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Many Small Employers Now Subje...

Many Small Employers Now Subject to Sarbanes-Oxley

Last week, the United States Supreme Court released its opinion in Lawson v. FMR, LLC, 571 U.S. ___ (2014), a decision that reaffirmed the breadth and force of the Sarbanes-Oxley Act’s whistleblower protection provision.  As a result, millions of private businesses are now potentially subject to claims of whistleblower retaliation that had previously been reserved for a few thousand publicly-traded companies.

The Sarbanes-Oxley Act of 2002 (“SOX” or the “Act”) was enacted by Congress after the Enron scandal, in which executives of Enron Corporation—and their hired accountants—used accounting loopholes and dishonest financial reporting to hide billions of dollars in debts from shareholders.  Following the government’s investigation and audit of Enron’s practices, it became apparent that many employees and outside professionals had been aware of this fraud, but had not come forward due to fear of retaliation.  Recognizing “a significant deficiency” in the law, Congress enacted SOX’s anti-retaliation provision, 18 U.S.C. §1514A, which prohibits public companies and their contractors from taking adverse action against “an employee” because of whistleblowing activity.

In Lawson, the Court was presented with the question of whether the Act’s whistleblower protection shields employees of private contractors of public companies, such as accountants and investment advisers, or whether it applies only to employees of public companies.  In a 6 to 3 decision, the Court confirmed that 18 U.S.C. §1514A extends to employees who work for contractors and subcontractors of public companies.

The respondents (collectively, “FMR”) are a collection of private companies that contract with the Fidelity family of mutual funds to provide management services, investment advice, etc.  The mutual funds served by FMR are public companies with no employees of their own.  Petitioners Jackie Lawson and Jonathan Zang had worked at FMR for 14 years and 8 years, respectively, until each was forced out after raising concerns about inflated expenses and inaccurate SEC reporting.  Lawson and Zang separately filed administrative com­plaints alleging unlawful retaliation, followed by civil lawsuits in U.S. District Court.

FMR moved to dismiss the suits, arguing that neither plaintiff had a claim for relief under §1514A.  FMR maintained that the Act’s anti-retaliation provision only protects employees of public companies, not the employees of those companies’ private contractors.  After the district court initially denied FMR’s motions to dismiss, the First Circuit Court of Appeals reversed; the appellate court agreed with FMR that “an employee,” within the definition of §1514A, refers only to employees of public companies and does not cover a con­tractor’s own employees.  The Supreme Court granted certiorari last spring, and heard oral argument in November 2013.

In its decision issued last week, the Court rejected the narrow reading of SOX’s whistleblower protection favored by FMR and the First Circuit.  Writing for the majority, Justice Ginsburg acknowledged that the Act’s anti-retaliation provision is susceptible to multiple interpretations; however, a strict reading of the text itself, coupled with its legislative history and the overall intent of the Act, convinced the Court that §1514A was intended to cover employees of privately-held contractors.  To deny contractors the same whistleblower protection as employees of publicly-traded companies, the Court reasoned, could defeat the purpose of Sarbanes-Oxley.

In addition, Justice Ginsburg pointed out that virtually all mutual funds operate without employees; “they are managed, instead, by independent investment advisors.”  If the Court were to accept FMR’s argument that “an employee” within the meaning of §1514A refers exclusively to public company employees, this would effectively “insulate the entire industry from liability under §1514A.”  Doubting that Congress intended SOX’s anti-retaliation provision to have no application to mutual funds, the Court instead chose to interpret §1514A in a way that “protects the employees of investment advisors, who are often the only firsthand witnesses to shareholder fraud involving mu­tual funds.”

The dissenting opinion authored by Justice Sotomayor warns of the dangers inherent in reading SOX’s anti-retaliation provision so expansively.  After all, “public companies often hire inde­pendent contractors, of whom there are more than 10 million,and contract workers,of whom there are more than 11 million. And they employ outside lawyers, ac­countants, and auditors as well.”  Now, any business that serves as a contractor or subcontractor of a publicly traded company may find itself slapped with a §1514A suit anytime it disciplines an employee who may have raised a concern about an erroneous invoice, an accounting error, or the like.

In the wake of this decision, employers of every size and type could be facing more and more litigation in this arena.  Now that the Court has interpreted §1514A to “impose liability upon broad swaths of the private sector,” nonpublic companies would be well advised to set up compliance systems akin to those instituted by publicly traded companies.  The attorneys at May Law, L.L.P. can work with your company’s human resources department to establish such safeguards, and can counsel managerial staff on the potential impact of these and other recent judicial rulings.