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High Court to Consider Whether SOX Whistle-blower Protections Apply to Employees of Private Contractors

By Joanne Deschenaux   5/29/2013

The U.S. Supreme Court has agreed to determine 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).

In the first SOX case it has accepted, 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 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.

Investment Firm Employees Claimed Retaliation

Two former employees, Jackie Hosang Lawson and Jonathan Zang, brought separate suits in federal district court against FMR LLC 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 Department of Labor regulations and in friend-of-the-court briefs filed by the Labor and the SEC.

Supreme Court Agrees to Decide Case

The plaintiffs sought Supreme Court review on June 28, 2012. In their petition for review, they relied on the Labor Department’s Administrative Review Board’s (ARB) decision in Spinner v. David Landau & Associates LLC, ARB Nos. 10-111, 10-115 (May 31, 2012). Only four months after the 1st Circuit’s decision, the ARB held that Section 806 applies to employees of privately held companies if they have contracts with publicly traded companies. The plaintiffs argued that, because the ARB will apply its decision in Spinner to administrative claims arising in every circuit other than the 1st Circuit, the Supreme Court should resolve the issue.

The high court granted review on May 20 and will hear arguments in the case in its 2013-14 term, which begins in October.  

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

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