Supreme Court Expands Whistleblower Protections of Sarbanes-Oxley Act

Monday, March 17, 2014

In Lawson v. FMR LLC, the U.S. Supreme Court extended whistleblower protections found in the Sarbanes-Oxley Act (the "Act") to employees of privately held contractors and subcontractors of publicly traded companies.

The Sarbanes-Oxley Act was enacted in 2002 to safeguard investors in public companies after the collapse of Enron. The Act empowers government regulators to investigate and punish fraud in public companies.  Congress added whistleblower protections that prohibited "any officer, employee, contractor, subcontractor, or agent" of a publicly traded company from discharging, demoting, suspending, threatening, harassing or discriminating against an employee who has provided information or otherwise aided in an investigation of fraud.   

Jackie Hosang Lawson and Jonathan M. Zang worked for private companies that advised or managed the Fidelity family of mutual funds. The mutual funds themselves are publicly held but have no employees. Mutual Funds are often managed by private companies that contract with the funds.  Lawson contended that she was constructively discharged after she raised concerns that expenses were being overstated. Zang alleged that he was terminated after he "rais[ed] concerns about inaccuracies in a draft" registration that was filed with the Securities and Exchange Commission.

The two employees filed complaints with the Department of Labor.  The case made its way to the U.S. Court of Appeals for the Second Circuit.  The Appeals Court did not extend the whistleblower protection provisions to employees of privately held companies that are contractors or subcontractors of a publicly traded school. 

The Supreme Court reversed the Appeals Court decision.  A majority of the Court, in an opinion written by Justice Ruth Bader Ginsburg and joined by Chief Justice John Roberts and Justices Stephen Breyer and Elena Kagan (and joined in principal part by Justices Antonin Scalia and Clarence Thomas, who had a separate concurring opinion), held that the language of the Act clearly encompasses employees of private companies who perform consulting work for public employers – including outside accountants, attorneys, and others. The Court recognized that it broadened the reach by its holding, but the majority opined that Congress included the whistleblower protections in Sarbanes-Oxley in order to head off another Enron debacle, which was facilitated by Enron's outside contractors as well as Enron's own officers. Justice Ginsburg placed substantial weight on the legislative history of the Act, which indicated Congress's recognition that outside professionals play a critical "gatekeeping" role in detecting and reporting fraud involving the public companies with which they contract.

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