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Whistleblower Expansions Continue: SOX Covers Subcontractor Employees

Whistleblower protections continue to expand with the recent U.S. Supreme Court decision in Lawson v. FMR LLC, which ruled that  the anti-retaliation protection provided to whistleblowers by the Sarbanes-Oxley Act of 2002 (“SOX”) applies to employees of private companies that contract with public companies.   Enactment of SOX was prompted by the collapse of Enron Corporation.  In particular, §1514A(a) provides that “No [public] company . . ., or any officer, employee, contractor, subcontractor or agent of such company, may discharge, demote, suspend, threaten, harass, or discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity].”

In the case before the high Court, employee of a contractor mutual fund advisor, Jackie Lawson felt forced to resign in 2007 after notifying the SEC about irregularities on the books of a Fidelity mutual-fund group.  According to her, the irregularities likely affected the fees that the company was charging its clients.  Two years before Lawson’s claim, Jonathan Zang resigned under similar circumstances after he notified the SEC of statements made by the same company that he found were misleading to clients and to the public.

The U.S. Court of Appeals for the First Circuit found that both whistleblowers were not covered under whistleblower protections because they were not employees of the defendant (mutual fund) company, but employees of (mutual fund advisor) subcontractors of the company. In a 6-3 decision, the Supreme Court concluded that both the text of §1514A and the legislative history of SOX make clear that the whistleblower provision “shelters employees of private contractors and subcontractors just as it shelters employees of the public company.”

Assessing the import of § 1514A, the Supreme Court found that “[t] he ordinary meaning of ‘an employee’ in this proscription is the contractor’s own employee.” The Court noted that “[i]f, as we hold, ‘an employee’ includes employees of contractors, then grammatically, the term also includes employees of public company officers and employees.” But, the Court observed that as a practical matter, “[f]ew housekeepers or gardeners . . . are likely to come upon and comprehend evidence of their employer’s complicity in fraud.”

Finding that the text of SOX itself, along with its purpose, favored such interpretation, SCOTUS ultimately held that SOX extends protection to private companies and contractors that work with publicly traded companies.

The Court rejected defendant employers’ argument that the language of SOX was intended to apply only to outside contractors engaged to administer retaliation in avoidance of the SOX provision à la George Clooney’s character as an “ax-wielding specialist” in the movie Up in the Air.

The ruling could have a ripple effect on the mutual-fund industry since most public mutual-fund companies do not employ their own personnel, instead opting for the use of contractors.  The attorney for the whistleblowers expressed satisfaction with the ruling, stating that a loophole in the Act was closed by SCOTUS’ ruling.

In dissent, Justice Sotomayor (joined by Justices Kennedy and Alito), described the ruling as “a stunning reach,” and criticized the majority decision as not reflective of “the statute Congress wrote.”

In Lawson, SCOTUS focused on the meaning of the version of § 1514A(a) in effect in 2002.  Subsequently, the section has been amended by Congress, most recently in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Dodd-Frank added a whistleblowing bounty program as well as new provisions prohibiting any employer from retaliating against “a whistleblower” for providing information to the SEC or making disclosures required or protected by Sarbanes-Oxley and other securities laws.

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