2012 invited the solicitor general to file an amicus brief (30 HRR 1097, 10/15/12) and granted review in May 2013 (31 HRR 537, 5/27/13). The high court heard oral argument in November 2013 (31 HRR 1230, 11/18/13).

Law's Text Covers Contractors' Employees

Reversing and remanding, the majority ruled that the statutory language of Section 806 supports its conclusion that the law's whistle-blower protections apply to employees of private entities that contract with publicly traded companies.

Prior to amendments to SOX enacted in 2010, Section 806 stated that public companies, “or any officer, employee, contractor, subcontractor, or agent of such company” may not “discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee” for reporting conduct they reasonably believe constitutes certain types of fraud or a securities violation.

Agreeing with the First Circuit dissent, the high court majority said Section 806, when “boil[ed] down to its relevant syntactic elements,” provides that “no … contractor … may discharge … an employee.”

“The ordinary meaning of 'an employee' in this proscription is the contractor's own employee,” Ginsburg wrote for the majority, rejecting FMR's interpretation that would require insertion “of a public company” after “an employee.”

Nothing in Section 806's text limits its protections to employees of public companies, the majority said.

Ginsburg wrote that the majority's interpretation “avoids insulating the entire mutual fund industry,” as well as “[l]egions of accountants and lawyers,” from Section 806, which would occur under the “narrower construction” set forth by FMR and the dissent.


To contact the reporter on this story: Jay-Anne B. Casuga in Washington at jcasuga@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

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