Argument Preview: What to Look For in Lawson v. FMR LLC

| Jason M. Knott

On Tuesday, November 12, the Supreme Court will hear argument in the most-watched case of this Term (at least for those of us who edit this blog).  The case, Lawson v. FMR LLC, presents the question of whether an employee of a privately-held contractor of a public company can bring a whistleblower retaliation claim against his or her employer under the Sarbanes-Oxley Act of 2002.  The plaintiffs in the case, and the parties who have appealed to the Supreme Court, are Jackie Lawson and Jonathan Zang. 

In their lawsuit, Lawson and Zang claim that their employers – a group of privately-owned Fidelity subsidiaries that serve as “investment advisers” to publicly-held Fidelity mutual funds – retaliated against them for raising concerns about fraud.  Here’s a handy chart from Fidelity’s brief that illustrates the relationship between the parties:


The First Circuit dismissed Lawson and Zang's claims, holding that Sarbanes-Oxley’s anti-retaliation provision only protects employees of public companies.  Because Lawson and Zang worked on the blue side of the chart, and not the yellow side, they couldn’t bring a claim for retaliation.  (The mutual funds on the yellow side have no employees; they do their business through their contractors on the blue side.)

What do Lawson and Zang argue?

The parties spend a lot of time parsing the language of the Sarbanes-Oxley anti-retaliation provision (18 U.S.C. § 1514A).  In their opening and reply briefs, Lawson and Zang argue that the plain text of the law shows that Congress intended to shield employees of contractors of public companies from retaliation for reporting corporate misconduct.  If Congress didn’t mean to protect those employees, they say, it wouldn’t have prohibited retaliation by “any officer, employee, contractor, subcontractor, or agent” of “such [public] company.”  Under Fidelity’s reading of this provision, the language about contractors would only come into play if a contractor retaliated against a public company employee, and because that doesn’t happen in the real world, the use of the term “contractor [or] subcontractor” would be meaningless.

The United States has filed an amicus (friend of the court) brief in support of Lawson and Zang, and it also will argue on the 12th.  The government says that Sarbanes-Oxley charges the Department of Labor with enforcing its anti-retaliation provision in the first instance, and that the Court should follow the DOL’s determination in Spinner v. David Landau & Associates LLC that the law applies to contractors like the Fidelity defendants.  It also argues that Congress clearly intended Sarbanes-Oxley to reach contractors, pointing to the role that Arthur Andersen allegedly played in the Enron debacle that motivated Congress to pass the law.

What do the Fidelity defendants argue?

In their brief, the Fidelity defendants argue that Sarbanes-Oxley plainly doesn’t shield employees of contractors from retaliation.  All parties agree that “employees,” when used earlier in the same section, means “employees of public companies,” and Fidelity says that the word should be given the same meaning later on.  Fidelity also points to the headings of the pertinent sections, which state that they address “Protection For Employees of Publicly Traded Companies” –without mentioning employees of private contractors. 

Next, Fidelity delves into the legislative history postdating the passage of Sarbanes-Oxley in 2002.  It reports that in 2004, bills were introduced that would have expressly applied § 1514A to mutual fund advisers, and in 2010, the Dodd-Frank Act amended the law to include privately-held credit rating agencies.  If Sarbanes-Oxley already covered employees of private companies, Fidelity says, these legislative actions would have been unnecessary.

Fidelity also argues that Lawson and Zang’s reading is illogical because it extends the statute to protect any employee of any private company that ever served as a contractor to a public company.  This would exponentially increase private companies’ potential liability, particularly when coupled with the broad reading that courts have given to the types of misconduct that a whistleblower can report in order to obtain protection under Sarbanes-Oxley.  (For example, in Lockheed Martin Corp. v. ARB, which we discussed in this post, the Tenth Circuit held that an employee was shielded when she reported that she believed mail fraud had occurred, even though the misconduct didn’t relate to fraud against shareholders.)

Finally, Fidelity says that the Court shouldn’t defer to the Department of Labor’s reading of the statute, because the DOL’s Administrative Review Board (which issued the Spinner decision) doesn’t have rulemaking authority, the Spinner ruling didn’t address Lawson and Zang’s case, and many Sarbanes-Oxley claims are decided in the first instance in the federal courts.

What does George Clooney have to do with all of this?

One of Lawson and Zang’s arguments for their reading of the statute is that it’s hard to think of a scenario in which a contractor of a public company would retaliate against an employee of that company.  In response to this argument, the First Circuit raised the “Up in the Air” hypothetical, positing that the public company could hire an ax-wielding contractor (like the George Clooney character in the movie) to do its dirty work.  The parties addressed this hypothetical in their briefing, and the justices surely will be tempted to toss out Clooney’s name during the argument.

Why does this case matter?

Lawson, Zang, and the United States government argue that a ruling in favor of the Fidelity defendants will create a loophole for public companies, like mutual funds, who do business through contractors.  Because the employees of the contractors won’t be protected from retaliation, they will lack the necessary incentive to disclose misconduct, and investors could be harmed as a result.  Fidelity and its amici (particularly the Chamber of Commerce) contend that Lawson and Zang’s solution to this problem doesn’t have any appreciable limit.  If Lawson and Zang prevail, they say, some employees of private companies might pursue claims for retaliation even for their reporting of conduct that didn’t constitute shareholder fraud, which can’t be what Congress meant when it passed the statute.

Fidelity also argues that an outcome in its favor will have a minimal impact from a public policy perspective, pointing to the whistleblower protections that were recently passed as part of the Dodd-Frank Act.  It says that because Dodd-Frank will shield these same people from retaliation, we shouldn’t be worried about whether Sarbanes-Oxley protects them.  On the other hand, the Fifth Circuit recently held that Dodd-Frank doesn’t shield a whistleblower who did not report misconduct externally to the SEC (Asadi v. GE Energy).  If the Fifth Circuit was right about the reach of Dodd-Frank, then Sarbanes-Oxley may still be attractive to whistleblowers, because it will shield them regardless of whether they disclosed misconduct internally or externally.  Both the government and those charged with corporate compliance could favor a legal regime that protects a whistleblower who works for a contractor of a public company and reports misconduct to his superiors, rather than going straight to the SEC with concerns.  A holding in favor of Lawson and Zang would bolster that regime.

Finally, because the Court will need to decide what kind of weight to give to the Administrative Review Board’s reading of the statute, the outcome may impact the future deference that courts give to legal interpretations by agency adjudicative bodies.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.

Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.

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