Supreme Court Takes Broad View of Sarbanes-Oxley Whistleblower Coverage
On March 4, 2014, the U.S. Supreme Court held that the section of the Sarbanes-Oxley Act of 2002 (SOX) providing protections for whistleblowers applies not only to employees of public companies, but also to employees of contractors that provide services to public companies. The ruling opens SOX whistleblower protections to millions of employees of privately held employers in the U.S.
The case involved employees of privately held companies that provide advisory and management services to the Fidelity family of mutual funds. As is often the case in the mutual fund industry, the publicly-traded funds themselves have no employees, and instead contract with investment advisors like FMR LLC and its affiliates to provide necessary services to advise and run the funds.
The plaintiffs-petitioners in FMR were employees of these contractors who alleged that they were fired due to concerns they raised about accounting practices used at the funds and inaccuracies in a draft SEC registration statement for certain funds. The privately-owned employers challenged the applicability of Sarbanes-Oxley whistleblower protections to persons not employed by the public company itself.
The Court examined the relevant language of the statute stating that "no … contractor … may discharge … an employee" who engages in protected whistleblowing activity, and found that the phrase "an employee" in this passage must refer to a contractor's own employee, because (among other reasons) contractors ordinarily have no control over the employees of their clients or customers. The Court also noted that the remedies available to successful claimants under the whistleblower provision include reinstatement and back pay, remedies that a contractor would find difficult or impossible to provide to anyone other than its own employees.
Three dissenting Justices expressed concern that the majority's decision would "open the floodgates" to whistleblower claims by, for example, household employees of the millions of persons who work for (and therefore contract with) public companies. The dissent noted that, because the SOX whistleblower provision covers retaliation for reports of mail, wire and bank fraud, in addition to securities fraud, the majority's ruling would extend protection even to a babysitter terminated by a parent who happens to work at Walmart (a public company), if the babysitter had expressed concern prior to termination that the parent's teenage son participated in an internet purchase fraud. The majority did not dispute that such a situation would be covered by SOX under its holding, but found the dissent's floodgate-opening concerns "likely more theoretical than real. Few housekeepers or gardeners, we suspect, are likely to come upon and comprehend evidence of their employer's complicity in fraud."
The Court's ruling means that even privately held companies – if they have contracts with public companies - must be sensitive to the potential for retaliation claims by employees who raise concerns about securities law violations, wire fraud, mail fraud or bank fraud. Such companies may also need to become familiar with – or have counsel who is familiar with – the regulations governing public companies, so that they can identify potentially protected complaints from employees. Private companies should consider reviewing their disciplinary policies to be sure they have effective procedures in place to respond appropriately to whistleblower complaints.
This article was featured in the April issue of Stinson Leonard Street's Business Torts Update, which focuses on recent developments affecting litigation of securities law, whistleblower, trade secret and non-compete claims.