Supreme Court: SOX Whistleblower Protections Cover Private Contractors of Public Companies

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In Lawson v. FMR, decided March 4, 2014, the U.S. Supreme Court greatly expanded the scope of whistleblower protections under the Sarbanes-Oxley Act (SOX) by extending the Act’s reach to employees of private firms that contract with public companies. Lawson was the first SOX whistleblower case to ever be heard by the Supreme Court. Prior to Lawson, SOX whistleblower protections shielded employees of public companies only.

Congress enacted SOX in 2002 as a result of the corporate-responsibility scandals and business failures involving companies such as Enron, Adelphia and Global Crossing. The law prohibits companies covered under the Act from — among other things — discharging, demoting, suspending, threatening, harassing or discriminating against an employee who assists in enforcing the securities laws.

Lawson arose after two employees of FMR LLC, a private company that contracted with Fidelity Investments to manage mutual funds, filed a lawsuit alleging that their employer retaliated against them for reporting fraud. The employees appealed to the Supreme Court after a U.S. Court of Appeals panel ruled that the SOX whistleblower protections only applied to employees of public companies. In a 6-3 decision, the Supreme Court reversed the lower court’s ruling, finding that the definition of “employee” under the Act includes “employees of private contractors that serve public companies.”

Thus far, reactions to the decision have been mixed. Some securities-law experts have praised it for expanding the number of companies subject to SOX whistleblower protections — from 5,000 public companies to as many as 6 million private ones. Others have criticized the ruling for going way beyond the intended scope of SOX, with some believing that it will lead to unbearable costs for small private companies that now need to brace themselves for potential whistleblower claims.


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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