On March 04, 2014, the U.S. Supreme Court significantly expanded the scope of the Sarbanes-Oxley Act and ruled that in addition to protecting employees of public companies, federal whistleblower law protects employees of private companies (e.g. lawyers, investment advisors, or accountants) that perform work or contract to do business for public companies.
Congress passed the Sarbanes-Oxley Act of 2002 (the “Act”) in response to the financial collapse of Enron and many other major corporations. The Act sets standards for all U.S. publicly traded company boards, management and public accounting firms and aims to protect shareholders and the general public from accounting inaccuracies, falsified business practices, and corporate fraud. A provision of the Act, 18 U.S.C. § 1514A, states that “no company… or any officer, employee, contractor, subcontractor, or agent of [a public] company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee” who blows a whistle and reports corporate fraud.
In Lawson v. FMR LLC, No. 12-3, the U.S. Supreme Court addressed two complaints alleging unlawful retaliation, that were filed by Jackie Lawson and Jonathan Zang, against the privately-held parent company, FMR LLC and other related private companies (“FMR”) that provide, pursuant to contract, investment advising services to the Fidelity family of mutual funds. More specifically, Lawson, who worked at Fidelity Brokerage Services, LLC, a subsidiary of FMR LLC, from 1993 until 2007, alleged that the company “embarked on a campaign to discredit, harass and intimidate her” after she raised concerns about fund profitability practices and accused management of misrepresenting costs to shareholders. Lawson alleged she was constructively discharged due to her employer’s retaliatory conduct. Zang, who worked for a different FMR LLC subsidiary and managed several mutual funds from 1998 to 2005, alleged that he was fired after he complained about a new pay plan for Fidelity portfolio managers that incorrectly and unlawfully described how pay was calculated.
In response to the lawsuits, FMR argued that the whistleblower protections of the Act extend only to employees of public companies, not to privately-held contractors of public companies. Thus, since FMR is privately held, Lawson and Zang did not have standing to assert violations pursuant to the Act’s whistleblower provision.
The Supreme Court disagreed. “Based on the statutory text, and the mischief to which Congress was responding, we hold that the law shelters employees of private contractors that serve public companies, just as it shelters the public companies’ own employees” said Justice Ginsburg, author of the majority opinion. “It made no sense to think a Congress, prompted by the Enron debacle, would exclude from whistle-blower protection countless professionals equipped to bring fraud on investors to a halt. A reading of §1514A that did not reach the employees of contractors would have notably extreme consequence in the mutual fund industry. As the industry is structured, the contractor’s employees are likely to be the only firsthand witnesses to the shareholder fraud of concern to Congress. In short, we decline to endorse a design that would leave mutual funds unchecked by the retaliation ban” said Justice Ginsburg.
In response to the Court’s decision, the head of the National Whistleblower Center, Stephen M. Kohn, stated, “The Court has put an end to the popular shell game, which large companies use to try to silence whistleblowers. The Supreme Court closed a potentially devastating loophole in corporate whistleblower protection and the Court’s decision makes it harder for companies to silence companies,” said Kohn.
Justice Sonia Sotomayor, joined by Justice Anthony Kennedy and Justice Samuel Alito, wrote a dissenting opinion. “The Court’s interpretation allows a babysitter to bring a federal case against his employer, a parent who happens to work at the local Wal-Mart, a public company, if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud,” wrote Justice Sotomayor. “And it opens the door to a cause of action against a small business that contracts to clean the local Starbucks (a public company) if an employee is demoted after reporting that another nonpublic company client has mailed the cleaning company a fraudulent invoice.” The National Federation of International Business also criticized the decision, stating that the limitless decision “gives plaintiffs’ lawyers additional incentives to pursue aggressive litigation against employers.”
As the law stands today, private contractors who uncover and report fraud at public companies are entitled to the Act’s federal whistleblower protections. The Court’s decision dramatically affects the scope of the Act’s anti-retaliation protections, and it is possible that the ruling will result in a significant increase in the number of whistleblower complaints and related lawsuits brought against employers. Private firms that are contractors of public companies must re-evaluate their internal policies to thwart retaliation against whistleblowers and all employers must familiarize themselves with the Act’s whistleblower protections in order to minimize potential exposure and corporate liability.
If your institution has questions or concerns about this topic and you would like further information, please email James G. Ryan at jryan@cullenanddykman.com or call him at 516-357-3750. This article was written with Hayley Dryer, an associate at the firm.