The U.S. Supreme Court issued a landmark decision March 5 greatly expanding the whistleblower protections of the Sarbanes-Oxley Act to cover employees of private entities contracting with publicly traded companies.
This ruling dramatically changes the landscape of SOX’s anti-retaliation protections, opening the door to numerous and potentially costly lawsuits from employees of private companies, who did not previously have a cause of action under SOX.
The ruling stems from lawsuits brought by Jackie Lawson and Jonathan Zang, former employees of FMR LLC and its subsidiaries. These private companies are under contract with the Fidelity family of mutual funds to provide investment advice and management services. They are public companies registered with the Securities and Exchange Commission and, therefore, subject to its reporting requirements.
According to her lawsuit, Lawson complained to management about cost-accounting methodologies and the alleged improper retention of $10 million in fees—only to be “warned” for insubordination and passed over for a promotion. Ultimately, she resigned her job with Fidelity Investments, claiming she was constructively discharged due to her employer’s retaliatory conduct.
Zang alleged in a separate complaint that his employment was terminated for raising concerns about inaccuracies in a draft revised registration statement for certain Fidelity funds.
In both cases, FMR moved to dismiss the complaints, arguing Lawson and Zang were not “employees” as defined in the law. FMR argued the statutory language limited SOX’s whistleblower protections to direct employees of public companies, thus it did not apply to Lawson and Zang.
They responded that the statute must be interpreted to cover the employees of “contractors, subcontractors, or agents of publicly held investment companies” in accordance with the plain language of the statute. The former employees argued their former employers were such “contractors, subcontractors or agents” of the publicly-held Fidelity mutual funds, and they were in fact covered.
The Supreme Court held that, in view of the plain language of the statutory text as well as the context within which Congress enacted SOX, the law could reasonably be interpreted to extend its protections to cover the employees of contractors to publicly held companies, such as Lawson and Zang, in addition to direct employees of those publicly held companies.
In so holding, the court explained that the whistleblower provision prohibits retaliation against “an employee,” not just by the public company, but also by contractors, subcontractors and agents of a public company.
The law, as relevant to the circumstances surrounding Lawson and Zang, provides that “no … contractor … may discharge … an employee” for whistleblowing. The ordinary meaning of “an employee” in this provision then is the contractor’s own employee.
In addition, the court found that its reading of the statute would avoid insulating the entire mutual fund industry from SOX’s whistleblower protections, something that it believed Congress could not have intended.
Congress enacted SOX in 2002, following the scandal and shareholder fraud that brought down Enron and WorldCom, to prevent that type of fraud in the future by protecting employees who report fraud or other violations of securities laws from retaliation by their employers.
Unfortunately, the court declined to clearly define the boundaries of SOX, finding it unnecessary at this juncture to specifically limit SOX’s anti-retaliation protections to employees of a contractor or subcontractor reporting fraud at a public company.
Because SOX’s whistleblower provision encompasses mail, wire and bank fraud, and because the court’s interpretation of “an employee” did not exclude personal employees of people who work for public companies from being protected under SOX, doors appear to be open for retaliation lawsuits stemming from household workers and others who arguably fit under the definition, and whose “whistleblowing” activity is unrelated to any fraud occurring at the public company.
The dissenting opinion provided an example of this risk: a nanny to a CEO of a public company is fired after she reports that the CEO’s son is engaged in Internet fraud; under this Court’s interpretation of SOX, the nanny could bring a whistleblower claim.
The impact of the court’s decision is significant, with widespread implications for the financial services industry, its employees and the corporate structures of SOX-regulated entities.
Employers conducting business with public companies must familiarize themselves with the regulations governing public companies, including when those regulations have been violated, as well as their rights and potential liabilities pursuant to the whistleblower protections of SOX.
In addition, potential liability could extend even further for both public and private entities if the anti-retaliation provision is interpreted to protect personal employees or whistleblowers reporting fraud other than shareholder fraud.