On March 4, 2014, the Supreme Court issued an important ruling that expanded the legal protection for corporate whistleblowers. Specifically, in Lawson v. FMR LLC, No. 12-3, the Court held that the whistleblower-protection provision of the Sarbanes-Oxley Act of 2002 covers private companies and contractors that work with publicly traded companies. This expansion is of particular importance to companies in the mutual fund industry. As the Court noted, most public mutual fund companies “have no employees of their own” and, instead, are managed by independent advisers and rely on private contractors for their operations.
Sarbanes-Oxley protects “whistleblowers,” providing that “[n]o [public] company…or any…contractor [or] subcontractor…of such company, may discharge, demote…[or] discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity].” 18 U.S.C. § 1514A(a). The plaintiffs in Lawson were former employees of a private company that contracted with publicly traded mutual funds. As private contractors, the plaintiffs handled certain day-to-day operations for the mutual funds. In this capacity, one of the plaintiffs raised concerns about her belief that the cost-accounting methodologies being used overstated operating expenses, while the other plaintiff raised concerns about inaccuracies in a draft SEC registration statement about certain funds. The plaintiffs sued FMR under Section 1514A alleging that FMR had retaliated against them for these reports. FMR moved to dismiss the complaint on the grounds that Section 1514A only protects employees of public companies. FMR insisted that the provision should be read to prevent a contractor from taking adverse action against employees of a public company for which it performed services but not to prohibit a contractor from taking action against its own employees. The district court denied FMR’s motion to dismiss, but the First Circuit reversed, agreeing with FMR that only employees of public companies are protected by Sarbanes-Oxley.
In reversing the First Circuit’s decision, the Supreme Court held that the ordinary meaning of the statutory text prohibited adverse action against “the contractor’s own employee” for whistleblowing activity. The Court noted that FMR’s interpretation would require that the additional words “of a public company” be read into the statute, which was explicitly done elsewhere in the statute, but not in Section 1514A(a). The Court also held that its interpretation was confirmed by considering the provision as a whole. The Court explained that the prohibited retaliatory measures set forth in Section 1514A(a) are actions that an employer typically takes against its own employees—not actions that a contractor would be expected to take against employees of a public company for which it was working. The Supreme Court held that FMR’s suggestion that the provision should be read to prohibit only a contractor from retaliating against a client’s employees would “shrink to insignificance” Sarbanes-Oxley’s ban on retaliation by contractors.
The Court found additional support for the extension of the whistleblower protection in its analysis of the background and purpose of the Sarbanes-Oxley Act, including Congress’s installation of whistleblower protection in the statute “as one means to ward off another Enron debacle.” The Court reviewed the legislative history and stated that Congress had considered the role of outside contractors in facilitating fraud when it enacted Sarbanes-Oxley. The Supreme Court, therefore, held that “one can safely conclude that Congress enacted § 1514A aiming to encourage whistleblowing by contractor employees who suspect fraud involving the public companies with whom they work.”
The Court addressed the mutual fund industry specifically, holding that its “reading of § 1514A avoids insulating the entire mutual fund industry from § 1514A,” as FMR’s narrower statutory construction would have done. The Court found that “[v]irtually all mutual funds are structured so that they have no employees of their own; they are managed, instead, by independent investment advisers.” The Court announced that these advisers are prohibited—by the ruling—from retaliating against their own employees for whistleblowing activity, thus protecting the insiders who are the witnesses to any fraud. In so holding, the Court also rejected the First Circuit’s finding that the exclusion of the mutual fund industry from Section 1514A was acceptable because mutual funds and their investment advisers are regulated by other statutes and other provisions of Sarbanes-Oxley. The Court explained that none of these other provisions or statutes included whistleblower protection for employees of contractors working for mutual funds.
Justice Ginsberg delivered the majority opinion, in which Chief Justice Roberts and Justices Breyer and Kagan joined. Justices Scalia, joined by Justice Thomas, filed an opinion concurring in part and concurring in the judgment. Justice Sotomayor filed a dissenting opinion, in which Justices Kennedy and Alito joined. The dissent expressed concerns that the decision gave Sarbanes-Oxley a “stunning reach,” and that it could permit cases by personal employees (such as babysitters or gardeners) against employees of public companies. The majority dismissed these concerns, noting that the Department of Labor has interpreted the law to cover contractor employees for almost a decade, without any opening of litigation floodgates. It also held that if any such flood of unrelated litigation occurred, Congress could easily fix the problem by amending Section 1514A to explicitly remove personal employees of public company employees from the provision’s reach.
Companies that now fall within the expanded employee protection should evaluate their policies and consult with counsel to determine if existing policies are sufficient to address the concerns and claims of potential whistleblowers.
This advisory is published by Alston & Bird LLP’s Government Investigations and Securities Litigation practice areas to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under court rules of certain jurisdictions.