- U.S. Supreme Court to Decide Whether SOX’s Whistleblower Provision Protects Employees of Publicly Traded Company’s Contractors
- May 22, 2013 | Authors: Noa M. Baddish; Lloyd B. Chinn; Harris Michael Mufson
- Law Firm: Proskauer Rose LLP - New York Office
On May 20, 2013, the United States Supreme Court granted a petition for a writ of certiorari to review the United States Court of Appeals for the First Circuit’s decision holding that SOX’s whistleblower protection does not extend to employees of a publicly traded company’s contractors. Lawson v. FMR LLC, 670 F.3d 61 (1st Cir. 2012). Notably, this is the first time the Supreme Court has been called upon to resolve an issue under Section 806 of the Sarbanes-Oxley Act.
Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”), codified at 18 U.S.C. § 1514A, prohibits retaliation against employees of public companies who report suspected violations of Securities and Exchange Commission rules or federal laws relating to fraud. The SOX whistleblower protection provisions of § 1514A(a) state that no public company (i.e., registers securities under Section 12 of the Securities Exchange Act of 1934, required to file reports under Section 15(d) of the Securities Exchange Act of 1934 or certain subsidiaries thereof) or “officer, employee, contractor, subcontractor, or agent...of such company” may “discriminate against an employee” for engaging in a protected activity. 18 U.S.C. § 1514A(a).
Two former employees, Jackie Hosang Lawson and Jonathan M. Zang , brought separate suits alleging unlawful retaliation under § 806 of SOX against FMR LLC and other related private companies (“FMR”) that provide, pursuant to contract, investment advising services to the Fidelity family of mutual funds. The Fidelity mutual funds were not parties to either suit and are investment companies organized under the Investment Company Act of 1940. The Fidelity mutual funds are not owned, controlled by or affiliated with FMR.
After initially filing complaints with the Occupational Safety & Health Administration (“OSHA”), Lawson and Zang commenced de novo actions in federal district court. FMR moved to dismiss plaintiffs’ claims in district court, arguing that plaintiffs were not “covered employees” under § 1514A(a) because the statute does not protect employees of private subsidiaries of public companies. FMR maintained that the listing of “contractor” and “subcontractor” (along with other possible actors) merely identifies those who are barred from retaliating against employees of public companies, but does not extend protection to the employees of those contractors and subcontractors. Plaintiffs took the position that both the employees of public companies and those who are the employees of those public companies’ contractors and subcontractor are protected employees under the SOX whistleblower provisions. Following the district court’s denial of its motion to dismiss on this basis, FMR successfully petitioned for an interlocutory appeal of § 1514A(a)’s applicability to the plaintiffs to the First Circuit Court of Appeals.
The First Circuit’s Decision
On February 3, 2012, as the first (and only) court of appeals to address this issue, the First Circuit reversed the district court’s interpretation of § 1514A(a), holding that SOX’s whistleblower protection is limited to employees of publicly traded companies and does not extend to employees of a publicly traded company’s contractors and subcontractors. Lawson v. FMR LLC, 670 F.3d 61 (1st Cir. 2012). First, the court examined the text of the statute and found that FMR’s interpretation was “the more natural reading” because no evidence suggested that Congress intended the list of agents barred from discriminating to also define those protected from discrimination. The court considered the title of SOX § 806 and the caption of § 1514A(a), both of which referred to “employees of publicly traded companies”, not private companies. The court found that the wording of the title and caption of the statute to be a clear signal that the protection should be limited to employees of publically traded companies. The court also examined similar statutory provisions in SOX and other Acts, and found that when Congress desired to provide for broader coverage than just public company employees, it was explicit when it did so. Finally, the court explained that the legislative history of SOX specifically showed that the protection of § 1514A(a) was intended for employees of publicly traded companies, given that it was enacted in the wake of the demise of Enron - a public company. In that same vein, it also relied upon Congress’s rejection of a proposed amendment to § 1514A that would have expressly provided for coverage of employees of investment advisers to mutual funds. And the First Circuit pointed out supportive legislative history accompanying the Dodd-Frank amendment to § 1514A bringing certain non-publicly traded subsidiaries of public companies within its coverage. Finally, the First Circuit declined to defer to contrary agency views, as expressed in Department of Labor regulations and in amicus briefs filed by the Department of Labor and the SEC.
Petition for Certiorari and Implications
On June 28, 2012, plaintiffs filed a petition for certiorari with the United States Supreme Court. In their petition, plaintiffs relied on the current Administrative Review Board’s (“ARB”) decision in Spinner v. Landau & Assocs. LLC, 2012 WL 2073374 (ARB May 31, 2012), issued less than four months after the First Circuit’s decision. The ARB had never before directly addressed the question of coverage for employees of contractors and subcontractors to public employers. In Spinner, the ARB reached the opposite conclusion from the First Circuit and extended SOX protections to employees of privately held contractors or subcontractors of a public company. Plaintiffs argued that, because the ARB will apply its decision in Spinner to administrative claims arising in every circuit other than the First Circuit, the Supreme Court should resolve the issue. The Court granted their petition for certiorari on May 20, 2013.
The Court will therefore decide “whether an employee of a privately held contractor or subcontractor of a public company is protected from retaliation by Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A.” In so doing, the Court may also resolve (i) the degree to which courts will defer to the Department of Labor on issues relating to the interpretation of SOX, (ii) whether the SOX whistleblower provision will be interpreted in accordance with the purpose of SOX, i.e., the protection of the investing public from fraud by public companies or (iii) whether SOX has instead been transformed (by the current Department of Labor) into a general whistleblower protection statute, completely divorced from the statute’s overall purpose of rooting out public company fraud on shareholders.