United States Supreme Court Holds That Section 806 of the Sarbanes-Oxley Act Extends to Employees of Private Companies Who Are Contractors or Subcontractors for Covered Public Companies
In Lawson v. FMR, LLC, No. 12-3, 2014 WL 813701 (U.S. Mar. 4, 2014), the Supreme Court of the United States, in a 6-3 decision reversing the United States Court of Appeals for the First Circuit, held that the whistleblower protection provision in Section 806 of Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A (“SOX”), protects employees of publicly traded companies andemployees of privately held companies that are contractors or subcontractors for a covered publicly traded company. In reaching this decision, the Supreme Court has clarified the definition of “covered employee” under the whistleblower provisions of SOX and expanded the scope of SOX.
Petitioners in this action were former employees of privately held companies that contracted to advise or manage mutual funds, which were publicly traded companies with no employees. Petitioners each brought separate actions in the United States District Court for the District of Massachusetts, where they alleged unlawful retaliation by their employers in violation of the whistleblower protections of Section 806 of SOX. Section 806 provides, in relevant part, that “[n]o company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 . . . 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 any lawful act done by the employee . . . . ”
Petitioners’ privately held employers moved to dismiss the claims, arguing, in part, that petitions were not “covered employees” within the meaning of Section 806. The district court denied the motions, ruling that the SOX whistleblower protection in Section 806 extended to employees of private agents, contractors and subcontractors to public companies. On appeal, the First Circuit reversed, holding that the whistleblower protections of Section 806(a) do not extend to an employee of a contractor or subcontractor [see blog article here]. The Supreme Court granted certiorari.
The Supreme Court (Ginsberg, J.) reversed. In its review, the Court looked first to the ordinary meaning of the statute. The Court held that “nothing in [SOX’s] language confines the class of employees protected to those of a designated employer [and] absent any textual qualification, we presume the operative language means what it appears to mean: A contractor may not retaliate against its own employee for engaging in protected-whistle blower activity.” Thus, “based on the text of [SOX], the mischief to which Congress was responding, and earlier legislation Congress drew upon, that [SOX] shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.”
In reaching this decision, the Court chose to disregard the titles and headings within SOX, some of which lend credence to respondent’s arguments, because, the Court explained, SOX “is attended by numerous indicators that the statute’s prohibitions govern the relationship between a contractor and its own employees; we do not read the headings to ‘undo or limit’ those signals.”
The Court found further support by reviewing the underlying purpose of SOX — namely, to prevent “another Enron debacle.” The Court held that the desire to prevent another Enron debacle was reflected in the legislative record of SOX, a record which focused on the role that contractors had in facilitating the Enron fraud. Given the extensive legislative record, the Court concluded that “one can safely assume that Congress enacted [SOX] aiming to encourage whistleblowing by contractor employees who suspect fraud involving public companies with whom they work.”
Finally, the Court rejected the dissent’s view that the Court’s ruling was “all too inclusive” and could open the floodgates to SOX litigation. The majority argued that the dissent’s view that the floodgates would open was simply hypothetical as the “DOL’s regulations have interpreted [SOX] as protecting contractor employees for almost a decade.”
In light of the Supreme Court’s ruling, the definition of the term “covered employee” has been clarified and broadened, and it is now clear that the group of persons potentially covered by the protections of Section 806(a) of SOX include not only employees of publicly traded companies, but also employees of privately held contractors and subcontractors who provide services to the publicly traded companies.