May 28, 2013

U.S. Supreme Court To Decide Whether SOX Whistleblower Provisions Extend To Employees Of Privately Held Companies

On May 20, 2013, the U.S. Supreme Court announced its decision to hear its first-ever Sarbanes-Oxley Act whistleblower case in Lawson v. FMR LLC et al.  The lower court’s controversial decision centered on whether SOX’s whistleblower protections apply to employees of privately held companies that are contractors to public companies.

Plaintiffs Jackie Lawson and Jonathan Zang brought suit against their former employer, FMR, LLC, which is a privately held company that advises the Fidelity family of mutual funds.  The Fidelity mutual funds are public investment companies registered with the SEC and are required to file quarterly reports, but, as is common with investment companies, the Fidelity funds have no employees of their own.  Lawson and Zang alleged that FMR terminated them in retaliation for raising concerns about its inaccurate and fraudulent reporting practices.

On appeal, the First Circuit found that SOX does not apply to employees of privately held contractors of public companies.  Unlike two other federal whistleblower statutes which expressly included these broad protections, the plain language of SOX encompassed only employees of publicly traded companies.

Interestingly, the Lawson decision is in stark contrast to a decision from the Administrative Relations Board, the administrative body which initially adjudicates SOX claims, in Spinner v. David Landau & Associates.  In that case, the ARB found that SOX applies to employees of privately held companies that are contractors to public companies.

Although it is notable that the Supreme Court is going to decide a SOX case, there is reason to think that the Supreme Court has other, potentially more important  reasons for agreeing to hear the Lawson case.  In particular, the Supreme Court generally agrees to hear cases in two situations: (1) where there is a split between different circuit courts of appeal; or (2) where an important policy or political issue is presented.  Here, however, there is no split among the circuits, so one might reasonably ask what important issue Lawson  presents.

The First Circuit’s opinion in Lawson provides a good clue.  The court found that neither the SEC’s or DOL’s interpretation of the term “employee” as it relates to SOX was entitled to deference.  Is this a sign that the Supreme Court intends to push back on two federal agencies that have taken broad views of their jurisdictional powers?  Is it possible that the Supreme Court will force the DOL to reconsider regulations it has issued on other statutes it enforces, like the Fair Labor Standards Act or the Family and Medical Leave Act?  Only time will tell.  We will keep you informed of developments.