First Circuit Limits Breadth of Whistleblower Protection Provision Under Sarbanes-Oxley Act of 2002

The United States Court of Appeals for the First Circuit (“First Circuit”) recently held that Section 806 (the “whistleblower protection provisions”) of Sarbanes-Oxley Act of 2002 (“SOX”) covers only employees of public companies and not employees of private companies that provide services to the public company.¹ The court held that the clause ‘officer, employee, contractor, subcontractor, or agent of such company’ goes to who is prohibited from retaliating or discriminating against a covered employee, not to who is a covered employee. . . .²

Facts

In two separately filed cases, consolidated for appeal purposes, the plaintiffs, former employees of privately held subsidiaries of FMR LLC, itself a privately held company, alleged that their employers had retaliated against them in violation of Section 806 of SOX (“§806” or the “whistleblower rule”) for reporting violations of the federal securities laws.³ Plaintiff Jonathan Zang alleged that he was terminated “in retaliation for raising concerns about inaccuracies in a draft revised registration statement for certain Fidelity funds . . . that he reasonably believed . . . violated several federal securities laws.”⁴

Plaintiff Jackie Lawson resigned in September 2007, alleging that she was constructively discharged. Ms. Lawson alleged that she had been retaliated against because she raised “concerns . . . relating to cost accounting methodologies.”⁵

Plaintiffs filed their retaliation claims against their respective employers, but not against the Fidelity funds, which file reports under section 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”), and thus are deemed to be public companies.

Relevant Law

The whistleblower rule provides protection to employees who are “discharge[d], demote[d], suspend[ed], threaten[ed], harass[ed]” or discriminated against by “any officer, employee, contractor, subcontractor, or agent” of their employer for, among other things, reporting or providing information regarding violations of “any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders” to certain regulatory agencies, Congress or the employee’s supervisor.⁶ The Rule applies to companies with “a class of securities registered under section 12 of the . . . Exchange Act . . .” or that are “required to file reports under section 15(d) of the . . . Exchange Act . . . .”⁷

District Court Decision

At issue in Lawson, among other things, was whether the plaintiffs were “covered employees” under §806 since the plaintiffs worked for private, as opposed to publicly traded, companies. The District Court held that “the whistleblower protection provision within SOX §806 extend[ed] beyond ‘employees’ of ‘public’ companies (as those terms are defined in the section) to encompass . . . the employees of private companies that are contractors or subcontractors to those public companies [provided the private company] employees must be reporting violations ‘relating to fraud against shareholders.’”⁸ The District Court created the last requirement because without it the “interpretation could be thought too broad.”⁹ The Fidelity entities moved for an interlocutory appeal regarding whether the plaintiffs came within the coverage of §806, which was granted by the District Court. The First Circuit agreed to review the “controlling question of law,” i.e., whether the whistleblower protection provision of §806 extends to employees of a contractor or subcontractor of a public company where the reported violation relates to fraud against shareholders of the public company.

First Circuit Decision

The First Circuit reversed the district court and held “that only the employees of the defined public companies are covered by [the] whistleblower provisions; the clause ‘officer, employee, contractor, subcontractor, or agent of such company’ goes to who is prohibited from retaliating or discriminating, not to who is a covered employee.”¹⁰ In reaching its decision, the First Circuit considered, among other things, the construction of the statute, the title and caption of §806; the contemporaneous and recent legislative history of SOX; other provisions in SOX; the model for the SOX whistleblower protection provisions; other whistleblower protection statutes; and other canons of construction.

The First Circuit found that the “title of section 806 [(Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud)] and the caption of § 1514A(a) [(Whistleblower protection for employees of publicly traded companies)] are statements of congressional intent” and indicate that Congress intended the term “employee” to be limited to employees of publicly traded companies.¹¹ The First Circuit also stated that its “reading of ‘employee’ as excluding from coverage employees of officers, employees, contractors, subcontractors, and agents of public companies [was] . . . strongly confirmed by the pre-passage legislative history of [§806] and other sections of SOX and the purpose of the legislation.”¹² The First Circuit noted that SOX was adopted to address the collapse of Enron, which was a publicly traded company, and that the Senate Judiciary Committee report (“Report”) consistently referenced employees of “publicly traded companies,” with no corresponding reference to employees of private companies. The First Circuit also noted that in the Report, Congress had expressed concerns about the role that Arthur Andersen, a private company, played in the Enron collapse. To address the role of Arthur Andersen, Congress included certain provisions regarding accountants in SOX.

In determining the intent of Congress, the First Circuit noted that when Congress wanted to include a broader group of parties in SOX, it did so with specificity and clarity.¹³ Likewise, the First Circuit also noted that Congress had previously passed other whistleblower statutes that explicitly included contractors in the class of protected persons and that, based on previous experience, Congress would have explicitly included contractors within the class of protected persons in §806 if it intended to include contractors within the provision. The First Circuit also noted that, regardless of their close relationship, investment advisers and mutual funds are separate entities, citing the recent decision Janus Capital Group, Inc. v. First Derivative Traders,131 S.Ct. 2296 (2011).¹⁴

Although the Securities and Exchange Commission (“Commission”) and Department of Labor (“DOL”) submitted amicus briefs supporting the plaintiffs’ position, the First Circuit stated that the agencies were owed no deference because “the term ‘employee’ in [§806] is not ambiguous [so the court] would not defer to an administrative agency’s contrary determination, even had Congress delegated authority to the agency.”¹⁵ The First Circuit also noted that the Commission has no rulemaking or enforcement authority in connection with §806 and that although the DOL does have enforcement authority in connection with §806 that the DOL’s arguments “mirror the textual arguments of the plaintiffs and are not based on the DOL’s ‘specialized experience.’”¹⁶

Conclusion

The First Circuit’s decision makes clear that §806 protects only employees of public companies, as defined in §806, from retaliation or discrimination by officers, employees, contractors, subcontractors or agents of the public company. The protection of §806 does not, however, extend to retaliation or discrimination against employees of private companies providing services to public companies.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

¹See Lawson v. FMR LLC, et al., 2012 WL 335647 (1st Cir. February 3, 2012) (“Lawson”).

²See ID. at *5. Circuit Judge Thompson dissented in the opinion.

³18 U.S.C. §1541A.

⁴ See Lawson at *2.

⁵ See Id.

⁶ 18 U.S.C. §1541A (a).

⁷ Id.

⁸ See Lawson at *1.

⁹ Id.