Supreme Court: SOX Whistleblower Protections Cover Employees of Subcontractors and Contractors of Public Companies

Today, the Supreme Court issued a 6-3 decision holding that the whistleblower protection provisions of the Sarbanes-Oxley Act extend to the employees of subcontractors and contractors of public companies (i.e., companies whose stock is publicly traded).   Lawson v. FMR LLC, No. 12-3 (U.S. 3-4-14).  In that case, the public company – a mutual fund – had no employees, but contracted with the defendant investment advisor to manage and advise the fund.  Former employees of the investment advisor alleged that they had been retaliated against in violation of the SOX Act at 18 U. S. C. §1514A(a).  The defendant argued that SOX only prohibited retaliation against the employees of a public company by a contractor – such as George Clooney’s character in Up in the Air -- and did not apply to the employees of a contractor or subcontractor.  The Supreme Court disagreed.    First, a common sense and ordinary reading of the statutory language indicates that Congress meant to prevent contractors from retaliating against their own employees.  Contractors are rarely in a position to retaliate against the employees of a customer and it would not make sense to prevent contractors from retaliating against a customer’s employees while permitting them to retaliate against their own.  In addition, this construction is consistent with the Act’s purpose to protect whistleblowers.  Moreover, adopting the defendant’s interpretation would insulate virtually all mutual funds from the whistleblower protection provisions since few – if any – of them have employees of their own.

The relevant statutory language provides:

 

“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].” §1514A(a) (2006 ed.).

The defendant argued that the statutory language including coverage to contractors and subcontractors was meant only to apply to professional ax-wielders like George Clooney’s character in Up in the Air.  However, the Court’s majority saw no indication that this issue is what motivated Congress to include coverage for contractors and subcontractors.  Rather, it saw the concern as the retaliation against former accountants at Arthur Anderson, Enron’s former accounting firm.  Moreover, other language in SOX refers to the respondent as the “employer,” which would be the protected employee’s employer.  In addition, the remedies provided by SOX include reinstatement, which would be impossible for a contractor or subcontractor to effectuate if the statute only covered employees of the public company customer.

The defendant further argued that the statutory language was not meant to cover employees of non-public companies because otherwise it would apply to employees of company officers and employees, such as gardeners and nannies.  While the Court agreed this was a logical argument, it nonetheless dismissed it:

Nothing suggests Congress’ attention was drawn to the curiosity its drafting produced. The issue, however, is likely more theoretical than real. Few house­keepers or gardeners, we suspect, are likely to come upon and comprehend evidence of their employer’s complicity in fraud.

The defendants also argued that the statute’s subheadings indicated that it was only meant to protect the employees of public companies.

This Court has placed less weight on captions. In Trainmen v. Baltimore & Ohio R. Co., 331 U. S. 519 (1947), we explained that where, as here, “the [statutory] text is complicated and prolific, headings and titles can do no more than indicate the provisions in a most general manner.” Id., at 528. The under-inclusiveness of the two headings relied on by the Court of Appeals is apparent. The provision indisputably extends protection to employ­ees of companies that file reports with the SEC pursuant to §15(d) of the 1934 Act, even when such companies are not “publicly traded.” And the activity protected under§1514A is not limited to “provid[ing] evidence of fraud”; it also includes reporting violations of SEC rules or regula­tions. §1514A(a)(1). As in Trainmen, the headings here are “but a short-hand reference to the general subject matter” of the provision, “not meant to take the place of the detailed provisions of the text.” 331 U. S., at 528. Section 1514A is attended by numerous indicators that the statute’s prohibitions govern the relationship between a contractor and its own employees; we do not read the headings to “undo or limit” those signals.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.