United States Supreme Court To Take Up Important Case Regarding the Scope of SOX’s Whistleblower Protection Provisions

Posted by Jonathan Cohn and Benjamin Mundel

On Monday, the United States Supreme Court granted certiorari in Lawson v. FMR LLC, No. 12-3 (certiorari granted May 20, 2013). The issue presented is 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. The statute prohibits retaliation by a public company—or an officer, employee, contractor, subcontractor, or agent of a public company—against “an employee” who reports fraud or a violation of securities regulations. This is an important case that may interpret the scope of Sarbanes-Oxley’s whistleblower protection provisions.

The two plaintiffs, former employees of subsidiaries of publicly traded Fidelity mutual funds, brought suit in federal district court after allegedly suffering adverse employment action as a result of their whistleblowing. The first plaintiff allegedly blew the whistle on the fund for improperly attributing expenses to increase fees. The second plaintiff raised an issue regarding the categorization of a particular fund which he alleged led to the fund improperly charging a management fee. Fidelity filed a motion to dismiss on the grounds that the plaintiffs, who were not employees of a publicly traded company, were not “employees” within the meaning of statute. The district court denied Fidelity’s motion to dismiss. Relying on legislative history, the district court held that the statute protected employees of contractors. Fidelity filed an interlocutory appeal.

The First Circuit reversed in a 2-1 decision, holding that the term “employee” in the statute covers only those at publicly traded companies. The panel refused to grant any deference to the Department of Labor and SEC’s position and instead relied on the title of the statute and caption that reads: “employees of publicly traded companies.”

Before granting certiorari, the Supreme Court first called for the views of the Solicitor General. On behalf of the United States, the Solicitor General asked the court to deny certiorari even though he believed that the First Circuit’s interpretation was erroneous. As to the merits, the Solicitor General argued that the plaintiffs were covered under the plain terms of the act and the legislative history supported a broad reading. Furthermore, the Solicitor General argued that, if the statute were vague, the Department of Labor’s decision in Spinner v. David Landau & Assocs., LLC, ARB Case NOS. 10-111; 10-115 was entitled to Chevron deference. Regardless, the Solicitor General concluded that certiorari was not appropriate at this time because there was no disagreement in the circuits on the question, the issue has arisen infrequently, and no circuit had the opportunity to consider the Department of Labor’s recent Spinner decision.

Nevertheless the Supreme Court granted certiorari and will hear the case next term. This case will likely resolve the disagreement between the First Circuit and the Department of Labor regarding the scope of the term “employee” under Section 806 of the Sarbanes-Oxley Act. If the Supreme Court reverses the First Circuit, there may be increased exposure for companies because employees of privately held companies that contract with public companies will be entitled to whistleblower protections under SOX.