Yesterday, in Lawson v. FMR LLC, a divided U.S. Supreme Court decided its first case addressing the whistleblower protections of the Sarbanes-Oxley Act (SOX). The question before the Court: do those protections extend only to the employees of public companies, or do they also reach the employees of contractors and subcontractors of public companies? You can see our prior posts on the case here (June 19, 2012), here (October 8, 2013), here (January 7, 2014), and here (January 28, 2014).
With an unusual alignment resulting in three separate opinions, a majority of the court found that the statute’s protections extend not only to the employees of public companies, but also to the employees of their contractors and subcontractors, including outside accountants and attorneys who perform services for public companies.
- The Plurality. Justice Ginsburg, in a plurality opinion joined in full by Chief Justice Roberts, Justice Breyer, and Justice Kagan, relied on the statutory text, legislative history, statutory purpose, and similar legislation in concluding that SOX’s whistleblower protections extend to employees of contractors and subcontractors of public companies.
- The Concurrence. Justices Scalia and Thomas joined Justice Ginsburg’s opinion “in principal part,” but wrote separately to express their disagreement with the plurality’s reliance on legislative history.
- The Dissent. Justice Sotomayor, joined by Justices Kennedy and Alito, dissented, relying largely on the statutory context in concluding that the statute’s “deeply ambiguous” text should be given a narrow construction—one that would extend whistleblower protections only to the employees of public companies.
Accountants, Attorneys, and… Babysitters?
In the lead-up to the Court’s decision, a great deal of ink was spilled on the question of so-called “gatekeeper liability.” Everyone was in agreement on one point: Congress enacted SOX to restore confidence in the integrity of the public markets in the wake of Enron’s collapse. But the question remained: who did Congress envision as serving as the gatekeepers to fraud at public companies? Did Congress intend to limit SOX’s whistleblower protections to the individuals in the best position to prevent and detect public company fraud—the employees of public companies? Did it intend to extend whistleblower protections to all of the tens of millions of employees of private contractors or subcontractors of public companies? Or did it anticipate something in between—some combination of the employees of public companies and the outside accountants and attorneys at the heart of the Enron debacle?
The statute offers little in the way of guidance. With respect to the protected class, it provides that “[n]o [public] company . . . , or any officer, employee, contractor, subcontractor, or agent of such company, may [retaliate] . . . against an employee in the terms and conditions of employment . . . .”
The majority resolved the statutory ambiguities in favor of an incredibly expansive approach to gatekeeper liability. It concluded that SOX’s whistleblower protections extend, at least theoretically, to all employees of all officers, employees, contractors, subcontractors, and agents of public companies. For example, Justice Ginsburg reasoned that, once you conclude (as she did) that the statute covers employees of any “contractor” of “subcontractor,” there’s no reasoned basis to exclude personal employees of an “officer” or “employee” of a public company: housekeepers, gardeners, and babysitters. Justices Scalia and Thomas concurred in this expansive construction of the statute. That construction, it’s worth noting, is even more expansive than the one pressed by the petitioners, the Solicitor General, and the agency that adjudicates SOX whistleblower claims. No one before the Court was arguing for such a radically expansive construction.
So today, the law of land is that SOX’s whistleblower protections extend not just to employees of public companies, but also to the employees of officers, employees, contractors, subcontractors, and agents of public companies. Some applications of the majority’s interpretation will be more straightforward than others: it is clear that the statute now applies not only to the employees of private mutual fund advisors like the petitioners in Lawson, but also the “[l]egions of [outside] accountants and lawyers” performing services for public companies.
Whither the Limiting Principle?
Despite the plurality’s insistence that it needn’t determine all the bounds of SOX’s whistleblower protections, its expansive construction of the protected class cannot be disaggregated from other questions going to the statute’s scope.
In terms of protected activity, the statute protects disclosures relating to any one of six enumerated categories, two of which—violations of the federal mail and wire fraud statutes—can reach almost any type of fraud having absolutely no bearing on the core shareholder concerns animating the enactment of SOX. In dissent, Justice Sotomayor explained how a broad protected class, when coupled with a broad definition of protected activity, would yield absurd results:
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.
At first, the plurality intimates that “limiting principles may serve as [a] check against overbroad applications” like Justice Sotomayor’s babysitter hypothetical. Later, it mentions possible limiting principles—including the government’s suggestion that the statute protects a contractor’s disclosures only if they specifically relate to the contractor’s relationship with a public company—but the plurality never actually endorses any limiting principle. Instead, after radically expanding the scope of the protected class, the plurality kicks the can down the road, providing simply that “we need not determine the bounds of [the statute] today, because plaintiffs seek only a ‘mainstream application’ of the provision’s protections.” For their part, Justices Scalia and Thomas departed from the plurality by unequivocally rejecting any limiting principles. In their view, “[s]o long as an employee works for one of the actors enumerated in [the statute] and reports a covered form of fraud in a manner identified in [the statute], the employee is protected from retaliation.”
On the one hand, it’s reasonably clear that an outside accountant working for a private company who reports alleged wire fraud uncovered in the course of her work for a public company client can invoke the statute’s protections. But what about that accountant’s secretary who reports alleged wire fraud that’s completely internal to the private accounting firm and has no bearing on a public company (say, for example, his boss’s submission of false expense reports for expenses unrelated to a public company client)? Is the secretary protected? Justices Scalia and Thomas are clear: the secretary is covered. The plurality leaves it as an open question.
So in the end, the Court’s decision ended up providing little in the way of the hoped-for clarity as to the precise reach of SOX’s whistleblower protections. That task will apparently fall to the lower courts.