On March 4, 2014, the U.S. Supreme Court expanded the reach of the whistleblower protection provision under the Sarbanes-Oxley Act of 2002, holding that it applies to employees of a publicly traded company's private contractors and subcontractors.
The case is Lawson v. FMR, LLC, which involved retaliation claims by plaintiffs against their former employer, a non-public company that contracts to advise and manage mutual funds, which are publicly traded companies. Plaintiffs claimed that they suffered retaliation in violation of the Sarbanes-Oxley Act because they raised concerns about alleged fraudulent practices in the mutual fund's financial reports.
With Justice Ginsburg writing for the majority in a 6-3 opinion, the Court concluded that the whistleblower provision applied to plaintiffs even though their employer was not a publicly traded company.
The Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was enacted in the wake of the Enron scandal, and was aimed to safeguard investors in public companies and restore trust in the financial markets. It introduced major changes to the regulation of financial practice and corporate governance.
As Justice Ginsburg notes in the opinion, Enron succeeded in perpetuating its massive shareholder fraud in large part due to a "corporate code of silence", and Congress determined that this "code" discouraged employees from reporting fraud to the authorities, and within the company. In particular, Enron's accounting firm, Arthur Andersen, faced retaliation and discharge when it attempted to report misconduct.
In response, Congress enacted the Sarbanes-Oxley Act, which included Section 806, "Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud. This section added a new whistleblower protection provision to Title 18 U.S.C. section 1514A, which states, in relevant part as written in the opinion:
"No [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 in the terms and conditions of employment because of [whistleblowing or other protected activity]."
Application to Private Contractors and Subcontractors of Publicly Traded Companies
The Court concluded that a number of factors weighed in favor of extending whistleblower protection to employees of privately held contractors who perform work for public companies:
- Nothing in the provision's language confines the class of employees protected to those of a designated employer.
- Congress plainly recognized that outside professionals, accountants, law firms, contractors, agents, and others, were complicit in, and directly involved in the shareholder fraud and subsequent cover-up Enron officers perpetrated, and the goal of the Sarbanes-Oxley Act was to avoid another "Enron debacle."
- Lawyers and accountants are subject to extensive regulations and sanctions throughout the Sarbanes-Oxley Act, but no provision other than this whistleblower provision affords them protection from retaliation by their employers for complying with the Act's reporting requirements, so it makes sense that a contractor's employees would have to be covered under this provision.
- Mutual funds are unquestionably subject to the Sarbanes-Oxley Act, but most are structured so that they have no employees, but are instead managed by independent investment advisers. Congress could not have intended to achieve the goals they set out to accomplish with this Act and not include employees of the independent investment advisers.
- The Department of Labor's regulations have interpreted the whistleblower provision as protecting contractor employees for almost a decade.
"Stunning Reach"
In dissent, Justice Sotomayor railed against the "stunning reach" of the majority's interpretation of the law.
"As interpreted today, the Sarbanes-Oxley Act authorizes a babysitter to bring a federal case against his employer--a 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."
Her dissent was joined by Justices Kennedy and Alito.
Justice Ginsburg discounted this "opening of the floodgates" concern as merely theoretical. "Few housekeepers or gardeners, we suspect, are likely to come upon and comprehend evidence of their employer's complicity in fraud", she writes.
Further, no one in favor of limiting the provisions to employees of a publicly traded company could identify any case in which the employee of a private contractor had asserted a section 1514A claim based on allegations unrelated to shareholder fraud, according to Ginsburg.
Ultimately, the Court did not address the question of the outer bounds of applying the whistleblower provision, because plaintiffs' claims in this case fit squarely in the bounds of the Sarbanes-Oxley Act, i.e. alleged fraud affecting shareholders.
Concluding Thoughts
As the Court explicitly explains, whistleblower protection will apply to outside professionals, accountants, lawyers, and other contractors, who perform work for public companies.
It remains to be seen whether the protections will reach as broadly as claimed by Justice Sotomayor. The outer bounds of the whistleblower provision are not left well defined by the opinion, although the majority's numerous references to the purpose of the Sarbanes-Oxley Act may guide subsequent decisions on this issue. Until further clarification is provided, private employers who perform work for publicly traded companies should familiarize themselves with the provisions of the Sarbanes-Oxley Act, implement whistleblower policies, and prepare for possible whistleblower retaliation claims.