In its first decision regarding the whistleblower protection provision of the Sarbanes-Oxley Act (SOX), the U.S. Supreme Court held that employees of private contractors providing services to public companies are protected from retaliation for exposing public company misconduct. As a result, private employers servicing public companies should examine their employee disciplinary policies and procedures to ensure compliance with this provision of the Act.

In Lawson v. FMR LLC, private companies (collectively known as FMR) were contracted to advise and manage publicly traded mutual funds. Two FMR employees alleged that they blew the whistle on fraud relating to the mutual funds and, subsequently, were terminated in retaliation by FMR.

In a motion to dismiss, FMR argued that its former employees could not state a claim under 18 U.S.C Section1514A, SOX’s whistleblower protection provision, because that provision provides protection only for employees of public companies. On interlocutory appeal from the district court’s denial of that motion, the U.S. Court of Appeals for the First Circuit reversed, ruling that the term “an employee” in Section1514A(a) covers only employees of public companies. The Supreme Court disagreed.

The Supreme Court based its interpretation on the plain language of the provision, legislative history, and congressional intent. That provision provides, in relevant part: “No … officer, employee, contractor, subcontractor or agent … of [a public] 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 ….”

FMR asserted that “an employee” should be read to mean “an employee of the public employer.” The Supreme Court reasoned, however, that the ordinary meaning of “an employee” in this context was the employee of the retaliator—here, the contractor—and not the employee of the public company. The Court noted that Congress knew how to limit the scope of a class of employees when it wanted to, and that “nothing in [Section]1514A’s language confines the class of employees protected to those of a designated employer.”

The Supreme Court determined that a broad interpretation was consistent with the legislative record, which reflected Congress’s intent to “ward off another Enron debacle” by removing the fear of retaliation that historically had deterred outside professionals (e.g., accountants, auditors, and lawyers) from reporting fraud of which they had become aware through their role in advising public companies and assisting publicly traded companies in the reporting process. The Court also noted that, although SOX directly regulates professional contractors’ conduct in numerous ways, there is no provision other than Section 1514A that offers protection from employer retaliation for complying with SOX’s reporting provisions.

In rejecting FMR’s “narrower construction,” the Supreme Court noted that limiting the prohibition against retaliation to employees of public companies would essentially eliminate SOX whistleblower protection for the mutual fund industry— “virtually all mutual funds are structured so that they have no employees of their own,” and instead are run by contracted outside advisers. In addition, the Court refused to accept FMR’s argument that Section 1514A(a)’s heading—“Whistleblower Protection for Employees of Publicly Traded Companies”— limits its protection to public companies. The Court explained that where, as in SOX, the statutory text is “complicated and prolific, headings … can do no more than indicate the provisions in a most general manner,” and are “not meant to take the place of the detailed provisions of the text.”

Finally, the Supreme Court found unpersuasive FMR’s argument that post-SOX legislation—specifically the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that extended Section 1514A’s protections to employees of public company subsidiaries and nationally recognized statistical rating organizations—shows that Section 1514A did not previously cover contracted employees. The Court pointed out that U.S. Department of Labor (DOL) regulations in existence when the Dodd-Frank Act was passed already interpreted SOX’s whistleblower protection as covering employees of contractors. The Court reasoned that, if Congress had intended to exclude such employees, it would have addressed the DOL’s interpretation of Section 1514A in the Dodd-Frank amendment of the provision.

Ballard Spahr’s Labor and Employment Group routinely assists employers with issues regarding whistleblowers and retaliation in the workplace under Sarbanes-Oxley and a variety of other laws. If you have questions or concerns about appropriate policies, procedures, and/or employer conduct in the face of whistleblowing or other employee complaints, please contact the member of the Group with whom you work.

Copyright © 2014 by Ballard Spahr LLP.
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