Law School Case Brief
Lawson v. FMR LLC - 571 U.S. 429, 134 S. Ct. 1158 (2014)
Under former 18 U.S.C.S. § 1514A(a)(1) (amended 2010), employees gained protection for furnishing information to a federal agency, Congress, or a person with supervisory authority over the employee (or such other person working for an employer who had the authority to investigate, discover, or terminate misconduct). And under former § 1514A(a)(2), employees were protected from retaliation for assisting in a proceeding filed or about to be filed (with any knowledge of an employer) relating to an alleged violation of any of the enumerated fraud provisions, securities regulations, or other federal law relating to shareholder fraud. The reference to employer knowledge is an additional indicator of Congress’s expectation that a retaliator typically would be an employee’s employer, not another entity less likely to know of whistleblower complaints filed or about to be filed.
To safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation, Congress enacted the Sarbanes-Oxley Act of 2002. A provision of the Act, 18 U.S.C. § 1514A, protects whistleblowers. Petitioners Jackie Lawson and Jonathan Zang were former employees, who "blew the whistle" on putative fraud relating to the mutual funds. The employees claimed that their employers, respondents FMR LLC et al., violated former § 1514A when they terminated the employees after one employee reported accounting practices that overstated expenses associated with managing certain mutual funds while the other employee expressed concerns about inaccuracies in a draft registration statement his employer prepared for the Securities Exchange Commission (SEC) on behalf of certain funds. Their employers terminated the employees. Petitioners Lawson and Zang sued respondents FMR LLC and the other "privately-held" company that provided advisory and management services to a family of mutual funds, claiming that the employers violated former 18 U.S.C.S. §1514A (amended 2010). Moving to dismiss the suits, FMR argued that the plaintiffs could state no claim under § 1514A, for that provision protects only employees of public companies, and not employees of private companies that contract with public companies. On interlocutory appeal from the District Court's denial of FMR's motion to dismiss, the United States Court of Appeals for the First Circuit reversed, concluding that the term “an employee” in § 1514A(a) refers only to employees of public companies. The former employees petitioned for certiorari review.
Did § 1514A the Sarbanes-Oxley Act of 2002 shield employees of privately-held contractors and subcontractors — for example, investment advisers, law firms, accounting enterprises — who perform work for the public company?
The United States Supreme Court held that the employees had stated valid claims for recovery under former § 1514A's whistleblower protection because the statute shielded employees of privately held contractors and subcontractors who performed work for a public company. The Court looked first to the ordinary meaning of the provision’s language. The prohibited retaliatory measures enumerated in § 1514A(a)—discharge, demotion, suspension, threats, harassment, or discrimination in employment terms and conditions—are actions an employer takes against its own employees. Contractors are not ordinarily positioned to take adverse actions against employees of the public company with whom they contract. FMR’s interpretation of § 1514A, therefore, would shrink to insignificance the provision’s ban on retaliation by contractors. The protected activity covered by § 1514A, and the provision’s enforcement procedures and remedies, also indicate that Congress presumed an employer-employee relationship between the retaliator and the whistleblowing employee. This Court’s reading of § 1514A avoids insulating the entire mutual fund industry from § 1514A, given that virtually all mutual funds were structured so that they have no employees of their own; they are managed, instead, by independent investment advisors. Accordingly, the “narrower construction” endorsed by FMR would leave § 1514A with no application to mutual funds. In contrast, the Court’s reading of § 1514A, protects the employees of investment advisors, who are often the only firsthand witnesses to shareholder fraud involving mutual funds. The Court reversed the decision of the Court of Appeals and remanded the case for further proceedings.
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