Supreme Court: SOX Whistleblower Provision Protects Employees of Private Contractors to Public Companies

Practical Law Legal Update 8-559-8486 (Approx. 8 pages)

Supreme Court: SOX Whistleblower Provision Protects Employees of Private Contractors to Public Companies

by Practical Law Labor & Employment

Background

The plaintiffs are former employees of private companies (collectively referred to as FMR) that contracted to advise and manage Fidelity mutual funds. The mutual funds are public companies with no employees. The plaintiffs alleged that they suffered adverse employment consequences in violation of Section 1514A in retaliation for engaging in protected whistleblowing activity Section 1514A states that no publicly traded company subject to the registration or reporting requirements of the Securities Exchange Act of 1934 or "any officer, employee, contractor, subcontractor, or agent of such company or nationally recognized statistical rating organization, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment" because the employee engaged in protected activity (18 U.S.C. § 1514A(a)).

After filing administrative complaints, the plaintiffs each filed suit in the US District Court for the District of Massachusetts. FMR moved to dismiss the suits, asserting that the plaintiffs could not state a claim under Section 1514A because they are employees of private companies and the provision only protects employees of publicly traded companies. The district court denied FMR's motions to dismiss.

FMR moved for interlocutory appeal, and the First Circuit reversed the district court's decision. A divided panel held that Section 1514A protects only employees of public companies, and therefore the plaintiffs could not state a valid claim (see Legal Update, Sarbanes-Oxley Whistleblower Provision Does Not Protect Employees of Private Contractors to Public Companies: First Circuit).

Subsequently, in an unrelated case, the DOL's Administrative Review Board (ARB) held in Spinner v. David Landau & Assoc. that Section 1514A provides whistleblower protections to employees of private contractors that render services to public companies (see Legal Update, DOL Rules SOX Whistleblower Provision Protects Employees of Private Contractors to Public Companies, Rejecting First Circuit Decision).

On May 20, 2013, the US Supreme Court granted certiorari in Lawson v. FMR LLC to decide whether employees of private contractors or subcontractors who perform work for public companies are protected from whistleblower retaliation under Section 1514A. Oral argument was held on November 12, 2013.

Outcome

On March 4, 2013, the US Supreme Court reversed and remanded the First Circuit's decision, holding that Section 1514A's whistleblower protections extend to employees of private companies that are contractors and subcontractors to public companies.

The Court held that Section 1514A protects a contractor's own employees, relying on the text and effect of the statute.

Finding that the text of the statute supports including privately held contractors' employees in Section 1514A's definition of "employee," the majority held that:

The ordinary meaning of "employee" in Section 1514A(a) refers to the contractor's own employee.
Congress specified "of a public company" in other provisions of the section and did not include it in Section 1514A(a), which allows the court to presume that Congress intended the provision to protect employees of private contractors as well.
The argument that the provision's statutory headings "Whistleblower Protections for Employees of Publicly Traded Companies" and "Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud" indicate that the protections are limited to employees of publicly traded companies is not persuasive because:
- the provision already extends protection to employees of companies that are not publicly traded, such as employees of companies that file reports with the SEC;
- the provision already extends protection to activities not limited to providing evidence of fraud, including reporting violations of SEC rules and regulations; and
- the limited headings do not cancel out the other indicators that the statute extends to the private contractor's own employees.

The majority held that applying the provision in the broader context confirms expanding the protections of Section 1514A to include private contractors' employees because:

The prohibited retaliatory actions enumerated in Section 1514A(a), including discharge, demotion and harassment, are adverse actions that an employer typically takes against its own employees, not against employees of a public company with which it has contracted.
Section 1514A(a) references employer knowledge of whistleblower activity, indicating that Congress presumed an employer-employee relationship between the whistleblower and the employer.
Section 1514A's enforcement procedures and remedies assume an employer-employee relationship because:
- it provides that claims brought under this section are governed by the anti-retaliation provision in Section 42121(b) of Title 49, which refers to the respondent as the "employer" (see 49 U.S.C. § 42121); and
- it states that remedies should include reinstatement, which generally only an employer can provide.
A narrower construction of "employee" would leave professional employees that are well-equipped to stop and prevent fraudulent investment activities of public companies without whistleblower protections, such as a contractor's accountants and lawyers, which would contravene Congress' intent in enacting SOX.
FMR's concern that a broad definition of "employee" would lead to absurd results by extending protections to the personal employees of company officers and employees, such as babysitters and gardeners, is unconvincing because:
- it is outweighed by the other arguments in favor of a broad definition; and
- the absurd results are unlikely to occur.
The legislative history of Section 1514A emphasizes the importance of outside professionals as gatekeepers to detect and deter fraud.
A broad interpretation prevents mutual funds from evading the provisions of Section 1514A because most mutual funds are structured so they have no employees and are managed by independent investment advisors. Therefore, all potential whistleblowers of mutual funds are employed by contractors and are unprotected from retaliation if the provision is read to exclude them.
The 2010 amendment to extend Section 1514A's protections to nationally recognized statistical rating organizations (NRSROs) does not mean that the provision previously did not cover contractors' employees, because:
- not all NRSROs are privately held;
- not all NRSROs contract with public companies; and
- Congress had the opportunity but decided not to strike down the DOL regulations that provided that Section 1514A protects contractors' employees (see 29 CFR 1980.101).
The ARB has interpreted Section 42121, which Section 1514A is modeled after, to protect employees of contractors.

Accordingly, the majority reversed and remanded the First Circuit's decision, holding that Section 1514A's whistleblower protections extend to employees of private contractors and subcontractors to public companies. The Court stated that it did not need to determine the bounds of Section 1514A in this decision because the plaintiffs only seek a mainstream application of the statute's protections.

Justices Scalia and Thomas concurred, agreeing in principal part with the majority's opinion. However, they criticized the majority for:

Relying on the legislative history for interpreting the provision because:
- the sole object of interpretation should be to determine what the law says, not what Congress intended;
- the majority assumes that there was congressional intent apart from the text of the statute, when in reality most senators and representatives have no view and are unaware of the issues entirely;
- the views expressed in the committee reports and floor statements supposedly represent those of all of the members of the House of Representatives, yet most of them did not read, hear or agree with them; and
- court opinions that rely on congressional intent allow courts to cite parts of the legislative history that support its holdings and ignore everything else.
Finding Section 42121(a) instructive in interpreting Section 1514A to include contractor's employees; although Section 1514A's procedural provisions contain cross-references to Section 42121(a), the substantive provisions of the two statutes are worded differently.
Accepting the suggestion that Section 1514A protects contractor employees from retaliation only to the extent that their whistleblowing relates to the contractor's activities for the public company, because this limit on Section 1514A's protections has no basis in the statute's text.

Justice Sotomayor, joined by Justices Kennedy and Alito, dissented from the majority opinion, holding that:

The majority's interpretation reaches too far and opens the door to excessive litigation. It authorizes any private employee of individuals who work for public companies or for a private companies that contract to work for public companies to bring a federal case alleging whistleblower retaliation.
Section 1514A is ambiguous and should be resolved in favor of a narrow interpretation to only include employees of public companies because:
- the provision's statutory headings "Whistleblower Protections for Employees of Publicly Traded Companies" and "Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud" indicate Congress meant to limit protections only to employees of public companies;
- the statutory context of Section 1514A does not clearly state that it extends beyond employees of public companies, unlike other sections of SOX that clearly address the conduct of private firms and their employees;
- the text of Section 42121, which Congress intended to protect employees of contractors and which Section 1514A was modeled after, and the text of Section 1514A differ substantively when referencing "contractors"; and
- the majority is wrong when it claims that contractors can rarely retaliate against employees of public companies, because the modern workforce is comprised of independent contractors, outplacement firms and consultants that may have control over public employees' terms and conditions of employment.
The alternative interpretation of the statute consistent with its legislative purpose should be used when the initial statutory interpretation creates absurd results, such as here, where the majority's interpretation:
- regulates the employment relationship between private employers and their private employees;
- burdens private businesses that have contracts with public companies with litigation costs;
- creates a right for employees of public companies to bring whistleblower retaliation claims, but not for employees of private companies, even when they have the same occupation; and
- threatens to subject private companies to a host of new employment litigation claims, since Section 1514A protects the reporting of securities fraud, mail fraud, wire fraud and bank fraud.
Congress established other ways to regulate outside lawyers and accountants, such as the Public Company Accounting Oversight Board (PCAOB) and the SEC's rules of professional conduct for attorneys.
The ARB's broad interpretation in Spinner should not be given deference because it doesn't meet the Supreme Court's test for deferring to an agency's interpretation of its statute, as articulated in Chevron USA Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

Practical Implications

In light of this decision, private employers who work with public companies should determine whether they would be considered contractors or subcontractors subject to coverage under SOX's whistleblower provisions, and if so, review their policies and practices, including internal complaint and investigation procedures, to minimize any potential liability under SOX.

Supreme Court: SOX Whistleblower Provision Protects Employees of Private Contractors to Public Companies | Practical Law