The United States Supreme Court recently expanded the whistleblower protections of the Sarbanes-Oxley Act (“SOX”) to include employees of private companies that contract with public companies. This ruling could lead to a significant increase in the number of whistleblower complaints and lawsuits.
Following the high-profile collapses of Enron, WorldCom, and several other publicly-traded companies, Congress enacted SOX in order to protect investors by improving the accuracy and reliability of corporate disclosures. As part of its enforcement mechanisms, SOX encourages whistleblowers to report fraud or a violation of securities regulations by protecting whistleblowers from retaliation by their employers. Until the Supreme Court’s recent decision in Lawson v. FMR LLC, 571 U.S. ___ (2014), federal courts had ruled that SOX’s whistleblower protections only applied to employees of public companies. However, the Supreme Court’s decision in Lawson rejected that narrow interpretation of SOX and expanded SOX’s whistleblower protections to employees of private companies that contract with public companies.
Supreme Court's Ruling
The Lawson plaintiffs were employees of FMR and its subsidiaries, private companies which provide investment advice and management services to the Fidelity mutual funds. The Fidelity mutual funds are public companies registered with the Securities and Exchange Commission and subject to its reporting requirements.
The plaintiffs each filed suit alleging that FMR violated SOX’s whistleblower provisions by retaliating against them after they blew the whistle on fraud related to the investment advice and management services FMR provided to the Fidelity mutual funds. In response, FMR argued that the plaintiffs were not covered by SOX’s whistleblower protections because they only apply to employees of public companies.
The Supreme Court held that the plain language of SOX and the post-Enron context in which Congress enacted the statute supports application of the whistleblower protections to employees of private contractors or subcontractors who report fraud at public companies. In reaching this conclusion, the Supreme Court emphasized the important role that private employees play as “gatekeepers” who detect and report fraud at public companies. For example, “Congress plainly recognized that outside professionals – accountants, law firms, contractors, agents, and the like – were complicit in, if not integral to, the shareholder fraud and subsequent cover-up [Enron] officers … perpetrated.” The Supreme Court found that these private employees must be protected by SOX in order to encourage them to report fraud and violations of securities regulations at public companies.
Justices Sonia Sotomayor, Anthony Kennedy and Samuel Alito dissented from the majority opinion and warned that applying SOX’s whistleblower protections to employees of private companies could lead to a significant increase in the number of whistleblower complaints and lawsuits. “[T]oday’s opinion threatens to subject private companies to a costly new front of employment litigation. Congress almost certainly did not intend the statute to have that reach.”
Significance of the Supreme Court's Ruling
The Supreme Court’s ruling has widespread implications for private companies who conduct business with public companies. The ruling means that private companies that have not previously considered themselves subject to SOX are, in fact, covered by its whistleblower provisions, even if they do not have to comply with other aspects of the SOX legislation. Accordingly, private companies who conduct business with public companies must familiarize themselves with SOX’s requirements and carefully evaluate their legal obligations if an employee raises concerns about fraud or a violation of securities regulations. Private companies should also make sure they have strong internal reporting mechanisms in place which allow employees to report allegations of fraud or violations of securities regulations because studies have shown that the vast majority of whistleblowers internally report their concerns before reporting to the government.
The Supreme Court’s ruling also affects public companies because it encourages employees of their private contractors to file whistleblower complaints. Thus, this ruling could have a significant impact on the number of whistleblower complaints and lawsuits involving public companies.
Parker Poe’s attorneys have substantial experience with whistleblower investigations and litigation. For more information, please contact James C. Lesnett, Jr. and Eric H. Cottrell.