Since their 2002 enactment, the whistleblower protections in Section 806 of the Sarbanes-Oxley Act have been presumed to apply only to employees of publicly traded companies. After all, the provisions are entitled “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.” However, in its March 4, 2014 holding in Lawson v. FMR, LLC (here), the U.S. Supreme Court held that Section 806 protects whistleblowing activity by employees of a private contractor of a public company.
The decision has rightfully raised concern, if for no other reason than that the reach of the decision remains unclear. At the same time, the decision does not reach as far as some commentators have suggested. In this post, I take a look at what the court held, what is unclear, and some important distinctions that should be kept in mind when thinking or talking about this case and its implications.
This lawsuit involves the Fidelity family of mutual funds. The Fidelity funds themselves have no employees. Instead they contract with investment advisors that handle their day to day operations. The plaintiffs in these cases were employees of Fidelity Brokerage Services LLC, a subsidiary of FMR Corp. and a private company. The plaintiffs allege that they had been retaliated against by their employer in violation of Section 806 for reporting alleged improprieties involving certain of the Fidelity mutual funds. Their employer moved to dismiss their complaint arguing among other things that Section 806 applied only to publicly traded companies. Following proceedings in the courts below, the case made its way to the U.S. Supreme Court.
Section 806 provides 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 manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activities].”
In a 6-3 majority opinion written by Justice Ruth Bader Ginsberg, the Court held that based on the statutory text – and in particular Section 806’s reference to “contractor” and “subcontractor” – as well the “mischief” to which Congress was responding in the wake of the Enron and WorldCom scandals, Section 806’s whistleblower protections extend to employees of contractors and subcontractors.
In a dissenting opinion, Justice Sotomayor criticized the “stunning reach” of the majority’s opinion, noting that “by interpreting a statute that already protects an expansive class of conduct also to cover a large class of employees, today’s opinion threatens to subject private companies to a costly new form of employment litigation.” The dissent charged that the court’s holding could authorize 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.”
There is good reason that this decision has raised the alarm in certain quarters. Justice Sotomayor’s comment in her dissent that “today’s opinion threatens to subject private companies to a costly new form of employment litigation” provides ample justification for concern. Private company employers rightfully are concerned to learn that the SOX whistleblower provisions can apply to public companies’ private contractors.
As justified as these concerns are, I fear that the concern may be overstated in certain quarters—or rather, that concerns are being raised that even the most alarming parts of the Court’s decision do not justify. For starters, I have heard otherwise responsible commentators summarize the decision as saying that it holds that the SOX whistleblower provisions apply to private companies. This is a correct but incomplete statement. I think the implications of this decision are better understood if we clarify what actually happened here.
First of all, though the employees who claimed retaliation were indeed employees of a private company, the company on which they blew the whistle was a publicly traded company. This is not a situation in which private company employees blew the whistle on their own private company employer. The Supreme Court did not say that the Sarbanes Oxley whistleblower provisions apply when a private company employee blows the whistle on a private company. The involvement of the public company, and the fact that the whistle was blown on a public company, are critical considerations here. The majority’s reasoning placed heavy emphasis on the purposes of Sarbanes-Oxley in preventing fraud at public companies. In other words, without this public company involvement, there would appear to be no basis for the SOX whistleblower provisions to apply to a private company.
Another critical aspect of this situation is that, while the whistleblowers were employees of a private company, the public company involved had no employees of its own. All of the operations were conducted for the public company by the employees of a private company affiliate. The majority opinion was very concerned that these kinds of arrangements are common in the mutual fund industry and that if the Sarbanes Oxley whistleblower protections were not extended to these employees that mutual fund industry employees would be left without protection from retaliation. While the lower courts are going to have to interpret the Lawson decision, and while the plaintiffs obviously will want to try to push the limits of the Lawson court’s holding, the circumstances involved in this case were very specific kinds of circumstances. The dissent’s babysitter example rightfully raises concerns, but the context of this decision matters.
Unfortunately for all concerned, many questions will now have to be tested in the lower courts. The extent to which private company employers can be dragged into these kinds of cases will have to be developed. Of particular concern is the Court’s holding that private company employers can be subject to the whistleblowing provisions if the private company is a “contractor” or “subcontractor,” which certainly raises questions about what type of a relationship with a public company is sufficient to bring a private employer within the anti-retaliation provision of the Sarbanes-Oxley Act. This may be of particular concern where the private company employer enters long-term arrangements to provide legal, accounting, or financial services to a public company.
As the Covington & Burling law firm put it in its June 6, 2014 Law 360 article entitled “Private Employers and Whistleblowing Post-Lawson” (here, subscription required), ”every private company should ask whether it has a business relationship that could qualify it as a contractor or subcontractor of a public company.” This determination “will be straightforward in some cases but murky in others, given the lack of any defining criteria.” Until the courts provide clearer guidance, “prudent companies should act on the assumption that they will be subject to Section 806.”
I concur in the view that private companies should proceed on the assumption that they could be subject to Section 806. However, I want to reiterate that even under Lawson, the SOX whistleblowing provisions are not going to apply unless the whistle is blown on a public company. There is nothing about Lawson that says that Section 806 applies if the whistle is blown on a private company.
I think the most accurate way to say it is that Lawson extended SOX whistleblower protection to employees of contractors of public companies, whether the contractors are public or private – rather than just saying that the decision extended Sox whistleblower protection to private companies.
While I think this distinction is important, I don’t want to suggest that I think Lawson does not represent a significant expansion of the reach of Sarbanes-Oxley whistleblower protections. It does represent a significant expansion. My point is just that it as significant as the extension is, it is not as significant as some commentators have been describing it.
The Covington law firm memo has some helpful suggestions about steps employers can take to try to protect themselves in light of these developments.