Financial Services Employment Law News, Updates, and Insights for Financial Services Employers

First Circuit Limits SOX Whistleblower Protection to Employees of Public Companies

Tweet Like Email LinkedIn Comment

By: Christina Fletcher

Confronting an issue of first impression, the U.S. Court of Appeals for the First Circuit recently held that the “whistleblower” protections of the Sarbanes-Oxley Act of 2002 (“SOX”) cover only employees of public companies, and do not extend to the employees of a public company’s contractors or subcontractors which are themselves private companies. Lawson v. Fidelity Management & Research LLC, et al., No. 10-2240 (1st Cir. Feb. 3, 2012) (pdf). This holding provides private-company employers with a potentially strong defense to claims of retaliation against employees. However, it should be anticipated that Congress may revisit the scope of the protections and ultimately expand them in response to Lawson.

Section 806 of SOX prohibits discrimination against employees who engage in protected whistleblowing activities and work for publicly traded companies subject to the requirements of the Securities Exchange Act of 1934. 18 U.S.C. § 1514A(a).  In Lawson, Fidelity Investments, a public company covered by Section 806 of SOX, contracted with a private investment advisory firm to provide investment advisory services. Plaintiff Zang alleged that he had been terminated in retaliation for raising concerns about inaccuracies in a draft revised registration statement for certain Fidelity funds. Plaintiff Lawson alleged retaliation for raising concerns relating to cost accounting methodologies. She resigned her employment in September 2007, claiming constructive discharge. Defendants’ motions to dismiss the complaints argued that the plaintiffs were not covered employees under Section 806 of SOX. The district court agreed with the plaintiffs, holding that subcontractors to a public company subject to SOX were protected by SOX’s whistleblower provision.

The First Circuit reversed, basing its decision on the language of SOX, principles of statutory interpretation, and SOX’s legislative history. The Court noted that plaintiffs’ suggested reading of the Act created anomalies and provided very broad coverage not intended by Congress. The Court explained that the clause “officer, employee, contractor, subcontractor, or agent of such company” in the whistleblower protection provision goes to who is prohibited from retaliating or discriminating, not to who is a covered employee. Thus, covered employees are limited to employees of public companies

The Court also found Section 806’s title, “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud,” significant.  The Court noted that “[f]rom that alone, it would be odd to read § [806] as covering employees of private companies. It is unlikely Congress intended the term ‘Civil action to protect against retaliation in fraud cases’ in the heading of § [806] to be broader than the terms of the ‘Protection’ discussed in the title of section 806.” Lawson, No. 10-2240, at 18. Moreover, the Court noted that Congress repeated the limitation “Whistleblower protection for employees of publicly traded companies” from the caption in the first line of the text of subpart (a) of § [806], further evidencing legislative intent to limit protections to only employees of public companies. “The title and the caption each contain the phrase, ‘employees of publicly traded companies,’ which supports the reading that the use of the term ‘employees’ underneath refers to ‘employees of publicly traded companies.’” Id. at 19.

The Court further noted that where Congress wished to enact broader whistleblower protection elsewhere, it explicitly did so and, in other portions of SOX, where Congress intended separate provisions of the Act to apply to employees of private entities, it said so explicitly. By contrast, the limited language within the text of Section 806 and the title and caption show that Congress did not intend coverage to reach beyond employees of public companies.

The Court also explained that the legislative history supports its interpretation of the Act. The statements in the Congressional committee reports only mention employees of publicly traded companies; employees of private companies are not mentioned.

In concluding that the whistleblower provision in Section 806 of SOX only covers employees of public companies, and does not protect employees of private companies that are contractors or subcontractors to covered public companies, the First Circuit noted that “if we are wrong and Congress intended the term ‘employee’ in § [806] to have a broader meaning than the one we have arrived at, it can amend the statute.” Lawson, No. 10-2240, at 49. History suggests that Congress may well take the First Circuit up on its invitation. 

Congress recently expanded the scope of Section 806 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. Law 111-203 (“Dodd-Frank”). Specifically, Dodd-Frank extended Section 806 to apply not only to publicly traded companies, but also to “any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company[.]” The Dodd-Frank amendments indicate a Congressional appreciation that legislation is required to broaden application of the protections of Section 806, beyond those initially framed by an earlier enactment. 

While an amendment superseding Lawson is of course not a certainty, it should not come as a surprise should Congress gain support to expand the scope of Section 806 to cover the employees of private companies that act as contractors or subcontractors to public corporations.