In Lawson v. FMR LLC, 571 U.S. ____, slip op.
(March 4, 2014), the United States Supreme Court held that
employees of privately-owned companies, here contractors and
subcontractors reporting on a publicly-traded company (companies
required to register securities and file certain reports under
provisions of the Securities Exchange Act of 1934), are protected
by the whistleblower provisions of the Sarbanes-Oxley Act.
The statutory provision at issue was 18 U.S.C. § 1514A,
which protects "an employee" from adverse changes in the terms and
conditions of employment because of protected whistleblowing.
Interestingly, this is the first time the Supreme Court has decided
a case under this section of the Sarbanes-Oxley Act of 2002
("SOX"). Read here
about Dodd Frank v. Sarbanes-Oxley and legal differences.
Two former employees brought separate suits alleging unlawful
retaliation against FMR LLC and other related private companies
("FMR"), contractors that provided investment advising and fund
management services to the Fidelity family of mutual funds.
Consistent with the industry structure for mutual funds, the mutual
funds served by FMR are public companies with no employees.
Lawson alleged that she raised concerns about certain cost
accounting methodologies, believing that they overstated operating
expenses associated with the mutual funds. Zang alleged that
he raised concerns about inaccuracies in a draft SEC registration
statement about some Fidelity funds. One was then fired by
FMR and the other suffered a series of adverse actions amounting to
constructive discharge. Following administrative filings with
the Department of Labor, the former employees brought a cause of
action in federal court to seek remedies under § 1514A.
FMR moved to dismiss Plaintiffs' claims,
arguing they were not "covered employees" under § 1514A(a)
because the statute does not protect employees of private
The employees took the position that both the employees of
public companies and those who are the employees of those public
companies' contractors and subcontractors are protected under the
SOX whistleblower provisions.
The First Circuit, which was the first appellate court to decide
an issue under this provision, reversed the district court's
interpretation of § 1514A(a) and determined that SOX's
whistleblower protection is limited to employees of publicly traded
companies and does not extend to employees of a public company's
contractors and subcontractors. Lawson v. FMR
LLC, 670 F.3d 61 (1st Cir. 2012). The court declined
to follow Department of Labor regulations, a Department of Labor
Administrative Review Board ruling in an unrelated case, or
positions advanced by both the Department of Labor and the
Securities & Exchange Commission in amicus briefs.
In a split decision, the Supreme Court reversed the First
The Court looked initially to the language of the statute,
noting that "§ 1514A(a) provides that 'no … contractor … may
discharge … an employee.'" Slip op. at 9. The ordinary
meaning of "an employee" in this context would be the contractor's
own employee. According to Justice Ginsburg's majority
ruling, FMR's "narrower construction" requires inserting "of a
public company" after "an employee," but where Congress meant "an
employee of a public company," it said so. Tellingly, the
dissenting opinion accuses the majority of virtually misquoting the
statutory provision at issue: "§ 1514A(a) actually
provides that '[n]o [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.'" Dissenting op.,
slip op. at 3.
Justice Ginsburg's majority opinion also
examined the legislative history, particularly noting the impact of
the Enron fraud in spurring the enactment of the SOX
In Congressional and other investigations following the fall of
Enron, many found that retaliation by contractors against their own
employees was a significant deterrent to those employees flagging
misconduct at Enron. As the Court stated:
The Court's reading fits § 1514A's aim to ward off another
Enron debacle. The legislative record shows 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. Sarbanes-Oxley contains numerous provisions
designed to control the conduct of accountants, auditors, and
lawyers who work with public companies, but only § 1514A
affords such employees protection from retaliation by their
employers for complying with the Act's reporting requirements.
Read here about a victory for Whistleblowers Reporting Fraud Under
Slip op. at 16-20.
Another critical factor for the Court was the concern that the
people with the most visibility into possible misconduct by a huge
segment of the financial market would be without protection from
retaliation if they provided much needed information about
potential frauds. The Court declined to interpret the
anti-retaliation provision in such a restrictive manner,
Virtually all mutual funds are structured so that they have no
employees of their own; they are managed, instead, by independent
See S. Rep. No. 91-184, p. 5 (1969) (accompanying
the 1970 amendments to the Investment Company Act of 1940).
The United States investment advising industry manages $14.7
trillion on behalf of nearly 94 million investors. See 2013
Investment Company Fact Book 7 (53d ed.), available at
http://www.icifactbook.org/pdf/2013_factbook.pdf (as visited
Feb. 20, 2014, and available in Clerk of Court's case
file). These investment advisers, under our reading of
§ 1514A, are contractors prohibited from retaliating against
their own employees for engaging in whistleblowing activity.
This construction protects the "insiders [who] are the only
firsthand witnesses to the [shareholder] fraud." S. Rep., at
10. Under FMR's and the dissent's reading, in contrast,
§ 1514A has no application to mutual funds, for all of the
potential whistleblowers are employed by the privately held
investment management companies, not by the mutual funds
Slip op. at 20-21.
Justice Scalia, in an opinion concurring in
principal part and concurring in the judgment, was in agreement
with the majority's reading of the statutory text but broadly
rejected the majority's use of the legislative history.
He sounded a familiar theme of his view of the Court's role:
I do not endorse, however, the
Court's occasional excursions beyond the interpretative terra firma
of text and context, into the swamps of legislative history.
Reliance on legislative history rests upon several frail
premises. First, and most important: That the statute
means what Congress intended. It does not. Because we
are a government of laws, not of men, and are governed by what
Congress enacted rather than by what it intended, the sole object
of the interpretative enterprise is to determine what a law
Concurring op., slip op. at 1. Unlike the majority,
however, which left this question open, the concurring opinion
would not limit the protection of contractor employees to
whistleblowing related to their role in advising the public
company. Id. at 3. This seems like an
unusually expansive view of the statute, beyond what even the
Solicitor General, at oral argument, had suggested as a limitation
on the scope of the anti-retaliation protection.
In a relatively rare instance where Justice Sotomayor disagreed
with Justice Ginsburg,  Justice Sotomayor authored a dissenting
opinion that sharply criticized the majority's interpretation of
the statutory language, as noted above, but also stridently claimed
that the majority's ruling would have far-reaching and unintended
The Court … holds that the law encompasses any household
employee of the millions of people who work for a public company
and any employee of the hundreds of thousands of private businesses
that contract to perform work for a public company.
The Court's interpretation gives § 1514A a stunning
reach. As interpreted today, the Sarbanes-Oxley Act
authorizes a babysitter to bring a federal case against his
employer - parent who happens to work at the local Walmart (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. 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 False Claims Act Provides Awards To Successful
False Claims Act provides for an award to a qui tam plaintiff in
the event the government settles a qui tam suit. If the
Government settles a qui tam action brought by a whistleblower
notifying the government of fraud, the whistleblower (often called
a "relator") is entitled to "receive at least 15 percent but not
more than 25 percent of the proceeds of the action or settlement of
the claim, depending upon the extent to which the person
substantially contributed to the prosecution of the action."
31 U.S.C. § 3730(d)(1).
Read more about Life of a Whistleblower Qui Tam Lawsuit and Why You
Want the Government to Intervene.
If you have discovered evidence of government fraud,
contact an experienced False Claims Act attorney before blowing the
whistle. You may be entitled to a substantial reward and the legal
protections afforded to whistleblowers under state and federal
laws. The attorneys of Berger & Montague are nationally
recognized experts in Whistleblower/Qui Tam actions with over a
decade of experience pursuing these complex fraud cases. For more
information or to schedule your confidential consultation, use the
form on this page or call us at 1-800-424-6690.
For further reading:
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Tam Litigation Statistics and Trends
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