In the first SOX whistleblower case to be heard by the U.S. Supreme Court, the Court held on March 4 that the Sarbanes-Oxley Act of 2002 (SOX) prohibits private contractors of publicly traded companies from retaliating against their employees for engaging in protected whistleblowing activities. As a result, private companies who perform services for public companies should be prepared to face an increasing number of SOX retaliation claims from their current and former employees.

The plaintiffs in Lawson v. FMR LLC, No. 12-3,  571 U.S. ___ (2014), were former employees of privately held companies that provide investment advice and management services to public mutual funds. Both employees claimed that they had been retaliated against after disclosing potential securities violations related to the publicly traded funds for which their employers performed services. To ground their claims, the petitioners cited SOX’s anti-retaliation provision,18 U.S.C. § 1514A, which provides in part that “no [public] company . . . or 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 in the terms and conditions of employment” because of certain lawful whistleblowing activities.1

The defendant employers moved to dismiss the plaintiffs’ claims, arguing that § 1514A prohibits retaliation only against the employees of the public company itself—and not against the separate employees of the company’s officers, employees, contractors, subcontractors, or agents. Although the district court rejected these arguments, a divided panel of the U.S. Court of Appeals for the First Circuit agreed with the employer defendants, holding that § 1514A covers only the employees of public companies.

Two months after the First Circuit denied a petition for rehearing en banc, the Administrative Review Board (ARB) of the U.S. Department of Labor reached the opposite conclusion in Spinner v. David Landau & Associates, LLC.2 The ARB explicitly declined to follow the First Circuit’s reasoning in Lawson and held that employees of private companies who “provide SOX compliance services to publicly traded corporations[ ] are covered as employees of contractors under [§ 1514A].3

Given the split between the First Circuit and the ARB, the Supreme Court granted cert to define the scope of § 1514(A)’s “protected class.”4

Writing for the Court, Justice Ginsburg held that the statutory text and “common sense” both supported the plaintiffs’ reading of § 1514A to mean that “[n]o . . . contractor . . . may . . . discriminate against [its own] employee [for whistleblowing].”5 Because “[c]ontractors are not ordinarily positioned to take adverse actions against employees of the public company with whom they contract,” the Court reasoned that a contrary interpretation of the statute “would shrink to insignificance the provision’s ban on retaliation by contractors.”6

The Court’s holding in Lawson considerably expands the reach of SOX’s anti-retaliation provision. Under the Court’s express reasoning, the “contractor” language of § 1514A protects not only “mutual fund advisers and managers” employed by private contractors of public funds but also “[l]egions of accountants and lawyers.”7

What is more, the Court declined the opportunity to exclude the “employees of public company officers and employees” from § 1514A’s scope. The Court thus acknowledged the “unlikely” possibility that “household employees” like “babysitters, nannies, [and] gardeners” could pursue retaliation claims under SOX.8

In dissent, Justice Sotomayor criticized the “stunning reach” of the majority’s interpretation.9 In her view, the Court’s acknowledgement of potential claims by household employees was tantamount to holding that § 1514A “encompasses any household employee of the millions of people who work for a public company and any employee of the hundreds of thousands of private businesses that contract to perform work for a public company.”10

Regardless of whether the dissenting minority’s fears are realized, this much is clear: Employers who perform services for public companies would do well to implement policies and safeguards designed to minimize their exposure to retaliation liability under SOX.

1 18 U.S.C. § 1514A(a) (emphasis added). Although Congress amended this provision in 2010 to extend its protections to the employees of a public company’s subsidiaries and of nationally recognized statistical ratings organizations, the Court was not persuaded that this change indicated a lack of protection for contractor employees before 2010. Lawson v. FMR LLC, No. 12-3, slip op. at 24-27 (U.S. Mar. 4, 2014).

2 2012 WL 2073374, at *3 (May 31, 2012).

3 Id. at *4.

4 Lawson, No. 12-3, slip op. at 1.

5 Id. at 2 (alterations and brackets in original).

6 Id. at 10. Justice Ginsburg’s opinion bolstered this conclusion by noting that the 2000 Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR 21), 49 U.S.C. § 42121, on which Congress had purportedly modeled the SOX retaliation provision, has also “been read to protect employees of contractors covered by the provision.” Lawson, No. 12-3, slip op. at 28. This reasoning was not adopted by a majority of the Court, however, because it was rejected by Justices Scalia and Thomas in a separate concurring opinion. See id. (Scalia, J., concurring) at 2.

7 Id. (Ginsburg, J., for the Court) at 14.

8 Id. at 23.

9 Id. (Sotomayor, J., dissenting) at 2.

10 Id. at 1-2.

 

Topics:  Contractors, Fidelity Investments, FMR LLC, Lawson v FMR, Retaliation, Sarbanes-Oxley, SCOTUS, Whistleblower Protection Policies, Whistleblowers

Published In: Civil Procedure Updates, Civil Rights Updates, General Business 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.

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