February 2012

1st Circuit Answers Question of First Impression: SOX Whistleblower Protection Does Not Extend to Employees of Public Company Contractors or Subcontractors

5 min

The First Circuit, addressing what it called an “important question of first impression,” recently decided that employees working for contractors or subcontractors of public companies are not protected under the whistleblower provision of the Sarbanes–Oxley Act (“SOX”).

SOX’s whistleblower provision protects certain employees who, among other things, report activity or provide evidence of fraud and violations of the SEC’s rules or regulations.  The case is Lawson v. FMR, LLC, Case No. 10-2240 (1st Cir. Feb. 3, 2012) (J. Lynch).

Section 806 of SOX provides, in pertinent part, that:

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 [who engaged in whistleblower protected activity].

The Lawson majority recognized that different readings may be given to the term “employee” for the purpose of defining who is a protected employee, but held that principles of statutory interpretation and SOX’s legislative history compel the conclusion that protected employees do not include employees of a public company’s “officers, employees, contractors, subcontractors, and agents.”  

What Happened

The plaintiffs, Ms. Lawson and Mr. Zang, worked for private companies that provide advisement and management services to the Fidelity family of mutual funds by contract.  Like most mutual funds, the Fidelity mutual funds are public investment companies, and do not have employees of their own.  The plaintiffs’ employers are not acting as agents of the Fidelity mutual funds for employment purposes.

Ms. Lawson filed claims against her former employer, Fidelity Brokerage Services, LLC and its parent, FMR, Corp. (later FMR, LLC), alleging that she was retaliated against, and ultimately constructively discharged, after raising concerns related to cost accounting methodologies.

Mr. Zang filed claims against his former employers, Fidelity Management & Research Co. and its subsidiary, FMR Co., as well as FMR Corp., alleging that he was terminated after he expressed concerns about inaccuracies in a draft registration statement prepared for several Fidelity funds.

Both plaintiffs filed suit in the District Court of Massachusetts after meeting the administrative review requirements, and the lawsuits eventually were consolidated.  The defendants moved to dismiss, on the basis that neither plaintiff was a covered employee under Section 806.  The district court denied the motion, and the question was certified to the First Circuit on interlocutory appeal. 

The Majority Opinion – A “Natural Reading” of Statutory Language

The First Circuit reversed the district court’s ruling, and held that only employees of public companies are protected – not the employees of their contractors or subcontractors.  The majority applied strict statutory construction, and stated that the “natural reading” of the text mandated a limited reach.  The Court analyzed the text as follows: § 806 first identifies certain public companies as covered employers; those employers may not retaliate against their own employees; then § 806 enumerates a list of those employers’ representatives (including contractors and subcontractors); and they too are barred from retaliating against the covered public company’s employees (as opposed to their own).

The majority also looked to the statutory language surrounding the whistleblower provision, including the title of § 806 – “PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES WHO PROVIDE EVIDENCE OF FRAUD,” and noted that Congress knows how to “explicitly” extend broader protection. For instance, the SOX whistleblower provision as to informants is not limited to any employment relationship but rather applies to “whoever...takes any action.”  The majority further acknowledged that while SOX has “some remedial purposes,” these remedial purposes cannot override the “actual text.”  The Court also declined to give Chevron deference to agency interpretations, since it found no ambiguity in the term “employee.”

The Court concludes by saying if it is wrong, Congress can amend the statute.

The Dissent – Not Such a “Natural Read” After All

Judge Thompson issued a scathing dissent.  From her perspective, the relevant statutory text is “no...contractor...may discharge...an employee.”  Not only is “an employee” not limited to “employees of publicly held companies,” but in her view the majority’s interpretation rendered the term contractor “superfluous.” The dissent also noted that under the majority’s approach, employees of private contractors have no legal recourse against their employers’ retaliatory acts which is problematic in the context of mutual funds as they rarely have employees. 

The dissent found the majority’s reliance on the title and caption of the whistleblower provision at odds with the First Circuit’s recent decision in United States v. Ozuna-Cabrera, and found no merit in the majority’s analysis of statutory framework or legislative history.  The dissent also noted that courts, when construing statutes, assume that Congress was aware of courts’ and agencies’ interpretations of existing law and that at that time of this provision’s enactment the Department of Labor had issued notice-and-comment regulations explicitly providing that § 806 applied to employees of contractors of public companies.  In addition, the dissent says, the regulations should be entitled to Chevron deference; “a statute that is susceptible of multiple interpretations and whose meaning requires over thirty pages to explain is neither clear nor unambiguous by definition.” 

Lawson’s Implications for Contractors and Other Private Companies

It is unclear whether other circuits would agree with Lawson, whether the Supreme Court will have an opportunity to comment, or whether we will see a statutory amendment. For the time being, however, in the First Circuit, contractors and other private companies contracting with public companies may likely avoid SOX whistleblower lawsuits post-Lawson.  And other jurisdictions may view Lawson as persuasive authority on this point.

To learn how your business may be affected and how Venable may be of assistance, contact a member of our Labor and Employment Practice Group.