On March 4, 2014, a divided Supreme Court reversed the 1st Circuit Court of Appeals and held in a 6-3 decision in Lawson v. FMR LLC that Sarbanes-Oxley’s whistleblower protection extends to employees of privately held contractors and subcontractors that perform work for public companies, and not only to employees of public companies.

The Court began its decision by highlighting the purpose behind Congress’ enactment of the Sarbanes-Oxley Act of 2002—namely, “[t]o safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation.” The Court noted that of particular concern to Congress was “abundant” evidence that Enron had succeeded in perpetuating its massive shareholder fraud in large measure due to a “corporate code of silence.”

The Court opined that this code of silence stemmed from employees’ fear of retaliation for reporting fraudulent behavior either internally or to law enforcement agencies, as there generally was no protection in the law available to whistleblowers. The Court stated that § 1514A of Sarbanes-Oxley addressed this concern through a provision that states that “[n]o public company or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any manner discriminate against an employee in the terms and conditions of employment because of [any whistleblowing or other protected activity].”

The Court identified the issue before it as involving the definition of the protected class and whether the Act’s anti-retaliation provision shielded only individuals employed by the public companies themselves, or whether it also protected employees of privately held contractors and subcontractors — such as investment advisers, law firms, accounting enterprises — who perform work for the public companies. The Court concluded that, based on the “text” of the anti-retaliation provision, the “mischief to which Congress was responding,” and earlier legislation Congress drew upon, the provision shelters both categories of employees.

First, the Court examined the plain language of the anti-retaliation provision, giving the words used in the statute their “ordinary meaning.” Quoting Judge Thompson’s dissent from the Court of Appeals’ judgment below, the Court stated: “‘boiling [§ 1514A(a)] down to its relevant syntactic elements, it provides that no … contractor … may discharge .. an employee.’” In the Court’s view, the ordinary meaning of “employee” in this context was the contractor’s own employee. Thus, to accept FMR’s view would require the insertion of the language “of a public company” after “an employee,” which was something Congress knew how to do had it wanted to do so.

The Court, among other things, noted that Section 1514A’s application to contractor employees was confirmed when viewing the provision in its entirety. Specifically, the Court found that the prohibited retaliatory acts enumerated in § 1514A(a) — discharge, demotion, suspension, suspension, threats, harassment or discrimination in terms and conditions of employment — are “commonly actions an employer takes against its own employees.” Because contractors generally are not in a position to take these types of actions against employees of the public companies with whom they contract, § 1514A’s ban on retaliation by contractors would “shrink to insignificance” if it did not apply to contractor employees.

Second, the Court concluded that its textual analysis of § 1514A “fits the provision’s purpose.” Specifically, the Court noted that the whistleblower provision was enacted by Congress in order to prevent another Enron debacle and that the Senate Report demonstrated that Congress was as focused on the role of Enron’s outside contractors in facilitating the fraud as it was on Enron’s own officers. Also clear from the legislative record was Congress’ understanding that outside professionals bear responsibility for reporting fraud and that fear of retaliation was the “primary deterrent” to such reporting by the employees of Enron’s contractors. Thus, the Court found that it could not accept that Congress intended to leave lawyers, accountants or other professionals vulnerable to discharge or other retaliatory action for reporting fraud.

The Court specifically noted that any other reading of § 1514A would effectively insulate the entire mutual fund industry from its protection because virtually all mutual funds are managed by independent investment advisors, rather than having employees of their own. Affording whistleblower protection to mutual fund investment advisers was crucial in the view of the Court to Sarbanes-Oxley’s aim “‘to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws.’”

Third, the Court found that Congress borrowed § 1514A’s prohibition against retaliation from the wording of an air-carrier whistleblower statute enacted two years prior to the Sarbanes-Oxley Act. Because that statute has been read to cover employees of air carriers as well as employees of contractors and subcontractors of the carriers, the Court concluded that the parallel statutory texts and whistleblower protective aims led it to read the term “an employee” in each as having “similar import.”

The implications of Lawson are far-reaching. Employees at investment firms, accounting enterprises, law firms, and other private companies providing services to public companies now may be protected from retaliation for whistleblowing or other protected activity. Private companies therefore should assess their relationships with public companies to determine whether they may fall under the Act’s protection in this context. They also should ensure that they have clear anti-retaliation policies in place and understand the potential risk they face should they make employment decisions based on any reports of fraud made by their employees.