What Should Private Employers Do Given the Supreme Court's Expansive Interpretation of Sarbanes-Oxley's Whistleblower Provision?

Volume 13, Issue 5
April 29, 2014

Last month, in Lawson v. FMR LLC, the United States Supreme Court found that the whistleblower protection under the Sarbanes-Oxley Act of 2002 (SOX), a post-Enron statute designed to prevent and punish corporate and criminal fraud, covers employees of a public company's private contractors and subcontractors. At issue was the provision of SOX that provides: "No [public] company . . . or any . . . contractor [or] subcontractor . . . of such company, may discharge, demote, suspend, threaten, harass, or . . . discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity]." Section 806 of SOX, codified at 18 U.S.C. § 1514A(a).

The petitioners were two former employees of private companies that advise and manage mutual funds. The mutual funds themselves were public companies with no employees. The two employees claim they were constructively discharged or fired in retaliation for raising concerns about supposed fraudulent activities related to the mutual funds. Their former employers tried to dismiss the claims by arguing that SOX's whistleblower provision only covers employees of public companies, and not employees of private companies. However, the Supreme Court disagreed, holding that the ordinary meaning of the provision's language suggests the existence of an employer-employee relationship between the retaliator and whistleblower, which necessarily extends to the employees of private contractors and subcontractors providing services to public companies. Additionally, while the Court noted that its interpretation of SOX's whistleblower provision was necessary to avoid insulating the entire mutual fund industry, as virtually all mutual funds have no employees of their own and are managed by independent advisers, the Court did not explicitly limit its holding to situations in which private contractors are providing services to public companies with no employees of their own.

Three Justices dissented from the Court's majority holding, contending that: the majority's interpretation gives SOX's whistleblower provision "a stunning reach;" creates a "sweeping regime" unsupported by anything in the text or purposes of SOX; and "threatens to subject private companies to a costly new front of employment litigation."

In light of the holding in Lawson, the scope of companies covered by SOX's whistleblower provisions has grown substantially from just over 5,000 publicly-traded companies to now include the percentage of the more than 5.5 million private companies in the United States with at least one employee that provide goods and services to public companies. Thus, such private companies need to consider the extent of their potential exposure to SOX whistleblower claims and, if they have not already implemented whistleblower policies and procedures, the Lawson decision suggests now is probably the time to do so.

Some of the reasonable steps that can reduce the risk of SOX whistleblower claims include:

  • Identifying all business relationships with public companies and the nature of employees' contact with such public companies.
  • Training managers and supervisors to recognize and appropriately respond to employees' fraud complaints related to any public company that your company has a relationship.
  • Becoming familiar with OSHA's Whistleblower Protection Program, which includes enforcement of SOX's whistleblower provision, along with whistleblower provisions of nineteen (19) other statutes.
  • Implementing a review process to screen any planned adverse action against employees who are connected with providing goods and services to public companies for the purpose of ensuring such action is not because of any prior complaints.
  • Providing mechanisms for internal complaint reporting of fraud allegations and SEC violations, including possibly providing a hotline for such reporting, combined with designated staff to manage and resolve such reports.
  • Drafting/revising compliance policies, internal investigation procedures and corporate governance documents geared to identify and address issues of alleged fraud and SEC violations that are consistent with the standards imposed by SOX.

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.