The U.S. Supreme Court confirmed in March that the Sarbanes-Oxley Act’s whistleblower provision — and its attendant cause of action for retaliation — protects not only public-company employees, but also employees of law firms, auditing firms, investment advisers and other contractors of public companies. Lawson v. FMR LLC, No. 12-3 (March 4). However, the Lawson court did not decide two important issues: whether a household employee of a public-company officer or employee — for example, a nanny or gardener — can bring a Sarbanes-Oxley claim against that officer or employee; and whether a whistleblower can bring a Sarbanes-Oxley claim against a public company, a private contractor of a public company or a public-company employee, even if the whistleblower has not reported shareholder fraud. Until these questions are resolved, private and public employers alike could face a broad variety of Sarbanes-Oxley whistleblower claims.
In Lawson, the plaintiffs were former employees of privately held Fidelity Investments advisers, which performed services for public Fidelity mutual funds. The plaintiffs alleged that they blew the whistle on fraud related to the funds and that the Fidelity advisers terminated them as a result. They brought a retaliation claim under Sarbanes-Oxley’s whistleblower protection provision (18 U.S.C. 1514A), which provides that 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 any [protected activity].”
The Fidelity investment advisers argued that this provision only shields “an employee” of a public company, and therefore did not allow the plaintiffs to bring a claim. The Supreme Court disagreed, holding that the “18 U.S.C. 1514A whistleblower protection extends to employees of contractors and subcontractors.”
On its surface, this may seem like a clear result. In fact, however, the decision revealed a significant split among the justices as to the scope of Sarbanes-Oxley’s whistleblower protection. The divide on the court was unusual: Justice Ruth Bader Ginsburg, joined by Chief Justice John Roberts Jr. and justices Stephen Breyer and Elena Kagan, seized the middle ground; justices Antonin Scalia and Clarence Thomas agreed with the result, but took a more pro-plaintiff view; and justices Sonia Sotomayor, Anthony Kennedy and Samuel Alito sided with the Fidelity advisers.
The Fidelity advisers argued that, if an employee is allowed to sue under Sarbanes-Oxley simply because he worked for “any officer, employee, contractor, subcontractor or agent” of a public company, unprecedented Sarbanes-Oxley claims would flood the U.S. Department of Labor and federal courts. For example, Sarbanes-Oxley can be read to state that “an employee” who reports any crimes listed in the statute (including mail fraud and wire fraud) or a violation of any U.S. Securities and Exchange Commission rule or regulation is protected, even if the reported conduct does not involve fraud against public-company shareholders. Protecting public-company shareholders was Congress’ principal concern when it passed Sarbanes-Oxley in 2002, in the wake of the Enron scandal.
EFFECT ON SHAREHOLDERS
Accepting this reading, the U.S. Court of Appeals for the Tenth Circuit allowed a claim by a whistleblower who reported mail fraud by her supervisor, even though that fraud did not affect shareholders. Lockheed Martin Corp. v. ARB, 717 F.3d 1121 (10th Cir. 2013). If one combines Lockheed with a broad definition of “an employee” under Sarbanes-Oxley, the result is that a nanny who works for a Wal-Mart manager (i.e., an employee of a employee of a public company) is protected from retaliation if she reports mail fraud by the manager, even if the fraud did not affect shareholders. The Fidelity advisers emphasized this kind of hypothetical case when they argued that the court should reject the Lawson plaintiffs’ claims. The plaintiffs and the U.S. government, by contrast, tried to work around the hypothetical nanny case: They argued that the statute does not protect personal employees of public company “officer[s]” and “ employee[s],” even though it protects employees of public-company “contractors.”
Ginsburg, writing for the six-justice majority, declined to take a clear position on whether the hypothetical nanny could bring a claim under Sarbanes-Oxley. Rather, she said, the court did not have to decide that question because the plaintiffs in Lawson were seeking a “mainstream application” of the statute to protect alleged firsthand witnesses to shareholder fraud. She recognized, but did not resolve, the government’s argument that the court could resolve any “overbreadth problems” in Sarbanes-Oxley by limiting it to apply only to violations affecting shareholders (contrary to Lockheed) and requiring a meaningful business relationship between contractors and public companies to subject contractors to liability under the statute.
Scalia and Thomas, concurring in principal part and in the judgment, were not so restrained. Scalia wrote that the proposed limitations advanced by the government had no basis in the language of the statute: “So long as an employee works for one of the actors enumerated in § 1514A(a) and reports a covered form of fraud in a manner identified in § 1514A(a)(1)-(2), the employee is protected from retaliation.” Thus, under Scalia’s view, if the hypothetical nanny reported a violation described in Sarbanes-Oxley, she would be shielded by the statute.
In her dissenting opinion, Sotomayor took a firm stand against not only the hypothetical nanny, but also the Lawson plaintiffs. She wrote that Sarbanes-Oxley was “deeply ambiguous” as to whether these claims are covered, as shown by the plaintiffs’ and the government’s attempt to distinguish between liability for public-company contractors and public-company employees, even though the text includes no such distinction. Sotomayor also said Scalia’s interpretation of the statute would lead to “absurd results.” Specifically, she described hypothetical claims by babysitters and day laborers, which would “embroil federal agencies and courts in the resolution of mundane labor disputes that have nothing to do” with the concerns that motivated Sarbanes-Oxley.
Based on these “absurd results,” combined with the wording of the statute and the legislative history, Sotomayor would have concluded that Sarbanes-Oxley was intended to apply only to public-company employees who blow the whistle on fraud relating to their public-company employers. Of course, her dissenting opinion is not the law, and because the majority opinion did not answer the two chief questions outlined above, the true scope of Sarbanes-Oxley is unknown.
FURTHER COURT GUIDANCE
Other decisions provide some guidance to how these questions will be resolved, but the three opinions in Lawson may still shape that future resolution. For example, the Labor Department’s Administrative Review Board answered the first question — whether a household worker can bring a claim against a public company employee — in Spinner v. David Landau & Assoc. LLC, No. 10-111 (May 31, 2012), when it said that protecting “employees of an ‘employee’ or employees of an ‘officer’ ” would be absurd. However, this statement was made without the benefit of the justices’ reasoning, and if the board revisits the issue, it will need to determine which of the court’s opinions is the most persuasive. Furthermore, to the extent the federal courts are called upon to resolve this issue, they are not bound to follow the Labor Department and could choose from any of the approaches advocated by the justices.
The Tenth Circuit decided the second question — whether a whistleblower’s report must relate to shareholder fraud — in Lockheed, when it allowed a mail fraud whistleblower’s claim to proceed. The Administrative Review Board reached a similar decision in Sylvester v. Parexel Int’l LLC, No. 07-123 (May 25, 2011). However, other circuits and the Supreme Court have yet to address the subject. Until they do, public companies and private employers alike will continue to argue that an employee cannot bring a Sarbanes-Oxley claim based on fraud that does not relate to shareholders.
For now, Lawson provides a significant boost to employees of private contractors of public companies who report shareholder fraud. However, because of the two key outstanding questions, it remains to be seen whether Lawson will lead to a true opening of the floodgates under Sarbanes-Oxley.
Jason M. Knott is a partner in the Washington office of Zuckerman Spaeder. He practices in the areas of civil litigation, white-collar criminal defense and congressional investigations. He is also a co-founder and contributing editor of the firm’s blog on disputes between executives and employers, Suits by Suits (www.suitsbysuits.com).