Geoffrey Rapp is the Harold A. Anderson Professor of Law and Values at University of Toledo College of Law

Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”) enacted a protective scheme for workers terminated for blowing the whistle on corporate and securities fraud.  SOX responded to the corporate scandals at Enron, WorldCom, and Tyco.  Congress sought to address a perception that a patchwork of state anti-retaliation provisions and common law decisions provided inadequate assurance that an employee who brings fraud to light would avoid adverse treatment at the hands of an employer.

Importantly, SOX targets the firms subject to disclosure requirements under the regulatory authority of the Securities and Exchange Commission (“SEC”). Section 806, captioned “Whistleblower protection for employees of publicly traded companies,” spelled out an anti-retaliation provision applicable to publicly traded companies or firms with stock traded on national exchanges.  The text of the provision prohibits “any officer, employee, contractor, subcontractor or agent of such company” from retaliating against “an employee” based on protected whistleblowing activity.

On November 12, the Court will hear oral arguments on the application of the SOX protection in the complicated world of mutual fund management.  A mutual fund typically has very few employees; instead, it contracts with a separate entity that serves as fund manager and provides day-to-day oversight regarding the investment of fund assets in exchange for management fees.  Unlike the mutual fund itself, the fund manager is typically a privately held entity.

I.          Background

Jackie Hosang Lawson, the named plaintiff, worked as a Senior Director of Finance for Fidelity Brokerage Services, LLC, an entity related to mutual fund giant Fidelity.  She raised objections to the financial reporting practices of FMR, LLC, a Fidelity mutual fund advisor.  She claimed in a whistleblower filing submitted to the Department of Labor’s Occupational Safety and Health Administration (OSHA), oddly responsible for reviewing SOX whistleblower claims, that retaliation led her to resign her position in 2007.  Jonathan Zang, another petitioner, worked for FMR, Co., Inc. and related parties, as a research analyst.  He raised objections to planned SEC filings, and was fired two months later.  He timely submitted a claim to OSHA.

Fidelity argued that SOX’s protections applied only to public companies, and excluded employees of the related privately held entities for which both Lawson and Zang worked.  The district court denied Fidelity’s motions to dismiss, and the case was appealed to the First Circuit.

The First Circuit’s task was a seemingly simple exercise in statutory interpretation.  Unfortunately, SOX did not define the critical term, “an employee.”  From the text of SOX, two readings could be defended.  One might read Section 806 to prohibit retaliation against employees of public companies by public companies and against employees of those public companies by contractors and agents of those public companies.  Alternatively, Section 806 could protect public company employees and employees of contractors and agents of those companies from retaliation for blowing the whistle.

In a divided opinion, the First Circuit sided with Fidelity.  When a contractor or agent retaliates against its own employees, reasoned the court, its actions would not run afoul of the SOX protection.  The statute’s reference to “an employee” meant an employee of a public company, rather than of a contractor, subcontractor, or agent.  This, the court held, was the “more natural” reading of the statute.

An administrative review board of the Department of Labor reached a different conclusion a few months later, creating a split between the First Circuit’s approach and the law as it would be applied in other jurisdictions. Even though no other circuits had weighed in on the issue, in what came as a surprise to many Court watchers, the petition for cert. was granted.

II.        Arguments

Lawson and Zang will likely argue that the First Circuit’s decision should be overturned based on administrative deference.  The Department of Labor has concluded that SOX protects employees of contractors of public companies, and Lawson and Zang will argue that Chevron deference requires the Court to respect that position so long as it is reasonable. Prior to this case, several decisions and procedural regulations by the Department of Labor had extended SOX protections to employees, such as Lawson and Zang, of public companies’ contractors and subcontractors.  The pair will argue that the Department of Labor’s view is consistent with the plain meaning of the phrase “employee,” which normally means employees of a particular company.

Fidelity will likely also begin with a focus on the plain language of the statute, arguing in particular that its headings compel the result reached by the First Circuit.  The section title references “employees of publicly traded companies,” and the caption of the whistleblower protection provision repeats the “of … companies” phrasing.  To Fidelity, this means that the statutory protection should apply only to “an employee” of a public company.  Moreover, Fidelity will argue that including employees of contractors under SOX’s protection would extend the scope of the provision far beyond its intent – applying to protect even household employees of officers of a public company against retaliation (though only if they reported fraud about the public company).

In support of Lawson and Zang, the United States will argue that the statute’s overall scheme and purpose favors the Department of Labor’s interpretation. If the statute applies only to public company employees but prohibits retaliatory actions by both those companies and agents or contractors, the United States will argue, then why would the statute provide remedies like back pay and reinstatement that could only be provided by the public company employer itself?  The statutory framework would prohibit the execution of retaliatory measures by contractors but then provide a remedy that could not be enforced against those contractors.

III.       Analysis

The deceptively simple statutory provision at issue has turned out to be more opaque than expected.  Both sides have presented plausible readings of the text, with policy rationales defending their respective broad and narrow readings of the law.

On Fidelity’s side, Congress may have included reference to contractors to guard against, as the First Circuit found, a public company contracting with “an ax-wielding specialist” to retaliate against whistleblowers.  Under this view, the purpose of the “contractor … or agent” language is simply to prevent public companies from evading SOX’s protection by hiring an agent to engage in retaliation. The First Circuit made explicit reference to George Clooney’s character in the film Up in the Air – an analogy discussed in both sides’ briefs.  One wonders if the Justices have seen the film and will take the opportunity to consider how SOX would apply to the hypothetical in presents!  If so, that would apparently be the first time George Clooney has arisen in a Supreme Court oral argument.

On Lawson and Zang’s side, however, is the argument that Congress intended to provide broad-based protection against retaliation targeting securities and financial fraud whistleblowers. In the Enron scandal that principally motivated the enactment of the SOX protection, for instance, the First Circuit’s interpretation would have permitted accounting firm Arthur Andersen to fire an employee who blew the whistle on fraud by publicly held Enron.

The Court may offer additional guidance on the usefulness in statutory interpretation of headings or captions.  Are headings to be relied upon for interpreting statutory text, confirming the meaning of generic terms contained in the text, as the Court reasoned in Immigration and Naturalization Services v. National Center for Immigrants’ Rights (1991)?  Or are they only “short-hand reference[s]” that cannot limit the application of a more broadly delineated statutory right, as the Court opined in Brotherhood of R.R. Trainmen v. Baltimore & Ohio R.R. (1947)?

The central tension in interpreting SOX is between whether the statute should be read broadly, in that it is remedial and ambitious, or narrowly, as has increasingly been the case in Supreme Court decisions in securities fraud cases.  The ARB decision that supports a broad reading emphasized the statute’s “overall…framework” and robust “purpose.”  On the other hand, the First Circuit’s approach may be more consistent with the Supreme Court’s adherence to the formalities of entities in Janus Capital Group., Inc. v First Derivative Traders, a 2011 decision.  In Janus, the Court recognized that a fund manager and a Fund itself were “separate entities” and refused to hold the manager responsible for misstatements of the Fund itself.  Because the manager was a separate entity, only the Fund made the “statement” targeted in the Janus litigation. While Janus concerned the interpretation of a different statute, its emphasis on the formal differences between related business entities may be influential to the Court in considering the interpretation of SOX.

Ultimately, the Court may give us a glimpse into its understanding of SOX itself, a glimpse which could provide a roadmap for how the Court will confront legal issues likely to arise under the newly enacted Dodd-Frank whistleblower bounty provision.  The court may tell us whether SOX is really a securities law, to be read narrowly, or an employee-protection statute, to be read with a broader eye.

Posted in Lawson v. FMR LLC, Featured, Merits Cases

Recommended Citation: Geoffrey Rapp, Argument preview: Eligibility of employees of public company contractors for Sarbanes-Oxley whistleblower protection, SCOTUSblog (Oct. 30, 2013, 11:00 AM), http://www.scotusblog.com/2013/10/argument-preview-eligibility-of-employees-of-public-company-contractors-for-sarbanes-oxley-whistleblower-protection/