Supreme Court Expands SOX Whistleblower Protection to Service Providers’ Employees

Investment Management Update

Date: March 11, 2014

On March 4, 2014, the U.S. Supreme Court ruled that the Sarbanes-Oxley Act of 2002 (SOX) prohibits service providers to mutual funds (and all public companies) from retaliating against their own employees for engaging in protected whistleblowing activities. The case, Lawson v. FMR LLC,1 overturned a lower court ruling that the relevant provisions of SOX only protected those employed by a public company itself.

The Lawson plaintiffs were former employees of privately held companies that provide advisory and management services to mutual funds. Both claimed that their former employers took adverse action against them in violation of SOX after they raised concerns about potential securities law violations related to the mutual funds they worked with. To support their claims, the plaintiffs cited SOX’s anti-retaliation provision, which states in relevant part that:

No [public] company…, or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms of employment because of [whistleblowing or other protected activity].” 15 USC § 1514A(a).

The defendant employers moved to dismiss the claims, arguing that this provision prohibits retaliation only against employees of the public company itself, not employees of the company’s officers, contractors, subcontractors or agents. While the district court rejected the defendants’ arguments, the U.S. Court of Appeals for the First Circuit agreed with the employers and held that this provision only protects public company employees. Several months later, the Administrative Review Board (ARB) of the U.S. Department of Labor issued a decision2 in a different case that disagreed with the First Circuit’s interpretation of the statute.

Mutual funds and other registered investment companies are unlike most public companies because they typically have no employees of their own. Instead, they rely on the employees of contractor service providers, such as investment advisers, accountants, lawyers, administrators, custodians and others. Thus, if the Supreme Court had upheld the First Circuit’s view, service providers’ employees would not have any protection against retaliation under the statute.

But the Supreme Court sided with the ARB when it took up the case to resolve the division of opinion. In holding for the plaintiffs, the courtconcluded that the statutory text itself and “common sense” supported the plaintiffs’ reading of § 1514A to convey that “[no] … contractor … may … discriminate against [its own] employee [for whistleblowing].” Given that understanding, embracing the First Circuit’s interpretation would, therefore, “shrink to insignificance the provision’s ban on retaliation by contractors.” Furthermore, because mutual funds typically do not have their own employees, the court in Lawson reasoned that its holding “avoids insulating the entire mutual fund industry from § 1514A” when mutual funds are “unquestionably governed” by the statute, and to hold otherwise would mean that service providers’ employees – who are often the only firsthand witnesses to shareholder fraud – would not be protected from retaliation.

That said, the decision in Lawson was not unanimous, with three of the justices dissenting. Their opinion favored the First Circuit’s interpretation, voicing concern over the “stunning reach” of the majority’s interpretation of the statute, which the dissenters opined provides a federal cause of action for retaliation to “any household employee of the millions of people who work for a public company and any employee of the hundreds and thousands of private businesses that contract to perform work for a public company.”

So what is the lesson of Lawson? Whether or not the dissent’s concerns over the majority’s interpretation ultimately prove well-founded, employers who provide services for mutual funds and other public companies should ensure that they have designed and implemented policies and procedures to minimize SOX liability exposure for retaliation against employees.


For more information, please contact:

Donald S. Mendelsohn

Craig A. Foster*

*Craig is not licensed to practice in Ohio; he is admitted only in Oregon.


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1No. 12-3 (U.S. Mar. 4, 2014).

2Spinner v. David Landau & Assoc., LLC, No. 10-11 etc. ALJ No. 2010-SOX-029 (May 31, 2012).