SOX Protection Expanded to Contractor’s Employees Who “Blow the Whistle” on Contractor’s Publicly Held Clients

Labor & Employment @lert

Date: March 06, 2014

On March 4, 2014, the Supreme Court of the United States decided its first Sarbanes-Oxley Act (SOX) whistleblower case, Lawson, et al. v. FMR LLC, et al., holding that SOX-whistleblower protection extends to employees of the private contractors and subcontractors of public companies. This 6-3 decision confirms the expansive reach of SOX whistleblower provisions, emphasizing the remedial nature of the statute and the harm it was originally designed to prevent.

The Lawson plaintiffs were formerly employed by private companies that contracted to advise and/or manage mutual funds. The mutual funds themselves are public companies, but they have no employees. The plaintiffs claimed that their private employer retaliated against them for “blowing the whistle” on alleged fraud against the public mutual fund’s investors. After exhausting the administrative process through the Department of Labor, the plaintiffs filed a SOX-whistleblower action in federal court. The employer moved for dismissal, arguing that SOX only protects employees of public companies – not employees of private companies that service public companies. The trial court denied the employer’s motion to dismiss, but on an interlocutory appeal, the United States Court of Appeals for the First Circuit reversed.

The Supreme Court held that SOX protects employees of contractors and subcontractors serving those public companies. The Court recounted the Enron scandal, emphasizing that it “had succeeded in perpetuating its massive shareholder fraud in large part due to a ‘corporate code of silence,’” which “discourage[d] employees from reporting fraudulent behavior not only to the proper authorities ... but even internally.” The Court further recognized that SOX, in response to Enron, “contains numerous provisions aimed at controlling the conduct of accountants, auditors, and lawyers who work with public companies,” and oftentimes, “if the whistle is to be blown on fraud detrimental to mutual fund investors, the whistleblowing employee must be on another company’s payroll, most likely, the payroll of the mutual fund’s investment adviser or manager.”

The Court rested its decision on the plain language of SOX, which provides that “no ... contractor ... may discharge ... an employee.” Although the defendant-employer argued that this prohibition applied only to “an employee” of a public company, the Court could envision few (if any) situations where a contractor would have ultimate control over the fate of another company’s employee, especially in the case of publicly held mutual funds that have no employees. To “avoi[d] insulating the entire mutual fund industry from [SOX protection],” the Lawson majority recognized that SOX presumes “an employer-employee relationship between the retaliator and the whistleblower.” The Court explained that if Congress was unhappy with the wide net cast by the Lawson decision, Congress could take legislative action to amend the statutory language.

The Lawson ruling teaches a clear lesson about the breadth of SOX whistleblower protection. Going forward, it will be important to identify any contractual relationships with public companies that may bring private employers under SOX contractor provisions. If so, private employers should ensure their anti-retaliation policies address SOX-protected activity, either by expressly prohibiting retaliation for raising good faith concerns about SOX-protected activity at public companies serviced by the employer, or by more generally prohibiting retaliation for engaging in any conduct protected by federal, state, or local law. Anti-retaliation policies should provide multiple avenues or sources for reporting employee complaints, as well as any perceived retaliation, and managerial staff should be trained to understand and comply with these policies and procedures. The best policies are written taking into account the existing practices and structure of the company, as opposed to a one-size-fits-all approach.

FOR MORE INFORMATION

For more information, please contact:

Jennifer R. Asbrock
937.443.6849
Jennifer.Asbrock@ThompsonHine.com

Tim McDonald
404.407.3623
Tim.McDonald@ThompsonHine.com

Stephen Richey
513.352.6768
Stephen.Richey@ThompsonHine.com

or any member of our Labor & Employment group.

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