Supreme Court Holds That Sarbanes-Oxley Whistleblower Provision Applies To Employees Of Investment Advisers And Other Private Companies

On March 4, 2013, the Supreme Court issued an opinion with broad implications for mutual funds and certain other SEC-regulated companies that conduct business through or with privately-held entities (such as investment advisers and managers), as well as the private companies that do business with them. In Lawson v. FMR LLC,¹ the Court held that the whistleblower provision of the Sarbanes-Oxley Act of 2002 (“Section 1514A”) ² protects employees of private companies that contract with public companies.³ This reversed a First Circuit decision holding that Section 1514A protects only employees of a public company.⁴ The decision, as the majority explicitly indicated, impacts mutual funds and their privately-held investment advisers, as well as accountants, law firms and other privately-held companies that serve as contractors or subcontractors to public companies.

Lawson involved claims of retaliation by two former employees of private companies (collectively, “FMR”) that managed and advised certain mutual funds. Mutual funds generally have no employees; rather, the funds contract with investment advisers like FMR to handle day-to-day operations (e.g., making investment decisions, preparing reports for shareholders, and filing reports with the SEC).⁵ The plaintiffs in Lawson alleged that they were discharged by FMR after raising concerns about the mutual funds’ cost accounting methodologies and inaccuracies in draft SEC registration statements.⁶ They initially filed administrative complaints against FMR alleging retaliation and, after the expiration of the 180-day period specified in 18 U.S.C. § 1514A(b)(1), filed suit in the United States District Court for the District of Massachusetts.⁷

After the district court denied FMR’s motion to dismiss, FMR appealed, and a divided panel of the First Circuit reversed.⁸ The plaintiffs appealed, asking the Supreme Court to address the question of whether Section 1514A “shield[s] only those employed by the public company itself, or . . . employees of privately held contractors and subcontractors [as well]—for example, investment advisers, law firms, accounting enterprises—who perform work for the public company.”⁹

Justice Ginsburg delivered the majority opinion for the Court,¹⁰ which held that Section 1514A “shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.”¹¹ The majority rejected FMR’s interpretation of Section 1514A, which, the Court explained, would require the “insertion of ‘of a public company’ after ‘an employee,’” noting that “where Congress meant ‘an employee of a public company,’ it said so.”¹² The majority also found that because mutual funds have no employees, if the statute was interpreted (as FMR claimed) to only refer to employees of public companies, mutual funds would entirely “escape § 1514A’s control.”¹³ Additionally, the majority pointed to Congressional intent, emphasizing that “Congress installed whistleblower protection in the Sarbanes–Oxley Act as one means to ward off another Enron debacle.”¹⁴ In light of that purpose, and the fact that other Sarbanes-Oxley provisions confer on outside professionals certain responsibilities to report suspected fraud, the majority reasoned that those same professionals likewise should be covered by Section 1514A.¹⁵

Notably, the majority did not reach the question of whether a retaliation claim under Section 1514A could proceed based on allegations other than those relating to fraud on shareholders. However, the majority was clear that Lawson brings mutual funds within the purview of Section 1514A in the sense that employees of investment advisers or other private companies that handle day-to-day operations are among the class of employees protected by Section 1514A.¹⁶

The dissent¹⁷ argued that the majority’s interpretation of the protected class was “stunning[ly]” broad, and contended that, given the Court’s holding, “contractors” could be construed to include gardeners, babysitters, and cleaning persons, a result obviously not intended by Congress.¹⁸ The dissent conceded that the statute was “ambiguous,” but asserted that the “narrower reading”—one that interprets “employees” to mean “employees of public...