Supreme Court Allows Employees of Private Contractors to Bring Sarbanes-Oxley Whistleblower Retaliation Claims

| Jason M. Knott

On Tuesday, the Supreme Court issued an opinion that may have sweeping implications for whistleblowers and employers.  In Lawson v. FMR LLC, the Court decided that the anti-retaliation provision of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1514A) allows an employee to bring a claim even if that employee works for a private contractor or subcontractor of a public company.  The Court’s decision could lead to a wide range of Sarbanes-Oxley lawsuits by outside counsel, private accountants, cleaning services, and others.

Lawson was a split decision.  Justice Ginsburg, joined by Chief Justice Roberts, Justice Breyer, and Justice Kagan, and by Justices Scalia and Thomas “in principal part,” wrote for the majority.  Justice Scalia wrote a separate concurrence, joined by Justice Thomas.  And in an unusual grouping, Justice Sotomayor authored the dissent, joined by Chief Justice Roberts and Justice Alito.  Today, we'll tackle Justice Ginsburg's opinion; tomorrow, we'll take a look at what Justices Scalia and Sotomayor had to say.

But first, a little background.

In Lawson, as we've previously covered here, here, and here, two employees of Fidelity investment advisers sued their employers for retaliation, claiming that they were punished for reporting mismanagement of Fidelity mutual funds.  Fidelity mutual funds, which are publicly traded and clearly subject to Sarbanes-Oxley, have no employees.  Rather, the employees of the private investment advisers handle their affairs.  So if employees of those private companies aren’t subject to whistleblower protections for reporting misconduct by the funds, no one is.

Justice Ginsburg was not comfortable with this possibility.  She wrote that Congress passed Sarbanes-Oxley in part because of concerns about conduct by private contractors for Enron and other companies.  Thus, she “regard[ed] with suspicion” the argument that the whistleblower protection would not cover those contractors. 

Further, both parties agreed that § 1514A prohibited at least some retaliation by private contractors.  The Fidelity companies argued that a contractor could be liable to a public company’s employee in a situation known as the “Up in the Air” hypothetical – i.e., if he was an “ax-wielding specialist” who fired the employee based on whistleblowing conduct.  But Justice Ginsburg concluded that allowing only these kinds of claims and excluding all claims by employees of private contractors against their own employers would “shrink to insignificance the provision’s ban on retaliation by contractors.” 

Next, Justice Ginsburg turned to the “parade of horribles” identified by the Fidelity companies.  Although Fidelity was able to identify some unusual applications of the statute to particular situations – such as the possibility that a personal gardener for a public company employee might happen upon information about fraud, blow the whistle, and then claim that he was subject to Sarbanes-Oxley – “[n]othing suggest[ed] Congress’ attention was drawn to the curiosity its drafting produced,” and the “issue . . . is likely more theoretical than real.” 

Justice Ginsburg also addressed the Tenth Circuit’s decision in Lockheed v. Administrative Review Board, which we wrote about here.  She acknowledged that the Lockheed court permitted whistleblower retaliation claims that did not involve “shareholder fraud,” but rather involved more run-of-the-mill mail fraud and bank fraud.  Fidelity argued, based on Lockheed, that if the Court accepted Lawson’s position, private employees would flood OSHA with Sarbanes-Oxley retaliation claims based on their reporting of mail or bank fraud by their own employers, even if that conduct had no impact on shareholders.  “But,” Justice Ginsburg wrote, “it would thwart Congress’ dominant aim if contractors were taken off the hook for retaliating against their whistleblowing employees, just to avoid the unlikely prospect that babysitters, nannies, gardeners, and the like will flood OSHA with § 1514A complaints.”  She declined to decide whether such a nanny could bring a Sarbanes-Oxley claim based on her employer’s mail fraud, stating that the Lawson plaintiffs were seeking only a “mainstream application” of § 1514A because they alleged that they reported fraud against shareholders.

Justice Ginsburg also punted on the issue of whether she needed to give any deference to the Department of Labor’s interpretation of the statute, because she agreed with its interpretation.

Tomorrow, we'll review Justice Scalia and Sotomayor's take on these issues.  One might expect, given their ideological bent, that Justice Scalia would argue for a narrower reading of the statute and Justice Sotomayor would read it more favorably for employees.  But as you'll see, it actually turned out quite differently.

One last point, if you've made it this far.  This decision only allows Lawson to seek to prove her claims rather than having them dismissed at the outset of her case.  So while she may have won this battle, she has yet to win the war.

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.