April 14, 2014
David Dubberly was recently featured in Midlandsbiz for his article on Supreme Court Expands Sarbanes-Oxley Whistleblower Protection to Employees of Private Companies.
In 2002, after corporate fraud at Enron led to the company's collapse, Congress passed the Sarbanes-Oxley Act (SOX). Under SOX's main whistleblower protection provision, an employee of a publicly traded company who claims retaliation for "blowing the whistle" on fraudulent conduct or conduct that violates securities laws can sue his or her employer for reinstatement, back pay, compensatory damages, and attorney's fees.
On March 4, 2014, in Lawson v. FMR LLC, the U.S. Supreme Court ruled that this whistleblower protection applies not only to employees of publicly owned companies, but also to employees of privately owned contractors and subcontractors of public companies. The Supreme Court's decision means private companies now face U.S. Department of Labor (DOL) investigations and lawsuits from employees claiming retaliation for reporting fraud or conduct prohibited by securities laws.
The plaintiffs in Lawson v. FMR LLC worked at private investment advisory and management firms that provide contract services for publicly traded mutual funds. The first plaintiff claimed she was forced to resign after raising concerns about accounting issues at the funds. The second plaintiff alleged he was fired for pointing out inaccuracies in a draft mutual fund Securities and Exchange Commission filing. The defendants moved to dismiss, arguing that SOX protects only direct employees of public companies.
The Supreme Court ruled employees of contractors and subcontractors are also covered, for three main reasons:
- First, the "ordinary meaning" of the text of the whistleblower provision indicates they are covered.
- Second, Congress enacted SOX to prevent another Enron debacle, and the legislative record shows Congress understood that outside professionals bear responsibility for reporting fraud by public companies they work for, and that fear of retaliation was the main deterrent to such reporting by employees of Enron's contractors.
- Third, the SOX whistleblower provision is based on the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, known as AIR21, which protects air carrier employees who blow the whistle on alleged violations relating to aviation safety. That law has been interpreted to also cover employees of contractors and subcontractors of air carriers.
Lawson v. FMR LLC was a 6-3 decision. In dissent, Justice Sotomayor wrote, "The majority's interpretation transforms [SOX's main whistleblower provision] into a sweeping source of litigation that Congress could not have intended." Indeed, the decision expands the universe of companies subject to a SOX whistleblower complaint from 4,000 to 5,000 public companies to potentially millions of private companies that do business with public companies.
SOX whistleblower cases, even those that have no merit, can go on for years and be very costly. They are first investigated by the DOL's Occupational Safety and Health Administration (OSHA). OSHA's determination can be reviewed, after discovery, in a de novo hearing by an administrative law judge, whose decision can be appealed to the DOL's Administrative Review Board (ARB) for another review. If the ARB does not reach a decision in a timely manner, the case can be moved to federal court.
There are a number of steps employers can take to reduce the risk of being found liable for retaliation against a whistleblower. They include:
- Adopting a corporate ethics policy that requires employees to report financial misconduct and other illegal conduct;
- Stating that employees who report violations will be protected from retaliation;
- Providing more than one individual to whom employees can make complaints;
- Training personnel to investigate reports of violations;
- Documenting all communications with the complaining employee about the complaint and its investigation;
- Getting legal advice before taking disciplinary action against employees who report complaints;
- Documenting the valid, non-retaliatory reasons for any disciplinary action; and
- Giving employees written performance feedback on a regular basis so that appropriate disciplinary action can be taken promptly if and when necessary, even if an employee complains of a violation of the ethics policy.
Taking steps like these may not prevent whistleblower claims, but they should reduce the risk of litigation and liability.