Until this month, the onerous (for employers) anti-retaliation protection in Section 1514A of the Sarbanes-Oxley Act (SOX) only applied to employees of publicly traded corporations. But, in a widely reported decision, Lawson v. FMR LLC, the U.S. Supreme Court ruled that the law now covers employees of private companies who are contractors or subcontractors to public companies. Consequently, private companies who provide services to publicly traded companies should assess their legal obligations and adopt strategies to minimize risks when taking any adverse employment action against one of their employees.
FMR LLC (a private company) provided investment advisory services to publicly traded mutual funds. FMR terminated two employees who then claimed that FMR retaliated against them for “blowing the whistle” on putative fraud claims related to the mutual funds served by FMR. The employees each filed a claim under Section 1514A. FMR asserted that Section 1514A only protected the employees of the mutual funds and publicly traded companies. The U.S. Court of Appeals for the 1st Circuit agreed and dismissed the employees’ claims.
Supreme Court decision
The U.S. Supreme Court reversed (6-3) and held that SOX’s anti-retaliation provisions cover not just employees of publicly traded companies but also employees of private contractors and subcontractors who perform services for public companies. The majority opinion focused on the text of Section 1514A and its purpose, namely, to detect and deter fraud in situations like the Enron scandal. The majority emphasized that outside professionals—such as Enron’s accountants, law firms, and other contactors—helped perpetuate that scandal. The Court also acknowledged that Section 1514A was modeled after an existing air-carrier whistleblower statute that covers employees of contractors and subcontractors, as well as employees of air carriers.
Employees of private contractors who complain of potential fraud against shareholders (e.g., mail fraud, wire fraud, violation of SEC rules and regulations) and later suffer an adverse employment action now can pursue whistleblower retaliation claims under Sarbanes-Oxley. Claims must first be filed with OSHA, which is charged with investigating the claims. In the event that OSHA cannot resolve it within 180 days, a claimant can file his or her claim directly in federal court
However, the Lawson decision leaves many basic questions to be resolved in a given case: Is the private company truly a “contractor” covered by the statute? Did the employee-claimant engage in activity actually protected by the statute? Can the claimant prove a causal connection between his/her “protected activity” and the adverse action?
What should a private company do now?
Every private company should evaluate whether it is a contractor to a publicly traded company. Although the Supreme Court focused its examples on accountants and lawyers, who by the nature of their roles may have insight into potential fraud, the Court decision is not clear how far the protection extends. To be safe, any entity that provides services to a public company should expect to be subject to Sarbanes-Oxley. Contractors should consider the following strategies to minimize risk:
Develop or update policies to encourage reporting of suspected fraud or wrongdoing by any public entity for whom the contractor provides services. Include multiple reporting mechanisms and consider procedures for anonymous reporting.
Update policies about retaliation to protect workers who express concern about shareholder fraud at public company customers or clients.
Train managers and supervisors to recognize potential protected complaints of fraud and how to respond to them.
Update internal investigation procedures to fully understand and analyze complaints received. Include a process to follow-up with the complaining worker to verify that no retaliation has occurred. Retain records of the investigation and follow-up.
Before taking adverse action against an employee (including termination), consider whether he or she previously reported wrongdoing (particularly anything that could be considered fraud against the shareholders). For any employee who has previously complained about anything that could be protected shareholder fraud, ensure that the employer has sufficient business justification for any adverse action (similar to risk assessments for discrimination or other whistleblower protections).