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Whistleblower Protection under Sarbanes-Oxley Act Strengthened by Supreme Court Ruling

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 companies.

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 Circuit.

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 legislation.

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 Sarbanes Oxley.

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, noting:

Virtually all mutual funds are structured so that they have no employees of their own; they are managed, in­stead, by independent investment advisers.

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 (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 themselves.

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 says.

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, [1] 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 consequences:

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 Whistleblowers

The 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.

Contact Us

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.

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For further reading:
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(Ginsburg and Sotomayor were in agreement on 72 out of 75 cases decided by opinion in October 2012 Term).  Accessed on Mar. 9, 2014.

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