June 2012

DOL Disagrees with First Circuit's "Natural Reading" of SOX and Decides that Whistleblower Protection Does Extend to Employees and Public Company Contractors

5 min

The U.S. Department of Labor Administrative Review Board, or ARB, recently held that whistleblower protection under the Sarbanes-Oxley Act (“SOX”) extends to employees of contractors providing SOX-compliance services to publicly traded companies. The decision, Spinner v. David Landau & Associates, specifically rejects the First Circuit’s recent holding in Lawson v. FMR, LLC (Click here to read our alert on this case). In Lawson, a case of first impression, the First Circuit reached the opposite conclusion and held that coverage was available only to employees of publicly traded companies.

Section 806 of SOX protects certain employees who, among other things, report activity or provide evidence of fraud and violations of the SEC’s rules or regulations. It 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].

Both the Spinner and Lawson opinions recognized that different readings may be given to the term “employee,” and that SOX does not define the term. In reaching completely contrary conclusions, the opinions evidence the growing divide between federal courts and the ARB regarding the scope of Section 806 coverage.

What Happened

David Landau & Associates, or DLA, provides a variety of services, including SOX audit and compliance services, via contract to S.L. Green Realty Corporation. S.L. Green is publicly traded, DLA is not. Thomas Spinner was hired by DLA as an internal auditor in March 2008, and began working on the S.L. Green contract in September 2008. Shortly after, Mr. Spinner reported internal control and reconciliation problems at S.L. Green and then he was fired.

In December 2008, Mr. Spinner filed an administrative complaint against DLA claiming whistleblower status and unlawful termination. An initial investigation by DOL determined that Mr. Spinner would have been terminated even if he had not engaged in protected activity. On review, an administrative law judge, or ALJ, disagreed with the results of the investigation, but determined that, as a matter of law, DLA was not a covered entity and Mr. Spinner was not a covered employee under Section 806 because his employer, DLA, was a private company. The ARB granted an appeal to Mr. Spinner and reversed the ALJ’s decision. In so doing, the ARB expressly rejected the Lawson holding.

The ARB Holds that SOX Is Intended to Have “Broad Coverage

The ARB first examined the text of Section 806 and decided that the statute’s “plain language” did not restrict coverage to employees of publicly held companies. Congress could have added the clause “of such company” after the term “employee,” or it could have expressly defined the term “employee,” but it failed to do so. According to the ARB’s analysis of the statutory language, Section 806 identifies four types of employers that cannot retaliate against their own employees for engaging in protected activity - public companies, contractors, subcontractors, or agents of public companies.

The Lawson majority, on the other hand, applied its own view of “strict statutory construction,” and reached a different conclusion. Under Lawson, Section 806 does not prohibit contractors, subcontractors, or agents working for a publicly traded company from retaliating against their own employees for engaging in protected activity, but these entities may not retaliate against an employee of the publicly traded company by, for instance, discharging or demoting that employee. The ARB pointed out that the reading adopted by the Lawson majority decidedly limits the application of Section 806, as very few – if any – contractors will have the ability to affect the employment of an individual employed by another company. The ARB also determined that Section 806’s title (“PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES WHO PROVIDE EVIDENCE OF FRAUD”) was intended to be a “short-hand reference to the general subject matter involved” rather than an express limitation on the Section’s application as stated by the Lawson Court.

The ARB also relied heavily on SOX’s legislative history in analyzing the statutory language. Section 806 was enacted in part to respond to the Enron scandal, which included complicit behavior by third party auditors and attorneys engaged by Enron. The Senate Report accompanying Section 806 specifically refers to attempts by corporate employees of Arthur Andersen, Enron’s independent auditor, to blow the whistle on improper accounting practices implemented by Arthur Andersen, but being “discouraged at nearly every turn.” Congress recognized that “outside professionals” were necessary accomplices to Enron’s fraudulent scheme, and the ARB reasoned that a narrow construction of Section 806 would leave unprotected those employees “most likely to uncover and comprehend evidence of potential wrongdoing.”

In addition, the ARB relied on interpretations of analogous whistleblower statutes and the DOL regulations that implement Section 806. The Lawson majority had declined to give Chevron deference to the DOL regulations because it found no ambiguity in the term “employee.”

Looking Forward

The Spinner decision creates uncertainty as to the categories of employees with SOX whistleblower protection. DOL acknowledges that Lawson is controlling authority as to cases arising from within the First Circuit (covering Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island). But claims that arise within the jurisdiction of other Circuits, while pending before the DOL, will likely be subject to the broader Spinner standard. And, it remains to be seen what position other Circuits will adopt when a party appeals an ARB decision on this point to a federal Court of Appeals other than the First Circuit.

Until further guidance is provided – or until or unless the U.S. Supreme Court or Congress weighs in – it may be best to assume that contractors of publicly traded companies are entitled to Section 806 whistleblower protection.

If you have any questions regarding this alert or would like a copy of the cited opinions, please contact the authors or any attorney in our Labor and Employment Practice Group.