Sarbanes-Oxley and Dodd-Frank Whistleblower Claims After Lawson v. FMR LLC

March 5, 2014

This past Tuesday, March 4, the Supreme Court issued its first decision interpreting the "whistleblower" protection provision of the Sarbanes-Oxley Act of 2002 ("SOX").  In Lawson v. FMR LLC, No. 12-3 (2014), the Court held by a 6-3 margin that SOX creates a cause of action not merely for the employees of public companies, but also for employees of non-public companies that perform work for public companies. 

The Lawson decision expands considerably the number of employees who may seek to bring suit under the SOX whistleblower provision.  The Court’s lengthy opinion also touches upon a number of other issues that are important in whistleblower litigation, without definitively resolving arguments that will continue to be advanced by plaintiffs and defendants under both SOX and the Dodd-Frank Act of 2010 ("Dodd-Frank").

After a brief overview of the Court’s decision, the discussion that follows addresses some of the leading issues that employers will confront in SOX and Dodd-Frank whistleblower litigation in the aftermath of Lawson.    

The Court’s Decision

Plaintiffs in Lawson were employees of mutual fund investment advisers, non-public companies that had contractual relationships with the public "investment companies," or mutual funds, that they advised.  Plaintiffs sued their employers under Section 806 of SOX, alleging that they had been retaliated against by the non-public advisers after they reported supposed shareholder fraud at the mutual funds.  Section 806–which is titled "Protection For Employees of Publicly Traded Companies"–provides in 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 in the terms and conditions of employment because of [whistleblowing or other protected activity]."  18 U.S.C. § 1514A(a).  Defendants moved to dismiss plaintiffs’ complaints on the ground that Section 806, as its title suggests, creates a cause of action only for employees of public companies, protecting them from discrimination and harassment by the company and its employees, agents, and contractors.  The district court disagreed and ruled for plaintiffs, but certified the question for interlocutory review to the First Circuit, which sided with defendants and reversed.  

The Supreme Court reversed the First Circuit, holding that SOX whistleblower protection "extends to employees of contractors and subcontractors."  (Slip op. at 2, 29.)  In a broad-ranging opinion by Justice Ginsburg, the Court based its decision on its reading of the statutory text and legislative history, the "mischief" to which Congress was responding when it enacted SOX in the wake of the Enron scandal, and an earlier whistleblower protection law on which SOX was partly modeled.  The Court declined to resolve a number of issues that had been considered important by the parties, their amici, and the courts below, including whether–if the SOX whistleblower provision extends to non-public company employees–there is a "limiting principle" that prevents the provision from being wielded against non-public companies in disputes that have little if anything to do with harm to shareholders, public accounting, and the concerns that led to SOX’s enactment.  The Court concluded it was unnecessary to reach these issues because the plaintiffs in this case had, in the Court’s view, alleged fraud that directly implicated the shareholders of the publicly held funds.  (Slip op. at 24.)

Justice Sotomayor’s dissenting opinion (joined by Justices Kennedy and Alito) criticized the majority’s reasoning and the "stunning reach" of its decision:  "By interpreting a statute that already protects an expansive class of conduct also to cover a large class of employees, today’s opinion threatens to subject private companies to a costly new front of employment litigation."  (Slip op. at 14 (Sotomayor, J., dissenting).)

SOX and Dodd-Frank Whistleblower Litigation After Lawson

The Court reached the decision it did in Lawson in part by declining to address some of the potentially sweeping consequences of holding that non-public company employees are covered by SOX.  The result will be an increase in SOX litigation against public and non-public companies, in which lower courts and litigants must continue to wrestle with a number of important questions about SOX’s scope and meaning:

1.         Scope of Whistleblower Claims by Employees of Non-Public Companies.  SOX prohibits retaliating against employees for reporting what they "reasonably believe" to be a violation of the federal laws regarding mail, wire, and bank fraud, securities fraud, and "any rule or regulation of the Securities and Exchange Commission."  18 U.S.C. § 1514A(a)(1).  Suppose an employee of a non-public company accuses her employer of wire fraud:  Is that protected activity under SOX?  And what if the accusation is unrelated to the work performed for the public company and, additionally, the contract with the public company is wholly unrelated to public accounting or securities compliance–Does SOX apply then?  See, e.g., Lockheed Martin Corp. v. ARB, 717 F. 3d 1121, 1132 (10th Cir. 2013) (finding protected activity where employee reported potential fraud on customers in connection with military pen pal program sponsored by employer).  The Court in Lawson sidestepped such questions in the belief that in the case at hand, plaintiffs’ complaints implicated public company accounting that was related to the contract with the non-public employer.  Non-public companies should expect a new wave of SOX litigation that tests these bounds.

2.         "Whistleblower" Reports Not Related to Shareholders or Fraud.  The district court in Lawson ruled, as the Supreme Court did, that SOX protections extend to employees of non-public companies, but it considered its holding limited by the fact that–in the lower court’s view–the employee’s complaint must "relate to fraud against shareholders."  724 F. Supp. 2d 141, 160 (D. Mass. 2010).  The language in SOX excerpted above can be read more broadly, however, and in dicta the Supreme Court said that the activity protected under § 1514A is not limited to "provid[ing] evidence of fraud," but also includes "reporting violations of SEC rules or regulations."  Slip op. at 16; see also id. at 13 n.9 (Sotomayor, J., dissenting).  The trend in the case law had already been away from a requirement that SOX complaints relate to securities fraud; the Court’s dicta will now be cited by plaintiffs as further evidence that complaints of technical securities law violations are sufficient for SOX protection. 

On the other hand, Lawson‘s heavy reliance on SOX’s purpose–preventing public company fraud such as at Enron and WorldCom–should help defendants argue against using the law in circumstances with no discernible connection to shareholder fraud. 

3.         Dodd-Frank Coverage for Internal Complaints.  Lawson involved only SOX claims, not claims under the Dodd-Frank Act.  The Court therefore did not resolve any issues that should prove important to the Dodd-Frank "bounty" program, or to Dodd-Frank whistleblower suits.  Among the most hotly contested issues currently under Dodd-Frank is whether employees suing under that law must have made a report to the SEC.  See 15 U.S.C. § 78u-6(a)(6) (defining a "whistleblower" under Dodd-Frank as "any individual who provides . . . information relating to a violation of the securities laws to the Commission").  The Fifth Circuit has held that an employee cannot bring a Dodd-Frank "whistleblower" claim unless he made a report to the SEC, whereas the SEC regulations implementing the bounty provision and decisions from some district courts say that an employee can pursue a Dodd-Frank whistleblower claim if he reported internally within the meaning of SOX.  Compare Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620, 625 (5th Cir. 2013), with, e.g., 17 C.F.R. § 240.21F–2(b)(1); Ellington v. Giacoumakis, 2013 WL 5631046, at *2-3 (D. Mass. Oct. 16, 2013); Egan v. TradingScreen, Inc., 2011 WL 1672066, at *5 (S.D.N.Y. May 4, 2011). 

Lawson leaves this split of authority in place, but some plaintiffs’ lawyers may seize upon fleeting dicta in the decision where the Court said that the Dodd-Frank provision focuses "primarily" on reports to the government, and then quoted a portion of the SEC amicus brief which seems to reflect the SEC’s view that internal complaints protected by SOX are protected under Dodd-Frank as well.  (Slip op. at 26-27.)  Defendants have by far the better legal argument on the question of whether a "whistleblower" must have complained to the government to be protected under Dodd-Frank, but the dicta in Lawson ensures that plaintiffs will continue to bring Dodd-Frank claims even when they made no complaint to the SEC.

4.         Deference to Labor Department Decisions.  The Administrative Review Board ("ARB") is an appellate body within the Department of Labor that recently has issued a number of decisions that are favorable to SOX plaintiffs.  In Lawson, one of the issues the parties disputed was whether courts should give deference to the ARB’s interpretations of SOX.  The Court expressly declined to resolve the issue.  (Slip op. at 8 n.6, 15 n.11.)  Accordingly, whether and to what extent ARB decisions are due deference is an important question that will continue to be litigated.

5.         Disciplining Employees for Violating Generally Applicable Standards of Conduct.  Another issue not addressed in Lawson, but that continues to present challenges for employers, is the extent to which they may discipline employees for violating generally applicable standards of conduct, when the violation occurred in the context of purported whistleblowing.  In one case, for instance, the ARB found it was retaliatory for a company to terminate an employee for forwarding personal information regarding 1,600 employees–including Social Security numbers and credit card numbers–to his roommate’s personal email account, because the employee intended to then share that information with the government.  Vannoy v. Celanese Corp., DOL ARB, No. 09-118 (Sept. 29, 2011).  And the SEC regulation implementing the Dodd-Frank bounty provision states that employers may not enforce employee confidentiality agreements to prevent whistleblowing employees from giving proprietary information to the government.  17 C.F.R. § 240.21F-17(a).   

Restrictions of this nature challenge companies’ ability to protect their legitimate interests and manage their workforce in an even-handed, non-discriminatory way.  After Lawson, many more employers will find themselves struggling with the challenges that result from broad protection for ostensibly whistleblowing employees.

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Plaintiffs were victorious in the Supreme Court’s first SOX whistleblower case, but the Court’s decision left open a number of issues that employers may continue to raise to prevent an overbroad application of whistleblower protections.  Moreover, the Court’s emphasis on the perceived purposes of the SOX whistleblower provision may help employers in the large number of cases where plaintiffs’ claims appear wholly unrelated to the shareholder protection purposes at the heart of the Sarbanes-Oxley Act. 

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.