Extended Whistleblower Protections Create More Liability for Companies

Originally published by J. Gregory Lahr and Ryan C. Chapoteau in the New York Law Journal. J. Gregory Lahr is a partner at Sedgwick in New York. Ryan C. Chapoteau is an associate at the firm.

New York businesses faced new liabilities last year when the U.S. District Court for the Southern District of New York allowed for employees to sue under the anti-retaliation section of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) if they reported alleged misconduct within the company. Other courts had ruled that the anti-retaliation section only applied to whistleblowing reporting to the Securities and Exchange Commission (SEC). Now, the U.S. Supreme Court has added a new avenue for certain employees to bring retaliation claims. In a 6-3 decision in Lawson v. FMR, __ U.S. __ (2014), the U.S. Supreme Court recently expanded the whistleblower anti-retaliation protections of the Sarbanes-Oxley Act of 2002 (SOX) to include employees of privately held contractors who perform work for public companies.

Sarbanes-Oxley Act

Plaintiffs Jackie Hosang Lawson and Jonathan M. Zang are former employees of private subsidiary companies of FMR LLC which contracted to advise and manage mutual funds for Fidelity Investments. Lawson allegedly raised concerns over Fidelity’s cost accounting methodologies with respect to overstatements of expenses associated with operating the mutual funds. She claims to have faced numerous adverse actions including being constructively discharged ultimately. Zang alleges he was fired as retaliation for voicing concerns of inaccuracies within a draft SEC registration statement.

The two filed separate lawsuits in the U.S. District Court for the District of Massachusetts, and FMR moved to dismiss their claims arguing that neither party had a claim for relief because the SOX antiretaliation statute only applies to employees of public companies.

Pursuant to 18 U.S.C. §1514A, SOX states, in relevant part, that: “No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934…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 any lawful” whistleblowing or other protected activity. Congress enacted SOX, including this whistleblower anti-retaliation statute, in response to the Enron scandal and evidence of individuals not reporting securities violations in fear of retaliation from their employers.

After the district court denied FMR’s motions to dismiss, it filed interlocutory appeals. The U.S. Court of Appeals for the First Circuit issued a split decision in which the minority agreed with FMR’s reasoning that the statute refers only to employees of public companies and does not cover the employees of the private employer.

Subsequently, in the unrelated matter of Spinner v. David Landau & Assoc., No. 10-111, ALJ No. 2010- SOX-029 (May 31, 2012), the Administrative Review Board of the Department of Labor interpreted Section 1514A and opined that the statute does afford protection to employees of the private contractors who work with public companies. Because of the split decisions, the Supreme Court granted certiorari to hear the Lawson case.

The court applied a textual analysis and looked at the legislative intent behind the statute to determine that the law grants protection to these private employees. Examining the ordinary meaning of “an employee” within the statute, the majority opinion stated that “nothing in §1514A’s language confines the class of employees protected to those of a designated employer” and, therefore, the statute applied to the private employees, too. It stated further that “it is implausible that Congress intended to leave such an employee remediless.”

Additionally, the justices were able to rely upon precedent. The SOX whistleblowing protection statute was modeled from the 2000 Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR 21), 49 U.S.C. §42121, which contains similar language and has been interpreted already to cover employees of contractors and subcontractors of airline carriers. Finally, the majority rejected FMR’s argument emphasizing that the caption of the statute controls, which states “Whistleblower Protection for Employees of Publicly Traded Companies” (emphasis added). The court noted that it does not place much weight on statute titles.

The dissent claimed the majority’s interpretation was too broad and presented a “slippery-slope” argument, fearing that the court’s interpretation allows for individuals not intended to be protected, to be able to bring a suit: “The Court’s interpretation gives §1514A a stunning reach. As interpreted today, [SOX] authorizes a babysitter to bring a federal case against his employer—a parent who happens to work at the local Walmart—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. It also opens the door to a cause of action against a small business that contracts to clean the local Starbucks if an employee is demoted after reporting that another nonpublic company client has mailed the cleaning company a fraudulent invoice.”

Dodd-Frank Retaliation Claim

Last year, in Murray v. UBS Securities, No. 12-cv-05914, 2013 WL 2190084 (SDNY May 21, 2013), Judge Jesse Furman issued an order that permitted employees who report alleged misconduct within their company to bring retaliation claims under Section 922 of the Dodd-Frank Act. This provision, in relevant part, forbids retaliation against a whistleblower who reports misconduct to the SEC or whistleblowing on any “disclosures that are required or protected under [SOX].”

Defendants in that action attempted to dismiss the case by arguing that Dodd-Frank retaliation claims should only be permissible if the employee’s whistleblowing was reported to the SEC. However, the court rejected this argument, finding the statute ambiguous, and broadly interpreting it to allow for protection of whistleblowers who report alleged wrongdoing within their company.

It is important to note that the U.S. Courts of Appeals for the Fifth and Ninth Circuits both reached a contradictory conclusion in Asadi v. GE Energy (ESA), 702 F.2d 620 (5th Cir. 2013) and Banko v. Apple, No. 13-cv-02977, 2013 WL 7394596 (N.D. Cal. 2013), respectively. Those courts ruled that Section 922 of the Dodd-Frank Act only applied to whistleblowers who reported to the SEC. Therefore, it is likely that the Supreme Court also will attempt to resolve these conflicting opinions in the coming year. If it follows its ruling in Lawson, it is likely to follow the New York decision. Furthermore, the Supreme Court already stated in Lawson that Section 922 of the Dodd-Frank Act does not affect Section 1514A of SOX.

Accordingly, New York employees who decide to whistleblow may now have two new avenues to file retaliation claims against their employers. In light of the Lawson decision, the whistleblower anti-retaliation statute definitively applies to employees of privately held contractors and subcontractors who perform tasks for public companies. Examples of such employees within this protected class include investment advisers, law firms, and accounting firms. Now that it is possible for New York employers to face SOX-related retaliation claims as well as Dodd- Frank retaliation claims, it is important for any company that contracts with businesses that must comply with SOX to review their whistleblowing and retaliation statutes to ensure full compliance with these decisions and the statutory mandates.