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Justices Weigh Scope of SOX Whistle-blower Protections

By Joanne Deschenaux  11/13/2013
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The U.S. Supreme Court, on Nov. 12, 2013, heard oral arguments in a case raising the question of whether the whistle-blower protections of the Sarbanes-Oxley Act (SOX) extend to employees who work for a publicly owned company's contractors or subcontractors, rather than for the public firm itself (Lawson v. FMR LLC, No. 12-3).

The justices are reviewing a 1st U.S. Circuit Court of Appeals decision that concluded that, while the statute applied to employees of publicly owned Fidelity mutual funds, the act did not provide the same protection to employees of an investment advisory firm that managed the funds.

Section 806 of SOX, codified at 18 U.S.C. § 1514A, prohibits retaliation against employees of public companies who report suspected violations of Securities and Exchange Commission (SEC) rules or federal laws relating to fraud. The SOX whistle-blower-protection provisions of § 1514A(a) state that no public company or “officer, employee, contractor, subcontractor or agent” of such company” may “discriminate against an employee” for engaging in a protected activity.

Three Positions Presented

Appearing on behalf of the two whistle-blowers who brought the case, Eric Schnapper of the University of Washington School of Law in Seattle argued that the 1st Circuit’s decision interpreting Section 806 to allow a contractor to “retaliate against its own employees” is not consistent with the language of the statute and allows the type of retaliation “we know Congress was concerned about.” 

Nicole Saharsky, assistant to the solicitor general, arguing on behalf of the federal government as a friend of the court, agreed with Schnapper that Congress intended to protect employees of contractors—but with some limitations. For example, she said Section 806 should protect only those private contractor employees who report fraud related to the public company.

But Mark A. Perry of Gibson, Dunn & Crutcher in Washington, appearing for Fidelity, asserted that a broad interpretation of Section 806 would constitute a “dramatic expansion” and that the 1st Circuit used “all the ordinary tools of statutory construction” to determine that the provision covers only employees of public companies, not its private contractors or subcontractors.

Trial Court Proceedings

Two former employees, Jackie Hosang Lawson and Jonathan Zang, brought separate suits in federal district court against FMR and other related private companies that provide, under contract, investment advisory services to the Fidelity family of mutual funds, alleging unlawful retaliation under Section 806 of SOX. The Fidelity mutual funds were not parties to either suit, and the mutual funds are not owned, controlled by or affiliated with FMR.

Lawson alleged she was harassed and, ultimately, forced to quit because she provided Fidelity managers with information on inappropriate expense reporting, retention of investment company fees, and methodologies for reporting or accounting for mutual fund expenses and operations. Zang contended he was fired for informing Fidelity management that disclosures that were being prepared for submission to the SEC did not accurately reflect the details of some fund managers' compensation.

FMR moved to dismiss the claims, arguing that the plaintiffs were not “covered employees” under SOX because the statute does not protect employees of private subsidiaries of public companies. FMR maintained that the listing of “contractor” and “subcontractor” simply 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. The plaintiffs argued that both the employees of public companies and those who are employed by public companies’ contractors and subcontractors are protected under the SOX whistle-blower provisions. The district court denied FMR’s motion to dismiss, and the company appealed to the 1st Circuit.

Appellate Court Finds Whistle-blower Protections Limited

On Feb. 3, 2012, the 1st Circuit reversed the district court’s interpretation of Section 1514A(a), holding that SOX’s whistle-blower protection is limited to employees of publicly traded companies and does not extend to those employed by a publicly traded company’s contractors and subcontractors.

The court first 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 Section 806 and the caption of Section 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 clearly indicate that the protection should be limited to employees of publicly traded companies.

In reviewing similar statutory provisions of SOX and other laws, the court found that when Congress sought to provide for broader coverage than just public-company employees, it was explicit in doing so. Finally, the court explained that the legislative history of SOX specifically showed that the protection of Section 1514A(a) was intended for employees of publicly traded companies, given that it was enacted after the demise of Enron—a public company. The court also relied upon Congress’ rejection of a proposed amendment to Section 1514A that would have expressly provided for coverage of employees of investment advisers to mutual funds. Finally, the 1st Circuit declined to defer to contrary agency views, as expressed in Labor Department regulations and in friend-of-the-court briefs filed by the Labor Department and the SEC.

Justices Concerned About Broad Interpretation

“The court, across ideological lines, seemed uncomfortable with the idea that millions of employees of various companies could be covered” by Section 806 if the provision were given an expansive reading, Lloyd Chinn, Proskauer’s whistleblowing & retaliation group co-head, told SHRM Online. Chinn, who attended the arguments, noted that Justice Stephen Breyer, for example, asked if every “mom and pop” company would be covered if the court were to accept the employees’ interpretation of the statute.

However, Gregory Keating, co-chair of Littler Mendelson’s whistleblowing & retaliation practice, who filed a friend-of-the-court brief on behalf of SHRM in support of FMR, said it was far from clear what the court would decide. “It would be very difficult to be a betting man and say which side they were leaning toward. Both sides were being grilled on their positions. You couldn’t tell which way the justices were leaning, based on the questioning.”

A decision in the case is expected by June 2014.

Joanne Deschenaux, J.D., is SHRM’s senior legal editor.

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