|April 4, 2014|
Previously published on March 31, 2014
Earlier this month, the U.S. Supreme Court concluded that whistleblower protections of Sarbanes-Oxley extend not only to employees of public companies, but to the employees of their contractors and subcontractors. See Lawson v. FMR LLC, 571 U.S. ---, slip op. (Mar. 4, 2014). By reaching into the workforces of companies that are not themselves regulated by Sarbanes-Oxley, but merely do business with public companies, the Court has vastly increased the scope of protection afforded to whistleblowers. Whistleblower litigation against non-public companies is, therefore, also expected to rise.
The Lawson case was brought by two former employees of investment advising firms that contracted to provide the day-to-day operations for Fidelity mutual funds, including making investment decisions, preparing reports for shareholders, and filing reports with the SEC. The funds themselves are public companies with no employees. One of the former employees claimed she was constructively discharged after she raised concerns about certain cost accounting methodologies, believing that they overstated expenses associated with operating the mutual funds. The other former employee claimed he was fired in retaliation for raising concerns about inaccuracies in a draft SEC filing.
The investment advising firms sought to dismiss the suits on the basis that the provision in Sarbanes-Oxley providing for whistleblower protection only applies to employees of a public company, and not to the plaintiffs who were employees of the contractor of a public company. The statutory language at issue provided, “No [public] company . . . , or any officer, employee, contractor, subcontractor, or agent of such 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 [whistleblowing activity].” 18 U.S.C. § 1514A(a) (emphasis added).
The Supreme Court concluded that Sarbanes-Oxley was intended to “shelter employees of private contractors and subcontractors, just as it shelters employees of the public companies served by the contractors and subcontractors.” Where Congress meant to refer only to “an employee of a public company,” it said so; in this instance, the ordinary meaning of “an employee,” without further qualification, is the contractor’s or subcontractor’s own employee. In addition, the Supreme Court reasoned that Sarbanes-Oxley’s legislative history supported its conclusion, noting that the Act was a response to the Enron case in which the role outside contractors at Arthur Anderson had in facilitating and covering up the fraud was of paramount concern.
Another critical factor for the Court was the practical implications of a narrower reading of the statute, which would insulate the entire mutual fund industry from the statute (because virtually all mutual funds are structured so that they have no employees of their own) and deny whistleblower protection to the people with the most visibility into possible misconduct by a huge segment of the financial market.
In dissent, Justice Sotomayor criticized the “stunning reach” of the statute under the majority’s interpretation, pointing out that a babysitter could 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 Internet purchase fraud. This is so because, pursuant to the majority’s reasoning, an employee of an employee of a public company would be protected.
Companies Should Implement Procedures to Avoid Potential Liability
As a result of Lawson, companies that traditionally did not have procedures for addressing whistleblowers and potential whistleblowers are now confronted with potential liability and should implement such procedures. These procedures include, at a minimum, providing a variety of means for employees to report concerns, responding quickly to reports, investigating all concerns carefully, having clear no retaliation policies, and implementing training and internal controls enforcing such policies at all levels of the company.