On May 20, 2013, the United States Supreme Court granted certiorari to plaintiffs Jackie Lawson and Jonathan Zang in their whistleblower retaliation lawsuit against their former employer, Fidelity Investments. The Court agreed to consider the following issue: “whether an employee of a privately held contractor or subcontractor of a public company is protected from retaliation by Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A.”
The petition for certiorari was filed after the U.S. Court of Appeals for the First Circuit ruled in favor of Fidelity on February 3, 2012, holding that the whistleblower protection provision of the Sarbanes-Oxley Act of 2002 (“SOX”) should apply only to employees of public companies and their subsidiaries, and not to the employees of a public company’s officers, employees, contractors, subcontractors, or agents. Because Fidelity is a nonpublic company in the mutual fund industry, and served as a contractor to publicly traded companies, the First Circuit concluded that employees of Fidelity were not protected by the SOX whistleblower protection provision.
Judge Thompson of the First Circuit dissented, pointing out that the SOX whistleblower provision should not only cover contractors because it would allow the legislation to more effectively satisfy the intent of Congress by protecting the investing public from fraud, but also because the legislation in fact explicitly included contractors within its whistleblower protection provision. While the majority read this inclusion to mean temporary contractors of the publicly traded company – rather than employees of a separate nonpublic company– Judge Thompson correctly pointed out that “contractors” of this sort were typically referred to as “agents,” which were separately protected in the statutory language. Accordingly, Judge Thompson stated that the majority’s view would render the inclusion of the term “contractors” in the whistleblower protection provision meaningless, a result that courts must avoid in statutory interpretation.
On May 31, 2012, the First Circuit’s decision was explicitly rejected by the Administrative Review Board (“ARB”) of the Department of Labor (“DOL”) in the case of Spinner v. David Landau and Associates, LLC. In that case, the plaintiff was a certified public accountant employed by an accounting firm that provided internal audit, forensics, and advisory and management consulting services for many companies, including the publicly traded company of S.L. Green Realty Corp (“SLG”). After Spinner reported problems with reconciliation and internal controls during his audit of SLG, Landau and Associates terminated him.
The ARB held that Spinner and other contractors of publicly traded companies should be covered under the SOX whistleblower protection provision. The Board wrote 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 officers of the publicly traded Enron perpetrated. … Congress was clearly concerned about the role Arthur Anderson played in the Enron ‘debacle’ and the retaliation exercised against one of its partners who attempted to blow the whistle.” Moreover, the ARB pointed out that SOX follows the framework of analogous whistleblower statutes, such as the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (“AIR21”), the Energy Reorganization Act (“ERA”), which have been consistently found to provide whistleblower protections to employees of contractors.
If the Supreme Court refuses to grant Chevron deference to the reasonable precedent set forth by the Labor Department in Spinner and other cases, and upholds the harmful decision by the First Circuit in Lawson, it will provide a significant loophole in SOX thereby damaging both whistleblowers in the financial industry, investors, and the public at large. Given that so much of the critical oversight of publicly traded companies is done by outside firms – as in the case of Arthur Anderson and Enron, which likely had a greater role than anything else in prompting Congress to pass SOX and create protections for whistleblowers in the financial industry – it is imperative that employees of those companies be protected from retaliation for raising concerns about fraudulent activity. While the Roberts Court has shown a decidedly pro-business bias, whistleblower advocates will be watching this decision closely and urging the Court to reverse the First Circuit Court of Appeals and provide the type of robust protection to employees in the financial services industry that Congress clearly intended in passing SOX.