March 7, 2014

Supreme Court Broadens Sarbanes-Oxley Whistleblower Protections, Extends Coverage to Employees of a Public Company’s Private Contractors

By Mary P. Hansen and Nicholas S. Feltham

In its March 4, 2014, opinion in Lawson v. FMR LLC [1] the Supreme Court extended the whistleblower protections of 18 U.S.C. § 1514A to include not only employees of public companies, but also employees of privately held businesses that provide services to public companies.  This important decision resolved conflicting interpretations of § 1514A adopted by the United States Court of Appeals for the First Circuit and the U.S. Department of Labor’s Administrative Review Board. [2]

At the time the underlying cases were filed, the relevant portion of § 1514A read as follows:

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]. [3]

The First Circuit held that the protected “employee” only included employees of the public company and did not apply to employees of private contractors. [4]  Under the interpretation adopted by the Supreme Court, whistleblowers providing information about a public company are protected from retaliation by their employer, whether their employer is the public company or a private contractor working for the public company.  This decision has obvious significant import for private companies such as investment advisers, law firms, and accounting firms who frequently work for public companies.  The decision, however, it not limited to those types of private companies.

The Supreme Court provided numerous rationales for its more expansive interpretation of the protections afforded by the statute.  First, the majority opinion cited the lack of language in the statute limiting the term “an employee” to employees of a public company, highlighting that Congress has included such limiting language in other statutes where it has seen fit. [5]  Second, the Supreme Court noted that “[c]ontractors are not ordinarily positioned to take adverse actions against employees of the public company with whom they contract,” [6] so the provision would have little meaning if it only protected public company employees from retaliation by private contractors and did not also protect employees of the private contractors themselves.  Third, the Court found that several provisions implied that Congress had intended for there to be an employer-employee relationship between the retaliator and the protected whistleblower. [7]  For example, the Court focused on the remedies that a successful claimant would be entitled to, including “reinstatement with the same seniority status” and “back pay with interest,” and reasoned that all of the remedies stem from an employer-employee relationship. [8]  Fourth, the Court placed substantial weight on the fact that the statutory section on which § 1514A was based, the anti-retaliation provision of the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, has been understood to protect private contractors of public companies. [9]

After dismissing several concerns raised by Respondents, the Court emphasized that its more expansive view of the whistleblower protections best fit with Congress’s purpose in enacting the Sarbanes-Oxley reforms – preventing another “Enron debacle.”  The Court noted that “outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron’s contractors.” [10]  The majority believed that denying whistleblower protection to such employees of private contractors would run counter to Congressional intent and “leave these professionals vulnerable to discharge or retaliatory action for complying with the law.” [11]  The majority opinion suggests the Court’s decision was highly influenced by the factual setting of the underlying controversy, i.e., the “whistleblowers” were two former employees of an investment adviser to mutual funds.  For example, the majority specifically noted that its expansive interpretation “avoids insulating the entire mutual fund industry from § 1514A,” since most mutual funds are structured to have no employees themselves and instead rely on independent advisers to manage the funds. [12]  The Court concluded that failing to extend this protection to employees of private contractors would effectively leave employees of independent mutual fund advisers “remediless” if they became whistleblowers. [13]

The dissent argues that the majority’s interpretation gives § 1514A a “stunning reach” that will allow “a babysitter to bring a federal case against his employer – a parent who happens to work at the local Walmart (a public company) - if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud.  And it opens the door to a cause of action against a small business that contracts to clean the local Starbucks (a public company) if an employee is demoted after reporting that another nonpublic company client has mailed the cleaning company a fraudulent invoice.” [14]  The majority, however, appears uninterested in the collateral consequences of its singular focus on the mutual fund industry and summarily rejects the dissent’s concern and suggests that Congress can “fix the problem by amending § 1514A explicitly to remove personal employees of public company officers and employees from the provision’s reach.” [15]

Only time will tell whether the expansion of § 1514A will have a meaningful impact, though we suspect that the Court’s ruling coupled with the Securities and Exchange Commission’s Whistleblower bounty program will only reinforce the recent trend towards a higher volume of whistleblower reports and claims of retaliation.   

Drinker Biddle & Reath LLP filed an amicus curiae brief in the above referenced case on behalf of the National Federation of Independent Business.  That brief advocated that the whistleblower protections of § 1514A did not extend to employees of private contractors and subcontractors of public companies.

[1]  Lawson v. FMR LLC, 571 U.S. ___, No. 12-3 (Mar. 4, 2014) (slip opinion).

[2]  Id. at 8-9.

[3]  18 U.S.C. § 1514A(a) (2006 ed.)

[4]  Lawson, slip op. at 8.

[5]  Id. at 9-10.

[6]  Lawson, slip op. at 10.

[7]  Id. at 11-14.

[8]  Id. at 12-13.

[9]  Id. at 27-29.

[10] Id. at 17.

[11] Id. at 20.

[12] Id.

[13] Id. at 21-22.

[14] Id. at 2 (Sotomayor, J., dissenting). 

[15] Id. at 23 (majority opinion). 

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