On March 4, 2014, the United States Supreme Court in Lawson v. FMR LLC held that SOX’s whistleblower protection extends to employees of a publicly traded company’s contractors and subcontractors.  Lawson v. FMR LLC, 572 U.S. __ (2014).    Notably, this is the first time the Supreme Court has decided a case under SOX’s whistleblower-protection provision (Section 806).

 Background

Section 806 of SOX, codified at 18 U.S.C. § 1514A, states that no public company (i.e., registers securities under Section 12 of the Securities Exchange Act of 1934, required to file reports under Section 15(d) of the Securities Exchange Act of 1934 or certain subsidiaries thereof) or “officer, employee, contractor, subcontractor, or agent…of such company” may “discriminate against an employee” for engaging in a protected activity.  18 U.S.C. § 1514A(a).   

Two former employees, Jackie Hosang Lawson and Jonathan M. Zang, brought separate suits alleging unlawful retaliation under § 806 of SOX against FMR LLC and other related private companies (“FMR”) that provide, pursuant to contract, investment advising services to the Fidelity family of mutual funds. The Fidelity mutual funds were not parties to either suit and are investment companies organized under the Investment Company Act of 1940.  The Fidelity mutual funds are not owned, controlled by or affiliated with FMR. 

The Supreme Court’s Ruling

In a 6-3 decision delivered by Justice Ginsburg, the Court held that SOX’s whistleblower protection extends to employees of a public company’s contractors and subcontractors.  Lawson v. FMR LLC, 572 U.S. __ (2014).   The majority held that expanding protection to public companies’ contractors and its employees is “consistent with the text of the statute and with common sense” because “[c]ontractors are in control of their own employees, but are not ordinarily positioned to control someone else’s workers.”   Notably, the majority chose to ignore titles and headings within Sarbanes-Oxley itself that make it plain that the statute reaches only “employees of publicly traded companies.”

The majority also that held including private contractor employees within SOX’s whistleblower provision was consistent with the statute’s purpose of preventing “another Enron debacle”.  In so doing, the majority did not give any weight to the fact that Sarbanes-Oxley separately (and explicitly) addresses the role of “contractors” such as attorneys and accountants in other substantive provisions of the statute. 

Sotomayor’s Vigorous Dissent

In a vigorous dissent, Justice Sotomayor expressed the view that “the Court’s interpretation gives § 1514A a stunning reach.”  Unlike the majority, the dissent found that § 1514A is “deeply ambiguous” and that SOX’s whistleblower provision “does not unambiguously cover the employees of private businesses that contract with public companies or the employees of individuals who work for public companies.”  Rather, “if Congress had really wanted § 1514A to impose liability upon broad swaths of the private sector, it would have said so more clearly.”

Implications

With this decision, the Supreme Court has expanded the universe of companies regulated by the SOX whistleblower provision from roughly 5,000 public companies to potentially 6 million private ones, including even the smallest “Mom and Pop” businesses.  This is quite obviously a dramatic expansion of the statute’s coverage and arguably contrary to the intended scope of the Act.  Employers of every size and type will have to prepare themselves for potential Sarbanes-Oxley whistleblower claims, merely because they are a contractor or subcontractor of a publicly traded company.  To the extent that private company employers have not previously implemented codes of conduct, whistleblower policies and the like, this decision may well suggest that it is time to consider doing so.

Proskauer will provide a more extensive analysis in a client alert to be published tomorrow.

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Photo of Lloyd B. Chinn Lloyd B. Chinn

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative…

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd’s practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media, education and technology, he focuses a substantial portion of his practice on the financial services sector. He has tried to final verdict or arbitration award substantial disputes in this area.

Due to Lloyd’s litigation experience, clients regularly turn to him for advice regarding the full range of employment matters, including terminations, whistleblower policy and procedure, reductions in force, employment agreements, and employment policies. For example, in the wake of the financial crisis, he has counseled a number of firms through reductions in force and related bonus and deferred compensation disputes. Lloyd has also been retained to conduct internal investigations of allegations of workplace misconduct, including claims leveled against senior executives.

Lloyd has represented global businesses in matters involving Sarbanes-Oxley and Dodd-Frank whistleblower claims. He has taken an active role in the American Bar Association on these issues, currently serving as Co-Chair of the Whistleblower subcommittee of the ABA Employee Rights and Responsibilities Committee. Lloyd has spoken on whistleblowing topics before a numerous organizations, including the American Bar Association, ALI-ABA, Association of the Bar of the City of New York, and New York University School of Law. He has testified twice before Congressional subcommittees regarding whistleblower legislation and has also published blog postings, articles and client alerts on a variety of topics in this area, including the Dodd-Frank Act’s whistleblower provisions. Lloyd is a co-editor of Proskauer’s Whistleblower Defense Blog, and he has been widely quoted by on whistleblower topics by a number of publications, including the New York Times, the Wall Street Journal, the National Law Journal and Law 360.

Lloyd has also become active in the International Bar Association, presenting on a variety of subjects, including: the #MeToo movement, the COVID-19 pandemic and employment law, and cross-border harmonization of employment provisions in transactions. Lloyd also hosts a quarterly roundtable discussion among financial services industry in-house employment lawyers. He has also published articles and given speeches on a variety of other employment-law topics, including non-solicitation provisions, FINRA arbitration rules, cross-border discovery, e-discovery, and the use of experts.

Photo of Steven J. Pearlman Steven J. Pearlman

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular…

Steven J. Pearlman is a partner in the Labor & Employment Law Department and Co-Head of the Whistleblowing & Retaliation Group and the Restrictive Covenants, Trade Secrets & Unfair Competition Group.

Steven’s practice covers the full spectrum of employment law, with a particular focus on defending companies against claims of employment discrimination, retaliation and harassment; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations. He has successfully tried cases in multiple jurisdictions, and defended one of the largest Illinois-only class actions in the history of the U.S. District Court for the Northern District of Illinois. He also secured one of only a few ex parte seizures orders that have been issued under the Defend Trade Secrets Act, and obtained a world-wide injunction in federal litigation against a high-level executive who jumped ship to a competitor.

Reporting to boards of directors, their audit committees, CEOs and in-house counsel, Steven conducts sensitive investigations and has testified in federal court. His investigations have involved complaints of sexual harassment involving C-suite officers; systemic violations of employment laws and company policies; and fraud, compliance failures and unethical conduct.

Steven was recognized as Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He is a Fellow of the College of Labor and Employment Lawyers.  Chambers describes Steven as an “outstanding lawyer” who is “very sharp and very responsive,” a “strong advocate,” and an “expert in his field.” Steven was 1 of 12 individuals selected by Compliance Week as a “Top Mind.” Earlier in his career, he was 1 of 5 U.S. lawyers selected by Law360 as a “Rising Star Under 40” in the area of employment law and 1 of “40 Illinois Attorneys Under Forty to Watch” selected by Law Bulletin Publishing Company. Steven is a Burton Award Winner (U.S. Library of Congress) for “Distinguished Legal Writing.”

Steven has served on Law360’s Employment Editorial Advisory Board and is a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is regularly quoted in leading publications such as The Wall Street Journal.

The U.S. Chamber of Commerce has engaged Steven to serve as lead counsel on amicus briefs to the U.S. Supreme Court and federal circuit courts of appeal. He was appointed to serve as a Special Assistant Attorney General for the State of Illinois in employment litigation matters. He has presented with the Solicitor of the DOL, the Acting Chair of the EEOC, an EEOC Commissioner, Legal Counsel to the EEOC and heads of the SEC, CFTC and OSHA whistleblower programs. He is also a member of the Sedona Conference, focusing on trade secret matters.