In Lawson v. FMR LLC, ___ U.S. ___ (March 4, 2014), the United States Supreme Court reversed the ruling of the United States Court of Appeals for the First Circuit and affirmed the ruling of the United States District Court for the District of Massachusetts that the whistleblower protections in the Sarbanes-Oxley Act (“SOX”) apply not only to employees of public companies but also to employees of private companies that contract with public companies.
Plaintiffs separately initiated proceedings under the whistleblower protections of SOX against their former employers, privately held companies that provide advisory and management services to a family of mutual funds, which are public companies that have no employees. The first plaintiff alleged that after she raised concerns about certain cost accounting methodologies, believing that they overstated expenses associated with operating the mutual funds, she suffered a series of adverse actions, ultimately amounting to constructive discharge. The second plaintiff alleged that he was fired in retaliation for raising concerns about inaccuracies in a draft SEC registration statement concerning certain funds. Each of them filed suit in the U. S. District Court for the District of Massachusetts.
Defendant employers moved to dismiss the suits, arguing, that neither plaintiff had a claim for relief under because defendants were privately held, and maintained that the whistleblower provisions of SOX protect only employees of public companies — i.e., companies that either have “a class of securities registered under section 12 of the Securities Exchange Act of 1934,” or that are “required to file reports under section 15(d)” of that Act. The district court denied the motions and defendants appealed to the First Circuit, which reversed.
The appellate court acknowledged that defendants were contractors within the meaning of SOX and, therefore, were among the actors prohibited from retaliating against any employees who engage in protected activity. It further concluded, however, that the term “employee” referred only to employees of public companies and does not cover a contractor’s own employees.
The United States Supreme Court disagreed, holding that SOX’s whistleblower protections cover employees of a public company’s private contractors and subcontractors. This interpretation is supported by the text of the Act, which provides that “no . . . contractor . . . may discharge . . . an employee.” The ordinary meaning of “an employee” in this proscription is the contractor’s own employee. Moreover, the prohibited retaliatory measures – discharge, demotion, suspension, threats, harassment, or discrimination in employment terms and conditions – are actions an employer takes against its own employees. Contractors are not ordinarily positioned to take adverse actions against employees of the public company with whom they contract. The protected activity and enforcement procedures and remedies found in SOX’s whistleblower provision also indicate that Congress presumed an employer-employee relationship between the retaliator and the whistleblowing employee. In addition, this interpretation comports with SOX’s aim goal of warding off “another Enron debacle,” and avoids insulating the entire mutual fund industry from the statute’s protections (virtually all mutual funds are structured so that they have no employees of their own; they are managed, instead, by independent investment advisors). Finally, there is scant evidence that the court’s decision would open the floodgates for whistleblowing suits, as the Department of Labor’s regulations have interpreted SOX’s whistleblower provision as protecting contractor employees for almost a decade.