U.S. Supreme Court Expands Whistleblower Protection under Sarbanes-Oxley

On Tuesday, March 4, 2014, the U.S. Supreme Court expanded the class of employees entitled to whistleblower protection under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or “the Act”). In its 6-3 decision in Lawson v. FMR LLC, the Court held that the employees of private companies that contract with publicly held companies are entitled to whistleblower protection for reporting the fraudulent activities of the publicly traded company. According to the Court’s interpretation of § 1514A of Sarbanes-Oxley, the Act prohibits private employers that contract with publicly held companies from taking adverse employment actions against its employees who report the fraudulent activities of the publicly held companies. For example, an employee of a private accounting firm who reports the fraudulent tax practices of a publicly held client is now protected from adverse employment actions taken by the accounting firm for reporting the fraudulent tax practices of the public company.

The Court addressed whether § 1514A of Sarbanes-Oxley shields only employees of a publicly traded company or whether it also protects employees of private companies that contract with publicly held companies. In Lawson, FMR, an investment advising firm, contracted with a publicly traded mutual fund to provide investment advice. Two FMR employees separately brought suit against FMR alleging that FMR retaliated against them when they raised concerns about investor fraud. The two FMR employees sought whistleblower status and protection under § 1514A of Sarbanes-Oxley.

Section 1514A of Sarbanes-Oxley states in relevant part:
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 [whistleblowing or other protected activity].

The Petitioners filed complaints with the Department of Labor’s (“DOL”) Occupational Safety and Health Administration (“OSHA”), which has regulatory and enforcement authority over the whistleblower provisions of Sarbanes-Oxley. The DOL’s Administrative Review Board (“ABR”) failed to issue a decision within 180 days of the date the claims were filed. The Petitioners filed suit in the U.S. District Court for the District of Massachusetts seeking relief under § 1514A of Sarbanes-Oxley.

FMR filed a motion to dismiss the claim arguing that § 1514A of Sarbanes-Oxley does not protect employees of private companies that contract with publicly held companies. The District Court denied FMR’s motion to dismiss holding that under § 1514A employees of private companies that contract with publicly held companies are entitled to whistleblower protection.

FMR appealed the District Court’s decision. The Court of Appeals for the First Circuit reversed the District Court’s decision and held that § 1514A of Sarbanes-Oxley should be interpreted narrowly to protect only employees of the publicly traded company. Petitioners appealed the First Circuit’s decision to the U.S. Supreme Court.

In an unrelated case, the ARB of OSHA interpreted § 1514A broadly to protect employees of private companies that contract with public companies in accordance with the view of the District Court for the District of Massachusetts. The ARB’s decision created a split between the First Circuit and the DOL’s interpretation of § 1514A of Sarbanes-Oxley.

The Supreme Court granted certiorari to resolve the split between the First Circuit and the ARB. To determine the appropriate interpretation of § 1514A, the Court focused its opinion on the Congress’s motivation for enacting Sarbanes-Oxley and the plain meaning of § 1514A.

Justice Ginsberg, writing for the Court, first addressed the historical motivation for Congress’s enactment of Sarbanes-Oxley. In the wake of the Enron Scandal, Congress enacted Sarbanes-Oxley to encourage people with knowledge of fraud to report information to their employers or to government agencies. Congress specifically cited employees of the accounting firm Arthur Anderson, a private accounting firm that contracted with Enron to provide consulting and auditing services. Arthur Anderson employees had turned a blind eye to the financial irregularities at Enron. The Court observed that one of Congress’s motivations for enacting Sarbanes-Oxley was to encourage employees, such as those working for Arthur Anderson, to report fraudulent activities.

The Court next addressed the statutory construction of § 1514A. The majority applied a plain meaning interpretation to the text of § 1514A. The majority determined that under the ordinary meaning interpretation of the statute, the provision reads, “no . . . contractor . . . may discharge . . . an employee.” Based on this interpretation, § 1514A clearly refers to the private company taking adverse employment actions against one of its employees who reports fraudulent activities.

The Court also noted that the language of § 1514A was taken directly from the whistleblower provision of the 2000 Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (“AIR 21”). AIR 21 has been interpreted broadly to protect employees of companies that contract with air carriers. The broad interpretation of AIR 21’s whistleblower provision provides further support for interpreting § 1514A to protect the employees of private companies.
The practical effect of the Court’s decision will have significant ramifications for employees of law firms, accounting firms, financial firms, banks, consulting firms and other firms providing legal, tax, financial and operational advice to public companies. Firms such as Arthur Anderson faced a potentially difficult financial decision: report the financial irregularities of Enron to the government and risk losing a significant client or remain silent to maintain business and revenue. Employees of a firm like Arthur Anderson faced the difficult decision of reporting irregularity and losing their jobs due Arthur Anderson’s fear of losing a significant client or remain silent and allow massive investor fraud. Now, employees in the position of Arthur Anderson accountants can be reassured that they have legal protection as whistleblowers under Sarbanes-Oxley.

If you are an employee of a private company and have been discharged, demoted, suspended, threatened, harassed or discriminated against because you reported the irregularities of a publicly traded company, contact Borrelli & Associates, P.L.L.C.