February 6, 2012
In an important decision regarding the scope of the Sarbanes-Oxley "whistleblower" provision, the U.S. Court of Appeals for the First Circuit ruled on Friday that the provision generally does not extend to employees of non-public companies. Lawson v. Fidelity Management & Research LLC, et al., No. 10-2240 (1st Cir. Feb. 3, 2012). The defendants in the cases were represented by Gibson, Dunn & Crutcher LLP and Goodwin Procter LLP.
As enacted, Section 806 of the Sarbanes-Oxley Act, or "SOX," stated that "[n]o company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 . . . , or that is required to file reports under section 15(d) of the [Act] . . . , 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" the employee’s protected whistleblowing. 18 U.S.C. § 1514A(a) (emphasis added). (Dodd-Frank amended the provision to extend it to employees of statistical rating organizations and certain subsidiaries of public companies.) The title and caption to the section both refer to "protection for employees of publicly traded companies." Numerous courts and administrative law judges had held that the provision generally does not extend to employees of non-public companies, but Labor Department procedural rules implementing Sarbanes-Oxley state that the Act prohibits retaliation by public company contractors and subcontractors against their own employees.
The First Circuit’s decision concerned two different cases brought by former employees of companies affiliated with Fidelity Investments. The companies that employed the plaintiffs indisputably were privately held, but plaintiffs Jackie Lawson and Jonathan Zang alleged that those companies provided investment advisory services under contracts with the Fidelity mutual funds, which are publicly held. A federal district judge in Massachusetts ruled that plaintiffs were covered by Sarbanes-Oxley, but the First Circuit granted interlocutory review and reversed.
The First Circuit based its decision on the language of Section 806, its title and caption, the Act’s legislative history, and other principles of statutory interpretation. The "more natural reading" of the statutory language, the court said, is that it protects employees of publicly held companies from discrimination and harassment by their employers and by their employers’ contractors and sub-contractors; to read the language to bar discrimination against employees of those other entities "creates anomalies," such as reading the statutory language to cover an "employee" of an "employee." Id. at 17. (The court noted that some decisions have suggested that private company employees may be covered when their employer retaliates at a public company’s behest, but the court did not discuss whether those cases were correctly decided. Id. at 13 n.7.) The reference in the title and caption to employees of public companies was properly considered in interpreting the statute’s text, the court held, and other sections of Sarbanes-Oxley–and other whistleblower laws–confirmed that when Congress intended to provide broader coverage, it knew how to do so. For example, Section 1107 of Sarbanes-Oxley makes it a crime to engage in employment retaliation against certain government informants without regard to the type of company they work for. Id. at 22. "[T]he broad remedial goals of [a securities law] are insufficient justification for interpreting a specific provision more broadly than its language and the statutory scheme reasonably permit," the court observed, id. at 33 (citations and quotation marks omitted), and in any event the legislative history showed that "Congress’s primary concern [in enacting the provision] was the Enron debacle, which involved the stock of a highly visible publicly traded company"; "only employees of publicly traded companies are mentioned" in the congressional reports. Id. at 36-37.
The U.S. Department of Labor and the Securities and Exchange Commission filed amicus briefs arguing that plaintiffs were covered, but the court gave no deference to their interpretations because "Congress chose not to give authority to [either agency] to interpret the term ’employee’"; the term "is not ambiguous"; and the Labor Department’s procedural rules warranted neither Chevron nor Skidmore deference because the agency’s interpretation lacked "the power to persuade." Id. at 44, 48. An amicus brief supporting the defendants was filed by the U.S. Chamber of Commerce.
Chief Judge Lynch wrote the decision, joined by Judge Howard. Judge Thompson filed a dissent.
The First Circuit’s decision rejects the far more sweeping coverage of SOX that would have resulted from the approach advocated by plaintiffs and their amici, since virtually all private companies have a contract of some kind with a publicly traded company. The ruling is particularly important in light of recent decisions by the Department of Labor that have broadened SOX coverage in other respects, including holding that the whistleblower provision encompasses a broad range of suspected fraud, not merely fraud on shareholders. Brown v. Lockheed Martin Corp., ARB No. 10-050 (Feb. 28, 2011).
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