By

Kristen Mann

31 March 2014

Supreme Court Extends SOX’s Whistleblower Protections to Employees of a Public Company’s Private Contractors

Posted by Kristin Graham Koehler and Kristen Mann

In Lawson v. FMR LLC, 571 U.S. ___ (2014), the Supreme Court held that the whistleblower protections in the Sarbanes-Oxley Act of 2002 extend to the employees of a public company’s private contractors and subcontractors. SOX provides that “[n]o [public] company … , or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment” because of whistleblowing activity. 18 U.S.C. § 1514A(a).

The plaintiffs, two former employees of FMR LLC (“FMR”) subsidiaries that provided management and advisory services to publicly traded Fidelity mutual funds, brought suit respectively alleging that their employers retaliated against them for raising concerns about cost accounting methodologies and inaccuracies in a draft SEC registration statement. FMR moved to dismiss the complaints, contending that the plaintiffs were not “employees” within the meaning of § 1514A(a). The district court denied FMR’s motions, concluding in each case that SOX’s whistleblower protections extend to the employees of a public company’s private contractors. On interlocutory appeal, a divided panel of the First Circuit reversed, holding that the retaliation provision’s protections extend only to employees of public companies, but not to the employees of a contractor of a public company.

The Supreme Court reversed the First Circuit’s decision. The Court looked first to the text’s ordinary meaning. It concluded that the operative language of § 1514A “means what it appears to mean”—that a contractor to a public company may not retaliate against its own employee for whistleblowing activity (slip op. 10). The Court found that the provision as a whole confirmed this reading. The Court further concluded that interpreting SOX’s whistleblower protections to apply to the employees of a public company’s private contractors was consistent with the Act’s aim to prevent another Enron scandal. The Court found that the legislative history demonstrated that Congress understood, and was motivated by concern about, the significant role outside professionals (such as accountants) play in reporting fraud by the public companies with whom they contract. In addition, Congress had modeled SOX’s retaliation provision on a retaliation provision from an earlier act that had been interpreted to cover employees of contractors and subcontractors.

The Court’s reading of “employee” potentially exposes public companies to suits brought by their employees’ personal employees (for example, a public company employee’s nanny or a gardener). Although the Court acknowledges that this is a “curious[]” result (slip op. 15), it dismissed concerns that its decision would open the floodgates for whistleblowing suits. It pointed to the Department of Labor’s longstanding interpretation that § 1514A applies to contracting employees and further noted that FMR could not identify a single case in which a contracting employee had asserted a claim based on allegations unrelated to shareholder fraud. The Court declined, however, to explicitly adopt limiting principles suggested by the plaintiffs and the Solicitor General, leaving the bounds of § 1514A to be determined in a future case.

The opinion can be accessed here. This decision is consistent with how agents and contractors are treated under the False Claims Act, which affords such individuals protection against retaliation. (31 U.S.C. 3730(h)(1) “any employee, contractor, or agent shall be entitled to all relief necessary … if that employee, contractor, or agent is discharged.”)

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