Supreme Court Holds That Sarbanes-Oxley Whistleblower Provision Applies To Employees Of Investment Advisers And Other Private Companies

by Cadwalader, Wickersham & Taft LLP
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On March 4, 2013, the Supreme Court issued an opinion with broad implications for mutual funds and certain other SEC-regulated companies that conduct business through or with privately-held entities (such as investment advisers and managers), as well as the private companies that do business with them.  In Lawson v. FMR LLC,1 the Court held that the whistleblower provision of the Sarbanes-Oxley Act of 2002 (“Section 1514A”) 2 protects employees of private companies that contract with public companies.3  This reversed a First Circuit decision holding that Section 1514A protects only employees of a public company.4  The decision, as the majority explicitly indicated, impacts mutual funds and their privately-held investment advisers, as well as accountants, law firms and other privately-held companies that serve as contractors or subcontractors to public companies.

Background

Lawson involved claims of retaliation by two former employees of private companies (collectively, “FMR”) that managed and advised certain mutual funds.  Mutual funds generally have no employees; rather, the funds contract with investment advisers like FMR to handle day-to-day operations (e.g., making investment decisions, preparing reports for shareholders, and filing reports with the SEC). The plaintiffs in Lawson alleged that they were discharged by FMR after raising concerns about the mutual funds’ cost accounting methodologies and inaccuracies in draft SEC registration statements.6  They initially filed administrative complaints against FMR alleging retaliation and, after the expiration of the 180-day period specified in 18 U.S.C. § 1514A(b)(1), filed suit in the United States District Court for the District of Massachusetts.7

After the district court denied FMR’s motion to dismiss, FMR appealed, and a divided panel of the First Circuit reversed.8  The plaintiffs appealed, asking the Supreme Court to address the question of whether Section 1514A “shield[s] only those employed by the public company itself, or . . . employees of privately held contractors and subcontractors [as well]—for example, investment advisers, law firms, accounting enterprises—who perform work for the public company.”9

The 6-3 Opinion

Justice Ginsburg delivered the majority opinion for the Court,10 which held that Section 1514A “shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.”11  The majority rejected FMR’s interpretation of Section 1514A, which, the Court explained, would require the “insertion of ‘of a public company’ after ‘an employee,’” noting that “where Congress meant ‘an employee of a public company,’ it said so.”12  The majority also found that because mutual funds have no employees, if the statute was interpreted (as FMR claimed) to only refer to employees of public companies, mutual funds would entirely “escape § 1514A’s control.”13  Additionally, the majority pointed to Congressional intent, emphasizing that “Congress installed whistleblower protection in the Sarbanes–Oxley Act as one means to ward off another Enron debacle.”14  In light of that purpose, and the fact that other Sarbanes-Oxley provisions confer on outside professionals certain responsibilities to report suspected fraud, the majority reasoned that those same professionals likewise should be covered by Section 1514A.15 

Notably, the majority did not reach the question of whether a retaliation claim under Section 1514A could proceed based on allegations other than those relating to fraud on shareholders.  However, the majority was clear that Lawson brings mutual funds within the purview of Section 1514A in the sense that employees of investment advisers or other private companies that handle day-to-day operations are among the class of employees protected by Section 1514A.16

The dissent17 argued that the majority’s interpretation of the protected class was “stunning[ly]” broad, and contended that, given the Court’s holding, “contractors” could be construed to include gardeners, babysitters, and cleaning persons, a result obviously not intended by Congress.18  The dissent conceded that the statute was “ambiguous,” but asserted that the “narrower reading”—one that interprets “employees” to mean “employees of public companies”—was the correct one.19

Potential Implications

Lawson may have a significant impact on private entities (e.g., investment advisers, management consultants, accountants, law firms, technical support providers and other similar service providers) that provide services to publicly-held companies.  Based on the Court’s statement that one objective of Lawson was to avoid “insulating [an] entire . . . industry from [the application of] § 1514A,”20 the decision will likely have a particular impact on industries that (like the mutual fund industry) are structured such that the public company has no employees.  But Lawson’s scope appears to be even broader.  Its holding is not explicitly limited, and thus Lawson potentially applies to: (i) private entities engaged by public companies that have their own employees; (ii) retaliation for reporting fraud other than shareholder fraud; and (iii) providers of goods in addition to service providers.  Accordingly, any private company providing goods or services to a public company should evaluate its current compliance programs to ensure that issues raised by employees are handled appropriately.  Companies, however, are advised to take care when drafting any policies or employment agreements touching on whistleblower issues so as not to be construed as impeding the employee’s ability to report problems to the SEC or other government agencies.  In fact, Sean McKessy, the SEC’s Chief of the Office of the Whistleblower, in remarks delivered on March 14 at the Georgetown University Law Center Corporate Counsel Institute, cautioned in-house and outside counsel against drafting contracts that incentivize whistleblowers not to report alleged wrongdoing to the SEC (or that otherwise attempt to evade SEC programs and compliance), noting that the Commission has the power to preclude lawyers from practicing before it.  Additionally, public and private company contractors alike should review the circumstances under which the contractor is entitled to indemnification under its public company contracts, including who is responsible for costs incurred in the private entity having to participate in whistleblower suits.  Public and private employees should also consider addressing the parties’ rights, including vis-à-vis indemnification, where the private contractor is terminated for complying with Sarbanes-Oxley by supporting the private employee’s fraud reporting.

1   No. 12-3, 2014 WL 813701 (Mar. 4, 2014). 

2   Section 1514A, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, states in pertinent 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 any lawful act done by the employee.”  18 U.S.C. § 1514A(a).

3   Under Section 1514A, a public company is one “with a class of securities registered under section 12 of the [Exchange Act] or that is required to file reports under section 15(d) of the [Exchange Act], including any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company.”  See id.  

4   See Lawson v. FMR LLC, 670 F.3d 61, 83 (1st Cir. 2012).

5   See Lawson, 2014 WL 813701, at *6.

6   Id.

7   Id.

8   See 670 F.3d at 68 (“We conclude that only the employees of the defined public companies are covered by [Section 1514A]”).

9   See 2014 WL 813701, at *3.

10  Justice Ginsburg was joined by Chief Justice Roberts and Justices Breyer and Kagan.  Justices Scalia and Thomas joined the majority opinion in principal part.

11  See 2014 WL 813701, at *3.

12  Id. at *7.

13  Id. at *9.

14  Id. at *11.

15  Id.

16  Id. at *3.

17 The dissent was penned by Justice Sotomayor, and joined by Justices Kennedy and Alito. 

18  See id. at *18 (“As interpreted today, the Sarbanes–Oxley Act authorizes a babysitter to bring a federal case against his employer—a parent who happens to work at [a public company]—if the parent stops employing the babysitter after [the babysitter] expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud”).

19  Id.

20  See id. at *12.

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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