Supreme Court Extends SOX Whistleblower Protections to Employees of Contractors

The Supreme Court issued a win for whistleblowers yesterday. In Lawson v. FMR LLC, 571 U.S. ____, slip op. (March 4, 2014), the Court held that the employees of privately held contractors and subcontractors reporting on a public company are protected by the whistleblower provisions of the Sarbanes-Oxley Act. At issue was 18 U.S.C. § 1514A, which protects “an employee” from adverse changes in the terms and conditions of their employment because they engaged in protected whistleblowing. A dispute had arisen about whether employees of third parties working for the public company, such as law firms and accounting companies, were also covered. Employees who work at a contractor or subcontractor of a public company can now be confident they are within the protected class when they report on misconduct at a public company which is within the scope of their employment. Justice Ginsburg’s majority opinion, however, leaves open the possibility that they will not be protected if they report on violations which are not within the scope of their contractor’s services for the public company.

The need for the Supreme Court decision arose from a difference of opinion between the Department of Labor’s Administrative Review Board in an unrelated case and the First Circuit’s decision in Lawson. On appeal, the First Circuit had held that the plaintiffs were not covered because SOX protections extended only to adverse employment actions against employees of the public company.

The plaintiffs in Lawson reported misconduct at a mutual fund. They did not work for the mutual fund, however. They were employees of a private company engaged by the mutual fund to provide it investment services. After they raised concerns, one was fired and the other suffered a series of adverse actions amounting to constructive discharge. Following the required filing with the Department of Labor, they brought a cause of action in federal court to seek remedies under § 1514A.

The Supreme Court looked initially to the language of the statute. Where Congress intended to limit protections in SOX to employees of the public company, it said so. The Court also struggled with how a contractor could take adverse actions and remedy discrimination against the public company employees before concluding the text was not limited to them.

Justice Ginsburg’s majority opinion also examined the legislative history. Congress recognized the role of outside professionals both in perpetrating shareholder fraud and in reporting it. Because of the importance of lawyers and accountants in Enron, the majority could not conclude Congress intended to exclude these professionals from protection against retaliation. As Congress investigated Enron, one of the things it found was retaliation by contractors against their own employees for flagging misconduct at Enron.

Justice Scalia, in an opinion concurring in principal part and concurring in the judgment, agreed with the reading of the text but rejected the use of the legislative history. Interestingly, Scalia, and presumably Justice Thomas, who joined in the concurrence, would not limit the protection of contractor and subcontractor employees to whistleblowing related to the role in which they were hired by the public company. The Solicitor General offered this contention as a limiting principle in oral argument and it was cited to in the majority opinion.

McEldrew Young helps whistleblowers report fraud and misconduct to the government through the SEC, CFTC and IRS whistleblower programs as well as the False Claims Act. If you would like to speak to Eric L. Young or another attorney at McEldrew Young about whistleblower protections from retaliation, please call 1-800-590-4116 or complete our contact form.

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