SARBANES-OXLEY WHISTLEBLOWER COVERAGE NO LONGER "UP IN THE AIR"
U.S. Supreme Court broadly interprets statute to cover employees of a public company’s private contractors and subcontractors
The whistleblower protections of the Sarbanes-Oxley Act of 2002 (“SOX”) cover the employees of privately-held contractors and subcontractors of public companies, according to the U.S. Supreme Court. In Lawson v. FMR LLC (No. 12-3, March 4, 2014), the Court held that the law protects the employees of private contractors and subcontractors, just as it protects the employees of a public company served by those private contractors and subcontractors. This extends SOX protections to investments advisers, law firms, and accounting enterprises – and perhaps even housekeepers and gardeners – who perform work for public companies or their officers and employees.
Jackie Lawson was formerly employed as the Senior Director of Finance for a privately-held company that contracted with mutual funds to provide advice and management. She claimed that her employer took various adverse employment actions, and constructively discharged her, after she allegedly raised concerns about certain cost accounting methodologies she believed overstated expenses associated with operating the mutual funds. Under SOX, a covered employer may not retaliate against an employee for reporting a covered form of fraud in the manner identified in the statute, but a divided First Circuit Court of Appeals dismissed Lawson’s SOX claim, holding that the law protected only employees of public companies.
The Supreme Court, however, reversed and held that SOX’s whistleblower protections also extend to employees of privately-held contractors who perform work for public companies. In so holding, the Supreme Court rejected the employer’s argument that would have limited liability for contractors to those “retaliatory ax-wielding specialists” of the kind that George Clooney portrayed in the movie “Up in the Air.”
Three dissenting Justices argued that the majority’s decision gave SOX “a stunning reach.” The dissenters argued that it would open the door to a cause of action against a small business that contracts to clean a local Starbucks (a public company) if an employee is demoted after reporting that another nonpublic company client had mailed the cleaning company a fraudulent invoice.
The dissenters also argued the majority’s interpretation of the law encompasses the housekeepers and gardeners of public company officers and employees. The majority did not deny this interpretation, but dismissed the argument as “more theoretical than real,” and stated that it suspected such household employees were unlikely to come upon and comprehend evidence of their employer’s complicity in covered fraud. In any event, the majority held that the possibility of such actions did not justify limiting the scope of SOX so as to exclude the attorneys, accountants, and other professionals equipped to bring fraud on investors to a halt.
Whether the law will extend to housekeepers might be the subject of debate, but this decision leaves no doubt that privately-held companies need to take steps to develop policies and programs – or revise existing policies and programs – to identify and address concerns of whistleblowers and to prohibit retaliation for protected conduct.