By Jason Zuckerman
On Tuesday, the Supreme Court held in Lawson v FMR that employees of contractors and subcontractors of publicly-traded companies are protected against retaliation under the whistleblower protection provision of the Sarbanes-Oxley Act (SOX). The decision is a big win for corporate whistleblowers, a rejection of the Chamber of Commerce’s attempt to create a massive loophole in SOX, and an important bulwark in protecting investors and avoiding another Enron.
Jackie Lawson and Jonathan Zang were employed by private companies that provided investment advisory services to the Fidelity mutual funds and brought SOX retaliation claims alleging that their employment was terminated for disclosing violations of SEC rules. In the mutual fund industry, the corporate entities that are required to file reports with the SEC typically do not have employees, and the funds are managed by employees of investment advisors. Despite statutory text prohibiting contractors and subcontractors of publicly traded companies from retaliating against whistleblowers, the First Circuit held that SOX covers only employees of publicly-traded companies, thereby excluding employees in the mutual fund industry from SOX whistleblower protection.
Applying the plain meaning of the statute and what Justice Ginsburg termed “common sense,” the Court held, by a vote of 6-3, that employees of contractors and subcontractors of publicly-traded companies can bring SOX actions when they suffer retaliation for disclosing what they reasonably believe to be a violation of an SEC rule, shareholder fraud, mail fraud wire fraud, or bank fraud.
Implications of the decision include:
1. Lawson benefits millions of Americans who invest their retirement savings in mutual funds, in that employees in the mutual fund industry will now be protected against retaliation when they complain about shareholder fraud or violations of SEC rules.
2. The decision will also benefit employees at law firms and accounting firms that prepare SEC filings and disclosures for publicly-traded companies. Section III of the opinion contains a good discussion of the well-documented role of accountants and lawyers in perpetuating Enron’s fraud and covering it up. Lawson notes that “Congressional investigators discovered ample evidence of contractors demoting or discharging employees they have engaged who jeopardized the contractor’s business relationship with Enron by objecting to Enron’s financial practices.” Under Lawson, an associate at a law firm who suffers retaliation for disclosing inaccurate statements in a client’s draft annual report or other SEC filing can sue the firm under SOX. It will be interesting to see what impact Lawson has on large law firms and accounting firms, which ostensibly act as gatekeepers and exercise independent professional judgment, but are also under intense pressure to please clients and generate new business.
3. The Chamber of Commerce wanted the Court to overturn a decision by the Department of Labor Administrative Review Board (ARB) that found—contrary to the Lawson decision from the First Circuit—that SOX protects a contractor’s employee from retaliation for whistleblowing; instead, the Court used the ARB decision to bolster the majority holding. Following the First Circuit’s decision in Lawson that only employees of publicly-traded companies are covered by SOX whistleblower protections, the ARB found—in a case called Spinner v. David Landau and Associates, LLC—that, contrary to the First Circuit, employees of contractors are covered by SOX protections when whistleblowing on fraud. The business community was hoping that the Supreme Court would decline to apply a principle, commonly known as Chevron deference, in which the Court defers to an agency’s interpretation of the law, just as the Court similarly—and surprisingly—declined to afford such deference to the Equal Employment Opportunity Commission in a case involving employee retaliation claims.
This is a high priority for the business community because it has been trying to persuade federal courts not to adopt the current ARB’s broad interpretation of the scope of protected whistleblowing under SOX, and instead preserve prior decisions establishing onerous and unreasonable burdens for SOX whistleblowers to prove protected conduct. In Lawson, the Court found it unnecessary to reach the Chevron issue because the statutory text is unambiguous, but quoted with approval the ARB’s observation in Spinner that “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.”
This decision is a significant defeat for the Chamber’s efforts to weaken SOX whistleblower protection, and renders SOX a potent tool for corporate whistleblowers to remedy retaliation.
Jason Zuckerman is Principal of Zuckerman Law, a firm that represents whistleblowers.