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Supreme Court Endorses Broad View of Sarbanes-Oxley's Whistleblower Protection

On March 4, 2014, the Supreme Court handed down its decision in Lawson v. FMR LLCet al., the high court's first opportunity to interpret the whistleblower protections in the Sarbanes-Oxley Act ("SOX," or the "Act"). At issue in the case was the scope of SOX's whistleblower provision, specifically, whether it protects only employees of public companies, or whether it also extends to employees of private contractors and subcontractors serving public companies.

In a 6-3 decision, the Court adopted a broad interpretation of Section 1514A, ruling that the whistleblower protection extends to employees of private companies contracting with public companies. Notably, the ruling expands the "protected class" under Section 1514A to cover accountants and attorneys performing work for public companies. As the opinion notes, the Act's legislative record reflects Congress' understanding that these outside professionals "bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron's contractors." Lawson v. FMR LLC, 2014 WL 813701, at *11 (U.S. Mar. 4, 2014). While the decision would appear to further Congress' aims by protecting outside professionals who report suspicious activity, it also expands SOX's protections to cover a broad range of employees and conduct. For the latter reason, the Lawson decision could have far-reaching implications for private companies and contractors performing work for public companies.

Factual Background

The two plaintiffs in the case were former employees of subsidiaries of FMR LLC, all nonpublic companies (collectively, "FMR"), that provided services to the Fidelity family of mutual funds. Id. at *6 (U.S. Mar. 4, 2014). One was a Senior Director of Finance employed by FMR for fourteen years who raised concerns about cost accounting practices she believed overstated expenses associated with operating the funds. Id. The other was a portfolio manager who had worked for FMR eight years when he raised concerns about supposed inaccuracies in a draft SEC registration statement concerning the funds. Id. Both claimed they were fired in retaliation for raising these concerns. Id.

Legal Reasoning

Section 1514A reads, in relevant part, as follows:

"No [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 [protected activity]." 18 U.S.C. § 1514A(a).

The majority looked to the Act's legislative history, noting that Congress recognized that outside professionals such as lawyers and accountants "were complicit in, if not integral to, the shareholder fraud and subsequent cover-up" at Enron. Id. at *11. The court noted that the legislative record reflected "Congress' understanding that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron's contractors." Id.

A significant reason cited by the majority is the fact that their reading "avoids insulating the entire mutual fund industry" from the whistleblower provision. Id. at *12. SOX characterizes those companies required to file reports under Section 15(d) of the Securities Exchange Act of 1934 as "public companies." Because mutual funds are required to file such reports, the Court noted that Congress "presumably had them in mind when it added 'publicly traded companies' to the discrete category of companies required to file reports under Section 15(d).'" Id. While mutual funds themselves are public companies under the Act, "[v]irtually all mutual funds are structured so that they have no employees of their own; they are managed, instead, by independent investment advisers." Id. A narrow reading of the Act's whistleblower provision would fail to protect the only firsthand witnesses to shareholder fraud in the mutual fund industry. Id. In addition to employees of a fund's investment adviser, a broad reading of the provision also extends whistleblower protection to employees of the fund’s other service providers.

Potential Consequences for Private Companies With Public Company Contracts

On its face, the decision protects employees of nonpublic service providers to mutual funds from retaliation for reporting concerns about accounting or securities reporting practices.

Following the Lawson decision, however, SOX's whistleblower provision covers an incredibly broad scope of both potential whistleblowers and protected activity. Specifically, as the dissent points out, the Court's conclusion that Section 1514A protects employees of "contractors" and "subcontractors" of public companies applies equally to the companies' officers, employees or agents and logically could be read to include nannies or gardeners of the employees of publicly traded companies.

Furthermore, the activity protected under SOX's whistleblower provision encompasses not just securities fraud, "but also mail, wire, and bank fraud." Id. at *13. This would encompass activity such as placing a fraudulent purchase order over the Internet or mailing a false invoice.

To demonstrate the expansive scope of SOX's whistleblower provision going forward, the dissent provided some troubling, if far-fetched, examples of potential lawsuits brought under to the Act following the majority's decision:

  • A babysitter could bring a federal case against his or her employer, who happens to work at the local Walmart, if the parent fires the babysitter after he or she expresses concern that a child may have participated in Internet purchase fraud. Id. at *18.

  • A janitor working for a small business with a contract to clean the local Starbucks could bring a federal case against the small business if the janitor were demoted after reporting that another employee had mailed a fraudulent invoice. Id.

As the dissent points out, the majority's decision "subjects a multitude of individuals and private businesses to litigation over fraud reports that have no connection to, or impact on, the interests of public company shareholders" that SOX was designed to protect. Id. at *18. Put differently, the opinion "threatens to subject private companies to a costly new front of employment litigation." Id. at *24.

Conclusion

Since the Enron scandal, Congress has made it a priority to ensure that corporate whistleblowers are shielded from retaliation. Following the passage of § 1514A in 2002, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") expanded SOX's whistleblower protections to employees of public company subsidiaries and nationally recognized statistical rating organizations. Dodd-Frank also established a "whistleblower bounty program" rewarding individuals who provide information that leads to an SEC enforcement action in which more than $1 million in sanctions are recovered, with rewards ranging between 10 percent and 30 percent of the recovery. The bounty program applies to all companies, public or private. The Lawson decision is merely the latest development in a well-established movement to expand the protections afforded to whistleblowers.

In the wake of Lawson, private companies that perform work for public companies must be more prepared than ever to deal with whistleblower complaints. These companies should consider maintaining a robust procedure for receiving and responding to potential whistleblower complaints, as well as enhancing existing ethics policies.

© 2019 Vedder Price

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J. Kevin Hennessy, Vedder Price Law Firm, Labor Employment Attorney
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J. Kevin Hennessy has represented management for over 25 years spanning all aspects of labor and employment law, including successfully handling employment litigation, collective bargaining, labor arbitrations, mergers and acquisitions, non-compete litigation and union organizing campaigns.  For example, Mr. Hennessy successfully negotiated six multi-site labor contracts for a national food distributor over an eighteen month period and helped lead a nationwide labor negotiation for a major supplier to Big Three Auto.  Mr. Hennessy’s overall approach emphasizes practical solutions to...

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Jennifer King, corporate, capital markets, securities, attorney, Vedder Price,
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Jennifer Durham King joined Vedder Price’s Chicago office in 1997 as a member of the firm’s Corporate and Capital Markets practice areas. She concentrates her practice in capital markets and corporate securities transactions, with a specific focus on financial institutions. Ms. King regularly represents issuers and underwriters in a broad range of capital markets transactions, including public and private debt and equity offerings, trust preferred offerings, mergers and acquisitions, and capital planning and formation.

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Junaid A. Zubairi, Vedder Price Law Firm, Government Enforcement Attorney
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Junaid A. Zubairi focuses his practice on government investigations, investment services and regulatory compliance matters.  His practice includes representing companies and individuals in SEC investigations, conducting internal investigations, counseling clients during regulatory examinations, and providing general compliance and remediation counseling.  Mr. Zubairi has extensive experience representing investment advisers, broker-dealers, corporations and officers and directors during government investigations and regulatory proceedings.

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