In Lawson v. FMR LLC, 2014 WL 813701 (March 4, 2014), the Supreme Court held that the whistleblower protection provision of the Sarbanes-Oxley Act of 2002 (SOX) protects employees of contractors and subcontractors of a publicly traded company from retaliation for reporting a violation of the securities laws. The case arose from SOX whistleblower complaints filed by two employees of a contractor responsible for advising and managing mutual funds. The mutual funds were publicly-traded SOX-covered entities that did not have any employees of their own but, rather, relied on privately-held contractors for essentially all services.
The controlling statute provides that “no [publicly traded] company … or any officer, employee, contractor, subcontractor, or agent of such company, may [retaliate against] an employee in the terms and conditions of employment because of any lawful act done by the employee [to report a violation of securities laws].” 18 U.S.C. § 1514A(a). The core issue raised in Lawson was whether “an employee,” as used in the statute, refers only to employees of a publicly traded company or, rather, to employees of a public company’s private contractors and subcontractors.
Below, the First Circuit held that the term “employee” meant employees only of the publicly traded company principally because (1) a contrary reading would lead to “anomalies” and “very broad coverage,” (2) the statutory headings referred to “protection for employees of publicly traded companies who provide evidence of fraud” and “whistleblower protection for employees of publicly traded companies,” and (3) SOX contains separate provisions specifically dealing with attorney and accountant contractors.
The Supreme Court reversed. Writing for the majority, Justice Ginsberg emphasized both a broader contextual reading of the statute, e.g., the fact that employers typically only have the power to retaliate against their own employees, and the legislative history of SOX, enacted in the aftermath of the Enron collapse for which outside professionals, particularly Enron’s auditors, were held largely responsible.
An important secondary issue presented in Lawson was the degree to which courts should defer to legal rulings of the Department of Labor’s Administrative Review Board, which had specifically ruled that SOX protected employees of privately-held contractors to a public company. The First Circuit had held that no deference was owed to the agency’s positions. In her majority opinion, Justice Ginsberg explicitly declined to decide what weight the ARB’s conclusions should carry, and Justices Scalia and Thomas made no reference to the issue in their concurrence, with only the dissent of Justice Sotomayor, joined by Justices Alito and Kennedy, directly addressing the issue and finding the ARB’s holdings unentitled to deference. Therefore, this issue remains unresolved.
The Supreme Court’s Lawson holding effectively requires privately-held employers who contract with public companies to now take into account the employee protection provisions of SOX and to develop or expand effective internal compliance procedures to respond to SOX-protected complaints, train supervisors on their obligations and review disciplinary decisions to mitigate the risk of subsequent claims of retaliation.