U.S. Supreme Court considering limits of SOX protection

 By Kimberly Atkins

The Daily Record Newswire
WASHINGTON — Just how far do “whistleblower” protections extend?
The justices of the U.S. Supreme Court are wrangling with that question – specifically, whether an employee of a private contractor or subcontractor hired by a public company is covered by whistleblower protections afforded by the Sarbanes-Oxley Act.

The matter at hand is Lawson v. FMR LLC, a case for which the Supremes heard oral arguments Nov. 5. Plaintiffs Jackie Lawson and Jonathan Zang worked at privately held Boston-based financial services companies that were contracted and subcontracted to advise mutual fund company Fidelity; they claim they were each fired by their employer after reporting alleged violations of federal regulations related to shareholder fraud.

Lawson and Zang both filed separate actions in federal court alleging their former employers violated a provision of the Sarbanes-Oxley Act that prohibits retaliation “against an employee in the terms and conditions of employment” for blowing the whistle on alleged corporate wrongdoings.

The companies sought to dismiss the claims, arguing that the SOX whistleblower provisions only apply to employees of public companies, not privately held contractors of public companies.

The district court disagreed, finding that the SOX provisions can apply to employees of contractors of public companies, such as a mutual fund. But a divided panel of the 1st U.S. Circuit Court of Appeals reversed that decision and ordered the complaints dismissed.

Congress enacted “only limited whistleblower protection” in the law, the court said in its ruling, and “where it wished to enact broader whistleblower protection elsewhere, it explicitly did so.”

Eric Schnapper, a professor at the University of Washington School of Law in Seattle, argued on the whistleblowers’ behalf that the 1st Circuit’s interpretation would lead to “implausible consequences.”

Such a reading would permit “the very type of retaliation that we know Congress was concerned about” when it passed Sarbanes-Oxley, Schnapper said.

“Is it your position that employees of any officer, contractor, subcontractor or agent of a public company are covered?” asked Justice Samuel A. Alito Jr. “They’re all covered?”

“It’s our position that employees of contractors and subcontractors are covered,” replied Schnapper.

Justice Stephen G. Breyer wondered if the plaintiffs’ approach would extend whistleblower protection beyond what was intended under the law, which was passed in the wake of Enron and other financial scandals in part to encourage reporting of misdeeds by financial officials.

Breyer asked if every vendor a company does business with would fall within the whistleblower provision: “Does [the statute] want to make every mom and pop shop in the country… suddenly subject to the whistleblower protection for any fraud, even those frauds that have nothing to do with any publicly traded company?”

Schnapper cited the law’s built-in limitations. “‘Contractor’ in the ordinary parlance refers to an ongoing relationship,” he said. “If someone from a firm goes down to Walmart, buys a box of rubber bands, that in ordinary parlance wouldn’t be referred to as a contractor.”

The Justice Department is supporting the employees as amicus curiae. Nicole Saharsky, assistant to the U.S. solicitor general, said the government’s position is that to be covered, a contractor must be “fulfilling its role as a contractor for the public company, not a contractor in some other capacity.”

Breyer said finding a limit to the protection is key. “I think that the strongest argument in those courts of appeals that … held against you is that they fear that otherwise, this statute would [cover] any gardener, any cook,” he said.

Mark Perry, a partner in the Washington office of Gibson, Dunn & Crutcher LLP, argued on the companies’ behalf that the statute does not extend protection when a private firm fires its own employees.

“There are approximately 40 whistleblower statutes on the books [and] more than 30 of them … say ‘No employer may retaliate’ or ‘Any employer is prohibited from retaliating,’” Perry said. “This statute is not phrased that way. … This statute says ‘no public company may retaliate.’”

“What happens if another Enron situation comes along and the corporation’s accounting firm retaliates against an employee of the accounting firm because that employee wants to report illegal activity by the corporation?” Alito asked.

Perry said that accountants, accounting firms and auditors are not covered by the whistleblower provision because they’re covered by separate provisions in the law.
A decision is expected later this term.