Supreme Court: SOX Whistleblower Provisions Protect Contractor, Subcontractor Employees

Author: Marta Moakley, XpertHR Legal Editor

March 4, 2014

The Supreme Court has ruled that employees of private companies that contract with public companies are covered by the whistleblower protections found in the Sarbanes-Oxley Act of 2002 (SOX). The Court's ruling in Lawson v. FMR, LLC preserves the relatively broad interpretation of SOX's whistleblower provisions favored by the US Department of Labor (DOL).

Specifically, the DOL has interpreted SOX's whistleblower provisions to protect employees of public company contractors reporting securities fraud for almost a decade in its regulations and in administrative rulings. However, mutual fund companies had maintained that SOX whistleblower protections apply only to public, not private, companies and their employees. In Lawson, the Supreme Court reversed the First Circuit Court of Appeals decision that had sided with the employer.

During oral arguments, the Court focused discussion on the reasons for SOX's enactment, which centered on energy giant Enron's scandalous collapse and Congress's desire to restore consumer confidence in the financial markets. The employees seeking whistleblower protections in the Lawson case were employed by private companies that contract to advise or manage mutual funds. Attorneys for the employees argued before the Court that their clients were exactly the types of employees that Congress sought to protect under SOX's whistleblowing provisions.

The Court agreed. The opinion focuses on the fact that the mutual fund companies have no employees. Therefore, the majority reasoned, "if the whistle is to be blown on fraud detrimental to mutual fund investors, the whistleblowing employee must be on another company's payroll, most likely, the payroll of the mutual fund's investment adviser or manager."

Delivering the opinion of the Court, Justice Ruth Bader Ginsburg relied on the plain text of SOX's Section 1514A, which reads: "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 protected activity]."

In arriving at its decision, the Court considered the wording of the retaliation protections in the 2000 Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR 21) because Congress borrowed some of the wording from that statute in crafting SOX's whistleblower provision. AIR 21's provisions has been applied to air carriers, employees of contractors and employees of subcontractors. DOL's Occupational Safety and Health Administration administers the whistleblower provisions of both AIR 21 and SOX, along with those of 20 other federal statutes.

Three justices (Sotomayor, Kennedy and Alito) dissented from the opinion.