Argument Recap: Five Takeaways from Lawson v. FMR LLC

| Jason M. Knott

On Tuesday, the Supreme Court heard oral argument in Lawson v. FMR LLCAs we explained in this post, Lawson presents the question of whether Sarbanes-Oxley’s whistleblower anti-retaliation provision (Section 806 of Sarbanes-Oxley, codified at 18 U.S.C. § 1514A) shields employees of privately-held contractors of public companies such as the plaintiffs, who are employees of investment advisers for Fidelity mutual funds.  We editors of Suits by Suits don’t often get the chance to report live on the cases we cover, but an argument at One First Street was too tempting to pass up, even on a blustery Washington day.  Here are five major takeaways that we drew from the argument (with the caveat that reading the tea leaves from an oral argument is always a difficult proposition):

1.      The Court is uncomfortable with the scope of potential Sarbanes-Oxley claims that would result from the Fidelity employees’ interpretation of the statute.

A number of Justices pressed Eric Schnapper, who argued for the Fidelity employees, and Nicole Saharsky, arguing for the United States in support of the employees, as to how the Court could limit the reach of the statute if it holds that Sarbanes-Oxley allows employees of private companies to bring whistleblower retaliation claims.  Justice Breyer posed a hypothetical involving an employee of a privately-held gardening company who reports on mail fraud by his employer, is fired, and then brings a whistleblower anti-retaliation claim, arguing that he is covered by Sarbanes-Oxley because his company has gardening contracts with public companies.  Schnapper argued that the statute as written would cover the gardener, but the Justices were less convinced that Congress intended this kind of reach for Sarbanes-Oxley.  Justice Breyer even commented that the fear of expanding the statute to cover “any fraud by any gardener, any cook, anybody that had one employee in the entire United States” was the “strongest argument” against the Fidelity employees’ position.

Mark Perry, arguing for the Fidelity defendants, identified the Tenth Circuit’s decision in Lockheed v. ARB (which we covered here) as the elephant in the room.  Under Lockheed, an employee is shielded from retaliation even if the employee reports on fraud that does not impact shareholders.  Perry argued that when paired with the Fidelity employees’ broad reading of Sarbanes-Oxley, Lockheed implies that “every fraud of any sort by any company that has a contract” with a public company would be subject to Sarbanes-Oxley’s anti-retaliation protection, opening the floodgates for numerous lawsuits against private employers.

Justice Breyer inquired as to who had written the term “contractor” in the statute, and Justice Scalia adopted a jokingly aggressive tone, shouting, “Who was it, counsel?!”  Perry said that the word “contractor” “appears nowhere in the legislative history,” but was taken from the Wendell H. Ford Aviation Investment and Reform Act for the 21 Century (the AIR-21 Act), which involves retaliation against employees of air carriers for reporting violations.  Schnapper, in rebuttal, pointed out that the Department of Labor has consistently interpreted AIR-21’s whistleblower protection as shielding employees of contractors of air carriers who report misconduct. 

Sarbanes-Oxley and AIR-21 are not identical, however, because Sarbanes-Oxley lists not only contractors among those who may not retaliate but also “employees, officers, and agents,” a category that AIR-21 does not include.  Schnapper took the position that this expansion of the potentially liable parties under Sarbanes-Oxley was not meant to shield the employees of those parties.   Justice Scalia found Schnapper’s position “peculiar,” saying, “I don’t see how you can piece it out like that, that it includes employees of contractors, subcontractors, but not . . . of any officer.”  However, he also asked whether covering employees of officers would be “as much of a disaster . . . as your opponent suggests.  That is to say, would . . . a firing for something that had nothing to do with the securities laws be swept in?”  Schnapper didn’t quite take the bait, arguing that in fact it would, because the statute deals “much more broadly with criminal fraud.”

2.      The Fidelity employees and the government don’t agree on the reach of the statute, and the Court is more likely to side with the government.

Saharsky politely attempted to walk away from Schnapper’s position, suggesting that the Court didn’t need to address the case of the gardener to hold for the Fidelity employees.  But Justice Scalia disagreed, saying, “I at least do have to grapple with . . . whether there are limitations.”  Justice Kagan tossed Saharsky a lifeline, commenting that “inherent in the . . . phrase ‘contractor of such company’ is a sort of status,” and “one should not read this statute as applying outside that particular status.”  In other words, one way the Court could find for the Fidelity employees would be to hold that when an employee of a privately-held company blows the whistle about misconduct that relates to the company’s status as a contractor for a public company, then that employee may bring an anti-retaliation claim under Sarbanes-Oxley.  Saharsky agreed with this view, which was not as broad as that advanced by Schnapper.  Based on the Justices’ comments at the argument, if the Court holds for the Fidelity employees, it is more likely to choose the government’s more narrow view of the statute than Schnapper’s expansive reading.

3.      At least one Justice indicated concern with Fidelity’s view that the only contractor who could be liable for retaliation would be the “ax-wielding specialist.”

Surprisingly, despite the opportunity, no one mentioned George Clooney, or even referenced his character from Up in the Air.  However, the “axe-wielding specialist” played by Clooney did make an appearance in Justice Alito’s questioning.  “[W]hat gives me pause about your interpretation,” he said to Perry, is that “[i]t gives the reference to the . . .  contractors and the subcontractors such a narrow meaning. And except for this concept of the axe-wielding specialist, those provisions mean nothing under that.”  Perry responded that contractor liability “is a conceivable scenario in many more things because . . . it’s not limited to discharge.  It’s also threats and harassment.”  Perry also identified the positives of having another potentially liable defendant in a case where the public company goes bankrupt or doesn’t have enough insurance. 

4.      Fidelity relied less on the language of the specific anti-retaliation provision and more on other provisions of Sarbanes-Oxley and other Congressional actions.

Perry spent less time on the language of Section 806 than expected, focusing instead on other provisions in Sarbanes-Oxley, including the provisions establishing investigative oversight of accountants (Section 105), requiring the SEC to establish standards of professional conduct for attorneys (Section 307), and creating safeguards for securities analysts (Section 501).  He argued that these provisions, read in conjunction with Section 806 as the section for public companies, show that Congress addressed its concerns arising out of the Enron debacle in an “industry-specific fashion.”  He claimed that if a member of Congress had suggested that employees of “6 million private employers” should be shielded from whistleblower retaliation, the proposal “would have been met with debate, derision, and defeat.”

Perry also argued that Congress’s later actions in attempting to pass language that expressly shields employees of investment advisers from retaliation and in eventually passing the broader Dodd-Frank Act showed that Sarbanes-Oxley cannot be read to protect individuals like the Fidelity employees.  Justice Scalia drew guffaws from Justice Breyer when he noted that “we usually don’t pay attention” to this kind of “post-legislative history.”

5.      The Court doesn’t seem impressed with the argument that it should defer to the Administrative Review Board’s holding that employees of privately-held contractors are protected.

The Fidelity employees argue that the Court should defer to the Administrative Review Board’s decision in Spinner that employees like them are covered by Sarbanes-Oxley, and there was a significant amount of back-and-forth about the topic.  Saharsky took the position that the Court should grant deference to the ARB's decision because Congress entrusted the Secretary of Labor with the authority to interpret the statute through formal adjudication, and the Secretary of Labor delegated that authority to the ARB.  (This doctrine of court deference to agency decisions is known as Chevron deference -- for an explanation, see the Third Circuit's recent SOX decision in Wiest v. Lynch.)  Chief Justice Roberts, however, pointed out that the ARB said in Spinner that it was following OSHA’s interpretation as set forth in its regulations, and OSHA had also commented in those same regulations that it had no authority to issue statutory interpretations. 

Saharsky also claimed that the SEC could not have issued a rulemaking interpreting Section 806: “[T]he anti-retaliation provision in SOX, like about 20 other anti-retaliation provisions, is entirely handled by the Department of Labor and it’s entirely handled through formal adjudication.”  But Justice Breyer later pointed Perry to Section 3(a) of Sarbanes-Oxley, which allows the SEC to “promulgate such rules and regulations as may be necessary and appropriate in the public interest or for the protection of investors and in furtherance of this Act,” and asked whether that section would have permitted the SEC to issue rules interpreting Section 806.  Perry said to be “blunt, before the government’s concession 20 minutes ago, I would have thought the same thing,” and also noted that the SEC had not issued such a rule.

On balance, the Court’s questioning suggested that it is not inclined to defer to the Administrative Review Board’s decision in Spinner, regardless of how it decides the merits. 

[If you are interested in Sarbanes-Oxley and other whistleblower topics, join us December 10 for our webinar, Whistleblower Watch: Big Issues in the Latest Whistleblower Cases Under Dodd-Frank, Sarbanes-Oxley, and the Internal Revenue Code.]


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.