Split U.S. Supreme Court: Contractors, Subcontractors Protected Under Sarbanes-Oxley

Split U.S. Supreme Court: Contractors, Subcontractors Protected Under Sarbanes-Oxley

 WASHINGTON, D. C. — (Mealey’s) The whistle-blower protection provision of the Sarbanes-Oxley Act (SOX) protects “employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors,” a split U.S. Supreme Court ruled this morning (Jackie Hosang Lawson, et al. v. FMR LLC, et al. , No. 12-3, U.S. Sup. ; See December 2013, Page 28) (lexis. com subscribers may access Supreme Court briefs and the opinion for this case).

“Congress borrowed [18 U.S. Code] §1514A’s prohibition against retaliation from the wording of the 2000 Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR 21), 49 U.S.C. § 42121. That Act provides:  ‘No air carrier or contractor or subcontractor of an air carrier may discharge an employee or otherwise discriminate against an employee with respect to compensation, terms, conditions, or privileges of employment’ when the employee provides information regarding violations ‘relating to air carrier safety’ to his or her employer or federal authorities. § 42121(a)(1). AIR 21 has been read to cover, in addition to employees of air carriers, employees of contractors and subcontractors of the carriers. Given the parallel statutory texts and whistleblower protective aims, we read the words ‘an employee’ in AIR 21 and in §1514A to have similar import,” Justice Ruth Bader Ginsburg wrote for the majority.

Chief Justice John G. Roberts Jr. and Justices Stephen G. Breyer and Elena Kagan joined in the opinion. Justices Antonin Scalia and Clarence Thomas joined in principal part.

Justice Scalia also filed an opinion concurring in principal part and concurring in the judgment, in which Justice Thomas joined. He opined, “I agree with the Court’s conclusion that 18 U. S. C. §1514A protects employees of private contractors from retaliation when they report covered forms of fraud. . . . I do not endorse, however, the Court’s occasional excursions beyond the interpretive terra firma of text and context, into the swamps of legislative history. Reliance on legislative history rests upon several frail premises. First, and most important:  That the statute means what Congress intended. It does not. Because we are a government of laws, not of men, and are governed by what Congress enacted rather than by what it intended, the sole object of the interpretative enterprise is to determine what a law says. Second:  That there was a congressional ‘intent’ apart from that reflected in the enacted text. On most issues of detail that come before this Court, I am confident that the majority of Senators and Representatives had no views whatever on how the issues should be resolved—indeed, were unaware of the issues entirely. Third:  That the views expressed in a committee report or a floor statement represent those of all the Members of that House. Many of them almost certainly did not read the report or hear the statement, much less agree with it—not to mention the Members of the other House and the President who signed the bill,” Justice Scalia opined.

Under Contract

Jackie Hosang Lawson and Jonathan M. Zang brought separate suits in the U.S. District Court for the District of Massachusetts, alleging unlawful retaliation by their corporate employers, which are private companies that act under contract as advisers to and managers of mutual funds organized under the Investment Company Act of 1940.

The District Court issued a single order ruling on both cases, finding that the whistle-blower protection provision of Section 806 of SOX, 18 U.S. Code Section 1514(a), extends its coverage beyond “employees” of “public” companies to encompass also the employees of private companies that are contractors or subcontractors to those public companies.

The District Court also added a limitation on such claims, ruling that employees must be reporting violations “relating to fraud against shareholders. ”

The defendants, FMR LLC, FMR Co. Inc. , FMR Corp. , Fidelity Brokerage Services LLC and Fidelity Management & Research Co. , petitioned the First Circuit U.S. Court of Appeals for interlocutory appeal, and the plaintiffs cross-petitioned, urging the First Circuit to grant the appeal.

A split First Circuit panel held that the statutory construction of SOX does not support the plaintiffs’ contention that they are protected as contractors under the whistle-blower provision of the act.

The workers petitioned the U.S. Supreme Court on June 29, 2012. Oral arguments were held Nov. 12.

Dissenting Opinion

Justice Sonia Sotomayor filed a dissenting opinion in which Justices Anthony M. Kennedy and Samuel Anthony Alito Jr. joined. She opined that the majority’s interpretation of Section 1514A is far too broad. “As interpreted today, the Sarbanes-Oxley Act authorizes a babysitter to bring a federal case against his employer—a parent who happens to work at the local Walmart (a public company)—if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud. And it opens the door to a cause of action against a small business that contracts to clean the local Starbucks (a public company) if an employee is demoted after reporting that another nonpublic company client has mailed the cleaning company a fraudulent invoice,” Justice Sotomayor wrote.

She went on to opine that the majority failed to recognize that Section 1514A is “deeply ambiguous” and that the statute’s headings, statutory context and “the absurd results that follow from the majority’s interpretation” indicate that a more narrow interpretation is necessary.

“Congress envisioned a system in which public company employees would be covered by §1514A, and in which outside lawyers, investment advisers, and accountants would be regulated by the SEC [U.S. Securities and Exchange Commission] and PCAOB [the Public Company Accounting Oversight Board]. Congress did not envision a system in which employees of other private businesses—such as cleaning and construction company workers who have little interaction with investor-related activities and who are thus ill suited to assist in detecting fraud against shareholders—would fall within §1514A. Nor, needless to say, did it envision §1514A applying to the household employees of millions of individuals who happen to work for public companies—housekeepers, gardeners, and babysitters who are also poorly positioned to prevent fraud against public company investors. And to the extent §1514A may have been under inclusive as first drafted, Congress has shown itself capable of filling in any gaps,” she opined.


Eric Schnapper of University of Washington School of Law in Seattle represents Lawson and Zang. Mark A. Perry of Gibson, Dunn & Crutcher in Washington represents the employers.

G. Eric Brunstad Jr. of Dechert in Hartford, Conn. , filed an amicus curiae brief on behalf of Investment Company Institute. Scott A. Coffina of Drinker, Biddle & Reath in Philadelphia filed an amicus brief on behalf of National Federation of Independent Business Small Business Legal Center. Michael Delikat of Orrick, Herrington & Sutcliffe in New York filed an amicus brief on behalf of Securities Industry and Financial Markets Association. Willis J. Goldsmith of Jones Day in New York filed an amicus brief on behalf of the U.S. Chamber of Commerce. Gregory C. Keating of Littler Mendelson in Boston filed an amicus brief on behalf of the Society for Human Resource Management.

Stephen M. Kohn and David K. Colapinto of Kohn, John & Colapinto in Washington filed an amicus brief on behalf of the National Whistleblower Center. Rae T. Vann and Ann E. Reesman of Norris, Tysse, Lampley & Lakis in Washington filed an amicus brief on behalf of the Equal Employment Advisory Council. R. Scott Oswald of Washington filed an amicus brief on behalf of the National Employment Lawyers Association and Government Accountability Project. T. Peter R. Pound of Boston filed an amicus brief on behalf of former SEC officials. Benjamin G. Robbins of the New England Legal Foundation in Boston filed an amicus brief on behalf of the New England Legal Foundation and Associated Industries of Massachusetts. Solicitor General Donald B. Verrilli Jr. in Washington filed an amicus brief on behalf of the United States.

Mealey's is now available in eBook format!

For more information about LexisNexis products and solutions connect with us through our corporate site.