TBA Law Blog

Posted by: Christy Gibson on Apr 10, 2014

By H. Rowan Leathers III*

On March 4, 2014, in Lawson et al. v. FMR LLC et al,[i] the U.S. Supreme Court addressed the scope of protection afforded to whistleblowers by the Sarbanes-Oxley Act of 2002 (“SOX”).  In reversing the First Circuit Court of Appeals, the Supreme Court held the whistleblower protections afforded by SOX extend to employees of contractors and subcontractors, who perform work for a public company, as well as the employees of that public company.  The significance of this decision is that individuals, employed by contractors for public companies who “blow the whistle” or engage in other protected activities, are now covered by the anti-retaliation provisions of SOX.  Contractors and subcontractors, according to the Supreme Court, include individuals and entities such as outside lawyers, accountants, portfolio managers, and other consultants and advisors. 

SOX, through 18 USC § 1514A, addresses the protections afforded to whistleblowers and provides in relevant portion as follows:

No [public] company … or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].

The public company involved in Lawson was a mutual fund that was part of the Fidelity family of mutual funds.  The plaintiffs, Jackie Hosang Lawson and Jonathan M. Zang, were employees of two private contractors that provided advisory and management services to the Fidelity fund involved. 

Lawson worked for FMR, LLC and its predecessors for 14 years, eventually serving as a Senior Director of Finance.  She alleged that, after she raised concerns about certain cost accounting methodologies, believing that they overstated expenses associated with operating mutual funds, she suffered a series of adverse actions, ultimately amounting to constructive discharge. 

Zang was employed by FMR Co. and its predecessors for eight years, having most recently served as a Portfolio Manager for several funds. He alleged he was fired in retaliation for raising concerns about inaccuracies in a draft SEC registration statement concerning certain Fidelity funds. 

Both Lawson and Zang filed administrative complaints with the U.S. Department of Labor and then ultimately lawsuits in district court. FMR moved to dismiss the lawsuits arguing that § 1514A protected only employees of public companies, not employees of private contractors.  The district court rejected FMR’s interpretation and denied its motion to dismiss. 

FMR filed an interlocutory appeal with the First Circuit Court of Appeals.  The First Circuit, with a divided panel, agreed with FMR and concluded “an employee” within the context of § 1514A referred only to employees of public companies and did not cover a private contractor’s own employees.[ii]  Judge Thompson, who dissented, viewed the majority as having “impose[d] an unwarranted restriction on the intentionally broad language of the Sarbanes-Oxley Act” and “bar[red] a significant class of potential securities-fraud whistleblowers from any legal protection.”[iii]

The Supreme Court, in a 6-3 decision, reversed the judgment of the First Circuit.  Justice Ginsburg delivered the opinion of the majority.  The Court focused on the “ordinary meaning” of the statutory provisions.  Justice Ginsburg borrowed from the First Circuit’s dissenting opinion in stating, “boiling [§ 1514A(a)] down to its relevant syntactic elements, it provides that ‘no … contractor … may discharge … an employee.’”  The Court determined the ordinary meaning of “an employee” in this proscription is the “contractor’s own employee.”[iv]

Through Congress’ enactment of the anti-retaliation provisions of SOX, the Supreme Court noted:

Of particular concern to Congress was abundant evidence that Enron succeeded in perpetuating its massive shareholder fraud in large part due to a ‘corporate code of silence’; that code, Congress found, ‘discouraged [the] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally.’  Congress identified the lack of whistleblower protection as ‘a significant deficiency’ in the law, for a complex securities fraud investigation, employees ‘are [often] the only firsthand witnesses to the fraud.’[v]

The Court additionally stated that “[a]lso clear from the legislative record is Congress’ understanding that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron’s contractors.”[vi]   The Supreme Court emphasized the importance of outside professionals “as gatekeepers who detect and deter fraud.”[vii]

Concluding its analysis, the Supreme Court stated Congress modeled § 1514A(a) after the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, 49 USC § 42121 (“AIR 21”), and borrowed the § 1514A prohibition against retaliation from the wording of AIR 21.[viii]  The anti-retaliation provision of AIR 21 provides “No air carrier or contractor or subcontractor of an air carrier may discharge an employee or otherwise discriminate against an employee with respect to compensation, terms, conditions or privileges of employment” (emphasis added) for engaging in protected activity.  The Supreme Court noted that AIR 21 has been read to protect, in addition to employees of air carriers, employees of contractors and subcontractors of the carriers.  Relying on AIR 21, the Supreme Court stated “[t[he provisions’ parallel text and purposes counsel in favor of interpreting the two provisions consistently.” 

The Supreme Court’s decision in Lawson reflects what appears to be a continuing trend to protect whistleblowers.  Employers must be sensitive to those concerns raised by employees regarding matters such as financial improprieties, safety and the like, and not simply view these employees as troublemakers or as possessing a bad attitude. 

[i] Jackie Hosang Lawson and Jonathan M. Zangv. FMR LLC et al., 188 L. Ed. 2d 158 (2014).

[ii] Lawson v. FMR LLC, 670 F.3d 61, 83 (1st Cir. 2012).

[iii] Id. at83.

[iv] 188 L. Ed. 2d 174-75.

[v] Id. at 171.

[vi] Id. at 179.

[vii] Id. at 180.

[viii] Id. at 185.


*Rowan Leathers is a partner at Butler Snow in Nashville, Tennessee. Rowan is a graduate of Emory University School of Law. He may be reached at rowan.leathers@butlersnow.com or (615) 651-6718.