Supreme Court Expands Scope of Sarbanes-Oxley Whistleblower Liability

This morning the Supreme Court of the United States issued its opinion in Lawson v. FMR LLC, No. 12-3, holding that the whistleblower protections of the Sarbanes-Oxley Act of 2002 protect not only the employees of regulated public companies but also the employees of contractors and subcontractors of those companies. By reaching into the workforces of companies that are not themselves regulated by Sarbanes-Oxley, but merely do business with regulated companies, the Court, through this decision, has vastly increased the scope of potential whistleblower claims. This increased scope will likely result in more Sarbanes-Oxley whistleblower litigation and, in particular, more litigation against non-public companies.

Jackie Hosang  Lawson was employed by an investment advising firm that handled the day-to-day investment decisions for certain Fidelity mutual funds. The funds are public companies with no employees, but are managed by private firms such as Lawson’s employer. Lawson alleged that she had been constructively discharged—essentially, forced to resign—because she raised concerns about overstating certain expenses related to the management of the mutual funds. FMR moved to dismiss the case, arguing that Lawson could not bring an action because she was not an employee of a public company regulated by Sarbanes-Oxley.

The relevant language of the statute provides that neither a public company nor “any officer, employee, contractor, subcontractor, or agent of such company may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee” due to whistleblowing activity [emphasis added]. The question before the Court was whether the term “an employee” means an employee of the public company only or also an employee of any of the persons and entities prohibited from discriminating.

The Court concluded that Sarbanes-Oxley was intended not only to protect employees of the public company at issue, but also to “shelter[] employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.”

The Court based its conclusion on a number of factors. First, it reasoned that the text of the statute clearly supported its conclusion. It also noted that, at least in the mutual fund industry, it is common for the public company to have no employees and to manage its affairs entirely through outside contractors. In this context, whistleblower protection for employees of the public company only would make little sense. The Court also looked to the context and legislative history of the Sarbanes-Oxley Act, noting that it was designed as a response to the Enron scandal, which was perpetrated not only by Enron employees but by outside entities such as the Arthur Andersen accounting firm.

The Court declined to decide whether employees of all of the other actors governed by the whistleblower retaliation provision (“any officer, employee, contractor, subcontractor, or agent”) would also be covered. The Court concluded that it “need not determine the bounds of [the whistleblower provision] today” because the whistleblower claim made by Lawson and her co-plaintiff sought only a “mainstream application” of the provision. Nevertheless, it admitted that it would make little sense for employees of contractors to be covered but not employees of other actors specifically listed in the statute, such as public company employees and subcontractors.

In the dissenting opinion, Justice Sotomayor found no principled basis for limiting the majority’s reasoning. Thus, the dissent reasoned, someone who worked as a babysitter for an employee of a public company could bring a whistleblower claim under the majority’s decision based on an assertion that the employee had engaged in fraudulent activity covered by the act. This is because, pursuant to the majority’s reasoning, an employee of an employee of a public company would be protected.

Key Takeaways

Although it remains to be seen whether the Court or Congress will eventually place some limit on liability in scenarios such as the example described above, the Lawson decision should be a sobering one for employers. Sarbanes-Oxley whistleblower complaints are not exclusively the concern of public companies. All employers should ensure that they have robust internal compliance procedures in place, evaluate carefully internal complaints about company wrongdoing, and consider the likelihood that a business relationship with a public company might give rise to Sarbanes-Oxley whistleblower liability. Because Sarbanes-Oxley whistleblower claims are subject to different substantive and procedural rules than retaliation claims under other statutes, it is essential that employers act quickly to evaluate and minimize risk when such a claim is possible.

The attorneys in Ogletree Deakins’ Ethics Compliance, Investigations, and Whistleblower Response Practice Group provide our clients with expert compliance program best practice solutions, as well as assist clients with investigations and defense of claims under myriad whistleblower statutes, including Sarbanes-Oxley.

- See more at: http://blog.ogletreedeakins.com/supreme-court-expands-scope-sarbanes-oxley-whistleblower-liability/#sthash.GW8WW1Uw.dpuf

This morning the Supreme Court of the United States issued its opinion in Lawson v. FMR LLC, No. 12-3, holding that the whistleblower protections of the Sarbanes-Oxley Act of 2002 protect not only the employees of regulated public companies but also the employees of contractors and subcontractors of those companies. By reaching into the workforces of companies that are not themselves regulated by Sarbanes-Oxley, but merely do business with regulated companies, the Court, through this decision, has vastly increased the scope of potential whistleblower claims. This increased scope will likely result in more Sarbanes-Oxley whistleblower litigation and, in particular, more litigation against non-public companies.

Jackie Hosang  Lawson was employed by an investment advising firm that handled the day-to-day investment decisions for certain Fidelity mutual funds. The funds are public companies with no employees, but are managed by private firms such as Lawson’s employer. Lawson alleged that she had been constructively discharged—essentially, forced to resign—because she raised concerns about overstating certain expenses related to the management of the mutual funds. FMR moved to dismiss the case, arguing that Lawson could not bring an action because she was not an employee of a public company regulated by Sarbanes-Oxley.

The relevant language of the statute provides that neither a public company nor “any officer, employee, contractor, subcontractor, or agent of such company may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee” due to whistleblowing activity [emphasis added]. The question before the Court was whether the term “an employee” means an employee of the public company only or also an employee of any of the persons and entities prohibited from discriminating.

The Court concluded that Sarbanes-Oxley was intended not only to protect employees of the public company at issue, but also to “shelter[] employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.”

The Court based its conclusion on a number of factors. First, it reasoned that the text of the statute clearly supported its conclusion. It also noted that, at least in the mutual fund industry, it is common for the public company to have no employees and to manage its affairs entirely through outside contractors. In this context, whistleblower protection for employees of the public company only would make little sense. The Court also looked to the context and legislative history of the Sarbanes-Oxley Act, noting that it was designed as a response to the Enron scandal, which was perpetrated not only by Enron employees but by outside entities such as the Arthur Andersen accounting firm.

The Court declined to decide whether employees of all of the other actors governed by the whistleblower retaliation provision (“any officer, employee, contractor, subcontractor, or agent”) would also be covered. The Court concluded that it “need not determine the bounds of [the whistleblower provision] today” because the whistleblower claim made by Lawson and her co-plaintiff sought only a “mainstream application” of the provision. Nevertheless, it admitted that it would make little sense for employees of contractors to be covered but not employees of other actors specifically listed in the statute, such as public company employees and subcontractors.

In the dissenting opinion, Justice Sotomayor found no principled basis for limiting the majority’s reasoning. Thus, the dissent reasoned, someone who worked as a babysitter for an employee of a public company could bring a whistleblower claim under the majority’s decision based on an assertion that the employee had engaged in fraudulent activity covered by the act. This is because, pursuant to the majority’s reasoning, an employee of an employee of a public company would be protected.

Key Takeaways

Although it remains to be seen whether the Court or Congress will eventually place some limit on liability in scenarios such as the example described above, the Lawson decision should be a sobering one for employers. Sarbanes-Oxley whistleblower complaints are not exclusively the concern of public companies. All employers should ensure that they have robust internal compliance procedures in place, evaluate carefully internal complaints about company wrongdoing, and consider the likelihood that a business relationship with a public company might give rise to Sarbanes-Oxley whistleblower liability. Because Sarbanes-Oxley whistleblower claims are subject to different substantive and procedural rules than retaliation claims under other statutes, it is essential that employers act quickly to evaluate and minimize risk when such a claim is possible.

The attorneys in Ogletree Deakins’ Ethics Compliance, Investigations, and Whistleblower Response Practice Group provide our clients with expert compliance program best practice solutions, as well as assist clients with investigations and defense of claims under myriad whistleblower statutes, including Sarbanes-Oxley.

- See more at: http://blog.ogletreedeakins.com/supreme-court-expands-scope-sarbanes-oxley-whistleblower-liability/#sthash.GW8WW1Uw.dpuf

Yesterday, the Supreme Court of the United States issued its opinion in Lawson v. FMR LLC, No. 12-3, holding that the whistleblower protections of the Sarbanes-Oxley Act of 2002 protect not only the employees of regulated public companies but also the employees of contractors and subcontractors of those companies. By reaching into the workforces of companies that are not themselves regulated by Sarbanes-Oxley, but merely do business with regulated companies, the Court, through this decision, has vastly increased the scope of potential whistleblower claims. This increased scope will likely result in more Sarbanes-Oxley whistleblower litigation and, in particular, more litigation against non-public companies.

Jackie Hosang  Lawson was employed by an investment advising firm that handled the day-to-day investment decisions for certain Fidelity mutual funds. The funds are public companies with no employees, but are managed by private firms such as Lawson’s employer. Lawson alleged that she had been constructively discharged—essentially, forced to resign—because she raised concerns about overstating certain expenses related to the management of the mutual funds. FMR moved to dismiss the case, arguing that Lawson could not bring an action because she was not an employee of a public company regulated by Sarbanes-Oxley.

The relevant language of the statute provides that neither a public company nor “any officer, employee, contractor, subcontractor, or agent of such company may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee” due to whistleblowing activity [emphasis added]. The question before the Court was whether the term “an employee” means an employee of the public company only or also an employee of any of the persons and entities prohibited from discriminating.

The Court concluded that Sarbanes-Oxley was intended not only to protect employees of the public company at issue, but also to “shelter[] employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.”

The Court based its conclusion on a number of factors. First, it reasoned that the text of the statute clearly supported its conclusion. It also noted that, at least in the mutual fund industry, it is common for the public company to have no employees and to manage its affairs entirely through outside contractors. In this context, whistleblower protection for employees of the public company only would make little sense. The Court also looked to the context and legislative history of the Sarbanes-Oxley Act, noting that it was designed as a response to the Enron scandal, which was perpetrated not only by Enron employees but by outside entities such as the Arthur Andersen accounting firm.

The Court declined to decide whether employees of all of the other actors governed by the whistleblower retaliation provision (“any officer, employee, contractor, subcontractor, or agent”) would also be covered. The Court concluded that it “need not determine the bounds of [the whistleblower provision] today” because the whistleblower claim made by Lawson and her co-plaintiff sought only a “mainstream application” of the provision. Nevertheless, it admitted that it would make little sense for employees of contractors to be covered but not employees of other actors specifically listed in the statute, such as public company employees and subcontractors.

In the dissenting opinion, Justice Sotomayor found no principled basis for limiting the majority’s reasoning. Thus, the dissent reasoned, someone who worked as a babysitter for an employee of a public company could bring a whistleblower claim under the majority’s decision based on an assertion that the employee had engaged in fraudulent activity covered by the act. This is because, pursuant to the majority’s reasoning, an employee of an employee of a public company would be protected.

Key Takeaways

Although it remains to be seen whether the Court or Congress will eventually place some limit on liability in scenarios such as the example described above, the Lawson decision should be a sobering one for employers. Sarbanes-Oxley whistleblower complaints are not exclusively the concern of public companies. All employers should ensure that they have robust internal compliance procedures in place, evaluate carefully internal complaints about company wrongdoing, and consider the likelihood that a business relationship with a public company might give rise to Sarbanes-Oxley whistleblower liability. Because Sarbanes-Oxley whistleblower claims are subject to different substantive and procedural rules than retaliation claims under other statutes, it is essential that employers act quickly to evaluate and minimize risk when such a claim is possible.

Topics:  Lawson v FMR, Retaliation, Sarbanes-Oxley, SCOTUS, Whistleblowers

Published In: Business Torts Updates, Civil Procedure Updates, Civil Rights Updates, Labor & Employment Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ogletree, Deakins, Nash, Smoak & Stewart, P.C. | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »