|March 11, 2014|
Previously published on March 7, 2014
In a decision that vastly expands the number of companies subject to legal claims for retaliation against internal or external whistleblowers, the U. S. Supreme Court has ruled by a 6-3 vote that the whistleblower protections of the Sarbanes-Oxley Act extend to employees of privately held contractors and subcontractors which perform work for public companies.
In Lawson v. FMR LLC, decided March 5, 2014, two former employees of privately held companies advising and managing publically held mutual funds brought separate actions claiming that they had been discharged in retaliation for blowing the whistle on alleged fraud in cost accounting methods and inaccuracies in a draft SEC registration statement for the mutual funds. Although the Act provides for regulating accountants and attorneys servicing public companies, at the relevant times it had only one section providing whistleblower protection to employees:
No public company..., or any...contractor [or] subcontractor...of such company, may discharge, demote, suspend, threaten, harass, or...discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity].
18 U.S.C. § 1514A(a). Concluding that the section’s whistleblower protections extend to employees of a public company’s private contractors and subcontractors, the Supreme Court reversed the contrary judgment of the lower court and remanded the case for further proceedings. The Court’s decision deals only with the statutory interpretation issue - the merits of plaintiffs’ allegations have yet to be adjudicated.
Writing for the majority, Justice Ruth Bader Ginsberg cited the genesis of Sarbanes-Oxley following the collapse of Enron, stating that, “the Legislative record shows Congress’s understanding that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron’s contractors,” and noting that the Court’s ruling, “avoids insulating the entire mutual fund industry” from the section’s whistleblower protections.
The decision is significant beyond the mutual fund industry. The section protects an employee reporting alleged mail fraud, wire fraud, bank fraud, securities fraud, or violation of “any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders,” when the report is made to a federal agency, Congress, or to “any person with supervisory authority over the employee.” § 1514A(a)(1)(C). Thus, internal complaints are protected in addition to complaints to the authorities. The remedies afforded by the Act include “all relief necessary to make the employee whole,” in addition to “reinstatement,” “back pay,” and “special damages...including litigation costs, expert witness fees, and reasonable attorney fees.” § 1514A(c).
The majority in Lawson declined to “determine the bounds of § 1514A” because the case called for only a “mainstream application” of the provision’s protections. Writing for the dissent, Justice Sotomayor argued that by adopting a broad interpretation of an ambiguous provision, the majority was extending the Act “to impose costly litigation burdens on any private business that happens to have an ongoing contract with a public company,” in a manner not intended by Congress. Just how far the “bounds of §1514A” extend remains to be determined. In the meantime, private companies contracting or subcontracting for public companies would be well advised to review or establish their internal complaint procedures and whistleblower protection policies.