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SHRM Files Brief in Supreme Court SOX Case

By Joanne Deschenaux  10/10/2013

The whistle-blower protections of the Sarbanes-Oxley Act (SOX) do not extend to employees who work for a publicly owned company's contractors or subcontractors, SHRM argues in a friend-of-the-court brief filed with the Supreme Court on Oct. 4, 2013. 

In Lawson v. FMR LLC (No. 12-3), scheduled for argument on Nov. 12, the high court will review a 1st U.S. Circuit Court of Appeals decision that concluded that, while the statute applied to publicly owned Fidelity mutual funds, the act did not provide the same protection to employees of FMR LLC, a private investment advisory firm that managed the funds. SHRM, in support of FMR, is arguing that the high court should affirm the appellate court decision.

SOX Protections Limited

Section 806 of SOX, codified at 18 U.S.C. Section 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 Section 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.

Two former employees, Jackie Hosang Lawson and Jonathan Zang, brought separate suits in federal district court against FMR and other related private companies, 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.

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. The district court denied FMR’s motion to dismiss, and the company appealed to the 1st Circuit.

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 Supreme Court granted review on May 20, 2013.

SHRM’s Arguments

In its brief, SHRM argues that applying Section 806 of SOX to private employers and their HR professionals would impose substantial and unwarranted burdens.

Along with their many other responsibilities, HR professionals are called upon to conduct workplace investigations in areas that are familiar to them, including complaints involving workplace discrimination, the brief says. “If SOX were extended to employees of private companies, these HR professionals would not only be faced with the need to learn unfamiliar securities laws, but they also would be further tasked with conducting complicated fraud investigations.”

Further, SHRM argues that expanding the coverage of Section 806 from employees of about 4,500 publicly traded companies to those employed by some 6 million private entities in the United States “inevitably would lead to an avalanche of litigation, clogging the administrative agencies and judiciary and costing small- and medium-sized businesses time and resources they can scarcely afford.”

The text and legislative history of Section 806 support the interpretation that the provision applies only to publicly traded companies, the brief concludes, noting that members of Congress uniformly stated that Section 806 applies only to “employees of publicly traded companies.”

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

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