Supreme Court Extends SOX Whistleblower Protections to Private Employees
March 31, 2014
On March 5, 2014, the Supreme Court held that the employees of private contractors and subcontractors who perform work for public companies are entitled to whistleblower protection under the Sarbanes-Oxley Act.
Facts of the Case: Two former employees of FMR, a private company providing investment services to a public mutual fund company, Fidelity, each brought suit against their employer (but not Fidelity) for retaliation under SOX. They alleged that they were either terminated or forced to quit because they informed Fidelity of financial improprieties by FMR.
At issue is the provision in SOX that states: “No public company . . . or any . . . contractor . . . of such company may [retaliate] against an employee . . . because of [activity protected by SOX].” FMR argued that this provision was intended to cover only public company employees, and not the employees of private contractors, from retaliation by their own company and by contractors. The U.S. Court of Appeals for the 1st Circuit agreed, and the case was appealed to the Supreme Court.
The Court’s Decision. The Supreme Court reversed the 1st Circuit’s ruling, finding that the stated goals of SOX – “to safeguard investors in public companies and restore trust in the financial markets” – required a broader reading of “employee.” The Court questioned whether Congress “prompted by the Enron debacle, would exclude from whistleblower protection countless professionals equipped to bring fraud on investors to a halt.” The Court also noted that the narrower reading sought by FMR would “insulate” the mutual fund industry from SOX’s whistleblower protections, as almost all mutual funds are structured so that they have no employees, but are managed by independent investment advisors.
In addition to the text and the purpose of SOX, the Court further found support for its reading of “employee” in the DOL’s regulations, which, for almost a decade, have interpreted the term to include contractor employees, as well as in the model on which SOX was based – an air-carrier whistleblower statute.
What This Means for Employers. The whistleblower protections of SOX now clearly apply to a much larger universe of companies than the approximately 5000 public companies. The employees of any business, regardless of size, that provides services to a public company may now bring SOX claims against their employer.