|March 18, 2014|
Previously published on March 14, 2014
On March 4, 2014 the United States Supreme Court held that “whistleblower” protection under the Sarbanes-Oxley Act of 2002 extends to the employees of a public company’s private contractors and subcontractors. This 6-3 opinion in Lawson et al. v. FMR LLC., et al. expands the reach of the whistleblower provision of the Sarbanes-Oxley Act to contractors of public companies and not just the public companies.
The Sarbanes-Oxley Act was enacted after the collapse of the Enron Corporation (Enron) to protect investors in public companies and to restore trust in financial markets. Lawyers, accountants, and investment advisors, all considered contractors (or subcontractors) to Enron, were complicit in Enron’s unethical practices and were also a main target of the legislation.
The whistleblower provision provides: “No [public] company . . . or any . . . contractor [or] subcontractor . . . of such company, may discharge, demote...[or] discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity].” 18 U.S.C. § 1514A(a). In Lawson, the interpretation of the seemingly unambiguous statute was at issue. Plaintiffs, former employees of a contractor to a publicly traded company, asserted that the clear language of the statute brought employees of contractors and subcontractors under the whistleblower protection. FMR, the former employer that terminated the plaintiffs for reporting fraud, contended the statute only provided protection to employees of publicly traded companies. FMR had successfully made this argument to the district court and the First Circuit, necessitating the appeal.
The district court, in separate decisions, found the statute provided protection only to employees of public companies and that FMR did not merit protection under the statute because it was not a “public employer.” On interlocutory appeal, a divided panel of the First Circuit reversed and found that FMR was a contractor under section 1514A, and therefore included in the list of actors that are prohibited from retaliating against employees. However, the First Circuit also held the plaintiffs were not protected employees because the statute protects only employees of public companies, reasoning that the plaintiffs were instead employees of the contractor. Therefore, the First Circuit affirmed the district court and found in favor of FMR.
The United States Supreme Court reversed the decision of both lower courts. Justice Ruth Bader Ginsburg, writing for the majority, drew support from legislative history, similar statutory expressions, and common sense. The Supreme Court rejected the First Circuit’s interpretation that the statute only prevented contractors from terminating employees of public companies, which would yield a nonsensical result. The Court noted, “[c]ontractors are in control of their own employees, but are not ordinarily positioned to control someone else’s workers.” She continued, “[m]oreover, we resist attributing to Congress a purpose to stop a contractor from retaliating against whistleblowers employed by the public company the contractor serves, while leaving the contractor free to retaliate against its own employees when they reveal corporate fraud.” However, the Court noted that there was a limit to how far the whistleblower protection extended: “Nothing in § 1514A implies that, if a [privately held business] buys a box of rubber bands from Wal-Mart, a company with traded securities, the [business] becomes covered by § 1514A.”
Employees of any contractors to publicly traded companies are the beneficiaries of this decision. What remains to be seen, however, is how expansive the definition of “contractors” is under the Act. The Supreme Court declined to address this issue. Although the Sarbanes-Oxley Act specifically targeted accountants, lawyers, and investment advisors, in light of this decision, any entity that performs work directly or indirectly for a publicly traded company is potentially liable for whistleblower violations. This decision opens a new avenue of liability for contractors and subcontractors of publicly traded companies. Private employers servicing public companies should examine their employee disciplinary policies and procedures to ensure compliance with this provision of the Act.