DOL Rules SOX Whistleblower Provision Protects Employees of Private Contractors to Public Companies, Rejecting First Circuit Decision | Practical Law

DOL Rules SOX Whistleblower Provision Protects Employees of Private Contractors to Public Companies, Rejecting First Circuit Decision | Practical Law

The Department of Labor's (DOL) Administrative Review Board recently ruled that the whistleblower protection provision in Section 806 of the Sarbanes-Oxley Act of 2002 (SOX) protects employees of private contractors, subcontractors or agents of publicly traded companies. The decision explicitly rejects the US Court of Appeals for the First Circuit's contrary reading of SOX in Lawson v. FMR LLC earlier this year.

DOL Rules SOX Whistleblower Provision Protects Employees of Private Contractors to Public Companies, Rejecting First Circuit Decision

by PLC Labor & Employment and PLC Corporate & Securities
Published on 19 Jun 2012 • USA (National/Federal)
The Department of Labor's (DOL) Administrative Review Board recently ruled that the whistleblower protection provision in Section 806 of the Sarbanes-Oxley Act of 2002 (SOX) protects employees of private contractors, subcontractors or agents of publicly traded companies. The decision explicitly rejects the US Court of Appeals for the First Circuit's contrary reading of SOX in Lawson v. FMR LLC earlier this year.

Key Litigated Issues

On May 31, 2012, the DOL's Administrative Review Board (ARB) issued a decision in Spinner v. David Landau & Associates, LLC. A key issue was whether the whistleblower protection provision in Section 806 of the Sarbanes-Oxley Act of 2002 (SOX) applies only to publicly traded companies and their employees, and not to employees of private contractors of those publicly traded companies.

Background

Thomas Spinner was terminated from his position as an internal auditor at David Landau & Associates (DLA), a contractor of the publicly traded corporation S.L. Green Realty Corp. Spinner subsequently filed an administrative complaint with OSHA, claiming he was terminated in violation of Section 806 of SOX for reporting internal control and reconciliation problems at S.L. Green.
OSHA concluded that DLA was a covered entity under Section 806 of SOX as S.L. Green's contractor and that Spinner was a covered employee. However, OSHA also determined that DLA would have taken adverse action against Spinner even if Spinner had not reported the problems at S.L. Green. After Spinner objected to OSHA's findings, the case was assigned to an administrative law judge (ALJ). DLA filed a motion for summary judgment, claiming it:
  • Was not a covered entity under Section 806 of SOX.
  • Would have terminated Spinner even if he had not engaged in the protected activity.
The ALJ granted DLA's motion for summary judgment on the grounds that DLA was not a covered entity and Spinner was not a covered employee. Spinner appealed to the ARB and DLA cross-petitioned, asking the ARB to find the ALJ erred in failing to find DLA would have terminated Spinner in any event and seeking penalties against Spinner for filing a fraudulent administrative claim.

Outcome

The ARB reversed and remanded the ALJ's decision, holding that employees of private accounting firms that contract to provide SOX-compliance services to publicly traded corporations are covered by Section 806 of SOX.
The ARB declined to adopt the US Court of Appeals for the First Circuit's decision in Lawson v. FMR LLC that Section 806 of SOX covers only employees of public companies (see Legal Update, Sarbanes-Oxley Whistleblower Provision Does Not Protect Employees of Private Contractors to Public Companies: First Circuit). Instead, the ARB followed the controlling DOL regulations implementing Section 806, which extend whistleblower protection to employees of contractors, subcontractors or agents of publicly traded companies. The ARB noted it had repeatedly interpreted Section 806 to protect employees of these entities regardless of whether the entities were themselves publicly traded companies. In response to Lawson, the ARB explained that:
  • The term "employee" in Section 806 of SOX is not restricted to employees of publicly held companies, and Congress could have limited the term if that was its intention.
  • Although the caption of Section 806 refers to "employees of publicly traded companies," this language is not controlling, and Congress did not intend for the caption itself to limit the provision's coverage.
  • SOX's legislative history does not indicate Congress intended to limit the provision's coverage to employees of publicly traded companies.
  • SOX's overall statutory scheme supports a broad interpretation of employee coverage, as limiting the protection of whistleblowers only to those directly employed by publicly traded companies would undermine SOX's overriding purpose of protecting investors.
  • An inclusive definition of employee under Section 806 reflects the DOL's long practice of extending coverage of similar whistleblower statutes to contractors' employees.

Practical Implications

In rejecting the First Circuit's February 3, 2012 holding in Lawson v. FMR LLC, the ARB's decision highlights the DOL's and the First Circuit's contradictory interpretations of the whistleblower protection provision in Section 806 of SOX. Employers should be aware that the decision may lead to an increase in claims under Section 806 by private employees of contractors of publicly traded companies. It remains to be seen which interpretation other federal courts of appeal will adopt.

Court Documents