The U.S. Supreme Court Extends Sarbanes-Oxley Whistleblower Protections to Employees of Mutual Fund Investment Advisers and Other Privately-Held Contractors to Public Companies

Introduction

The Supreme Court of the United States on March 4, 2014 held that employees of a privately-held mutual fund investment adviser are protected under a whistleblower provision enacted as part of the Sarbanes-Oxley Act of 2002 (SOX).1 Although the SOX whistleblower provision explicitly protects employees of publicly traded companies, the Supreme Court’s ruling extended the protections afforded under the provision to employees of a privately-held investment adviser because the adviser served as a contractor to mutual funds. As Justice Sotomayor’s dissenting opinion recognized, this decision “threatens to subject private companies to a costly new front of employment litigation.”

This Dechert OnPoint discusses: (i) the SOX whistleblower provision; (ii) the Supreme Court’s decision; and (iii) the steps that privately-held contractors and subcontractors of public companies should consider in light of the decision in Lawson. Private companies should pay particular attention to this statute because it applies to a broader scope of conduct than is covered by the whistleblowing protections created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).2

Background on SOX Whistleblower Protections

Section 806 of SOX (codified in Section 1514A of Title 18 of the United States Code) protects a whistleblower who provides information or assistance to federal authorities or to his or her supervisor regarding fraudulent conduct. Under Section 1514A, no public company or any contractor of such company may retaliate against an employee who blows the whistle on fraud, and any whistleblower who suffers retaliation can file a complaint seeking reinstatement with back pay, attorney fees, and litigation costs. In particular, Section 1514A reads in relevant part:

WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICALLY TRADED COMPANIES.—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 . . . because of [whistleblowing or other protected activity] . . . .

Supreme Court’s Decision

In Lawson, the Supreme Court addressed whether Section 1514A shields only those employed by the public company itself, or whether it also shields employees of privately-held contractors and subcontractors. The Court concluded that Section 1514A’s whistleblower protection includes employees of a public company’s private contractors and sub-contractors.3 The Court based its decision on the statute’s text and its purpose to “ward off another Enron debacle,” pointing out that if Section 1514A did not protect employees of private companies, “[t]here would be a huge hole . . . Contractors’ employees would be disarmed; they would be vulnerable to retaliation by their employers for blowing the whistle on a scheme to defraud the public company’s investors, even a scheme engineered entirely by the contractor.” In her dissenting opinion, Justice Sotomayor stated that “[t]he Court’s interpretation gives [Section] 1514A a stunning reach. 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 the local Walmart (a public company)—if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud.”

Steps to Consider in Light of the Court’s Decision

Given the Court’s decision in Lawson, privately-held investment advisers of, and privately-held contractors to, mutual funds and other public companies should consider taking steps to become familiar with Section 1514A and ensure that they have the necessary controls and policies in place to prevent and remedy potential violations of the law. The following are the key features of Section 1514A:

  • The statute creates a cause of action for employees who allege they were discharged or discriminated against because of their whistleblowing. A person who alleges discharge or other discrimination in violation of the statute may seek relief by filing a complaint with the Secretary of Labor, or, if the Secretary has not issued a final decision within 180 days of filing, by bringing an action in federal district court. A party to an action brought in district court is entitled to a trial by jury.
  • The statute protects employees who blow the whistle on a wide range of conduct. The scope of conduct covered under Section 1514A is substantially broader than the conduct covered under the whistleblowing protections under Dodd-Frank. Section 1514A covers employees who provide information or assistance regarding “any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities or commodities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.” Although a primary focus of the statute is on investor fraud, the statute sweeps in a broad range of other fraudulent conduct because violations of the federal mail and wire fraud statutes can reach almost any type of fraud. On the other hand, the Dodd-Frank whistleblower provisions protect individuals who blow the whistle on only violations of the securities laws.
  • The statute applies to employees of contractors and subcontractors of public companies, not just employees of public companies themselves. The statute provides that no company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (Exchange Act) or that is required to file reports under Section 15(d) of the Exchange Act, or any officer, employee, contractor, or subcontractor of such company, may retaliate against whistleblowing employees. Prior to the Supreme Court’s decision in Lawson, it was unclear whether Section 1514A covered employees of private companies that perform work for public companies. Lawson has resolved this issue by holding that the statute does protect such private company employees.
  • The statute applies to whistleblowing regarding fraudulent conduct that occurred at a private company. Based on the Supreme Court’s decision, the statute is not limited to whistleblowing regarding fraudulent conduct that happened at a public company. Rather, the statute also covers misconduct at a privately-held company, as long as that company is a contractor or subcontractor of a public company.
  • The statute covers whistleblowing to a federal regulatory or law enforcement agency, a member or committee of Congress, or any “person with supervisory authority over the employee.” Thus, an employee who expresses concerns internally to his or her supervisor regarding conduct he or she reasonably believes is fraudulent or that violates SEC rules is covered by Section 1514A. This is a key difference from the Dodd-Frank whistleblowing protections, which expressly only cover individuals who provide information or assistance to the Securities and Exchange Commission, although some district courts have concluded that Dodd-Frank’s protections extend to individuals protected under SOX regardless of whether the disclosures were made to the SEC itself.4
  • The statute entitles whistleblowers who suffer retaliation to “all relief necessary to make the employee whole.” Section 1514A expressly provides that relief shall include reinstatement with the same seniority status that the employee would have had but for the discrimination, back pay with interest, and compensation for any special damages, including litigation costs, expert witness fees, and reasonable attorney fees.
  • The statute forbids waiver or arbitration. The rights and remedies provided for by Section 1514A may not be waived by any agreement, and no pre-dispute arbitration agreement shall be valid or enforceable if the agreement requires arbitration of a dispute arising under the statute.

As the above discussion shows, Section 1514A now exposes privately-held investment advisers of, and other privately-held contractors to, mutual funds and other public companies to a broad swath of potential claims. Although many such companies may already have policies and procedures in place to address the whistleblower protections afforded under Dodd-Frank, companies may wish to update those policies and procedures to encompass the broader scope of Section 1514A in light of the Lawson decision. Furthermore, companies that may not previously have considered themselves covered by Dodd-Frank or SOX should evaluate whether they are now covered and need to implement new policies or tailor their existing policies to address these concerns. Accordingly, we recommend that privately-held investment advisers—and any other private companies that perform work for public companies—contact their attorneys for advice on how to implement policies and controls to address Section 1514A and minimize the risks created by the Supreme Court’s ruling.

Footnotes

1

 
Lawson v. FMR LLC, No. 12-3 (March 4, 2014) (Lawson). Dechert LLP submitted a brief in Lawson on behalf of the Investment Company Institute as amicus curiae.

2

 
See 15 U.S.C. § 78u-6.

3

 
The opinion of the Court was joined by four justices. Justices Scalia and Thomas also concurred in principal part and in the judgment. Justices Sotomayor, Kennedy and Alito filed a dissenting opinion.

4

 
See 15 U.S.C. § 78u-6; but see Ellington v. Giacoumakis, No. 13-11791, 2013 WL 5631046, at *3 (D. Mass. Oct. 16, 2013); Murray v. UBS Sec., LLC, No. 12-5914, 2013 WL 2190084, at *4 (S.D.N.Y. May 21, 2013).
 

 

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

Published In: Civil Procedure Updates, Civil Rights Updates, General Business Updates, Finance & Banking Updates, Labor & Employment 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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