Argument recap: Wrestling with a whistleblower law’s limits
on Nov 13, 2013 at 10:45 am
Yesterday the Court heard argument in Lawson v. FMR LLC, a case presenting the question whether the scope of Sarbanes-Oxley’s whistleblower protection includes employees of contractors of public companies. The Court struggled in its dialogue with counsel to delineate the limits of SOX protection.
The statutory language is open to two plausible interpretations. From the title and caption of the whistleblower provision, for instance, one could argue that it provides anti-retaliation protection only to employees of public companies. Adhering to this reasoning, the court of appeals below had ruled that the petitioners lacked standing under SOX to assert a claim for retaliation for engaging in protected activity.
On the other hand, the actual text of the provision talks about retaliation against “an employee” by not just public companies, but also contractors and agents of such companies. Focusing on the inclusion of “contractors” and “agents,” a decision by the Administrative Review Board of the Department of Labor extended SOX protection to employees of even privately held companies when those firms are “contractors” of public companies.
Creating a challenge for the Court, the statutory text is amenable to either reading and there is little precise legislative guidance on the intended scope of SOX’s protection.
Petitioners Jackie Lawson and Jonathan Zang, representing two mutual fund industry whistleblowers, urged the Court to overrule the First Circuit and extend whistleblower protections to employees of contractors of publicly held companies. The respondents argued that the petitioners’ interpretation would lead to an unlimited application of the statute.
Wrestling to identify the limits of the protective scheme created by a congressional text open to multiple plausible interpretations, the Justices and counsel focused on several occasions on the Enron scandal that had prompted Congress to enact SOX’s protection. Eric Schnapper, counsel for the petitioners, argued that the First Circuit’s interpretation would leave unprotected precisely the kinds of employees Congress was concerned about in the Enron scandal, such as those who worked for the privately held accounting firm Arthur Andersen. Schnapper even went so far as to argue that the ambiguity in SOX’s coverage was a deliberate congressional reaction to the complicated web of arrangements behind the Enron scandal – if Congress had been too specific in crafting the statute’s coverage, he contended, then some fraudster “would think of a way to get around it.”
The respondents argued that SOX’s whistleblower protection wasn’t actually written to target accountants like Arthur Andersen. Instead, Mark Perry, their counsel, asserted that other sections of the SOX statute directly addressed accountants, for example, by creating penalties for accountants shredding documents. Arthur Andersen retaliating against its own employees for blowing the whistle on the Enron scandal, Perry argued, would not have been covered by Section 806 of SOX.
Perry also used the Enron story to bolster the respondents’ preferred reading of SOX – that the “contractors” language was included not to protect employees of contractors but instead to protect public company employees victimized by their employers’ use of an “ax-wielding specialist” retained solely for the sake of executing a retaliatory measure. Enron, argued Perry, showed how companies structured business arrangements “to try to get the liability out of headquarters,” using subsidiary entities to engage in high-risk business practices. To the respondents, Enron’s use of subsidiaries explains why Congress was motivated to draft language broad enough to cover the “ax-wielding specialist” even though it may seem that such specialists only rarely surface in real world cases. Congress meant to stop companies from bringing in “contractors” and “consultants” to perform operational functions, working “side by side with public company employees” and making the lives of those employees – if they engage in protected activity – “intolerable” to the point that one might even find that such employees had been constructively discharged.
Justice Alito raised a challenge to the petitioners’ interpretation based on whether it would lead to unlimited application of the statute, an issue discussed in the respondents’ briefs. If the statute is interpreted broadly, applying to employees of contractors, agents and officers of public companies, as opposed only to employees of public companies themselves, would even domestic employees of public company officers be able to bring whistleblower retaliation claims under the statute? Schnapper attempted to argue that the statute would not cover employees of an officer, but would cover employees of a contractor or subcontractor. Justice Scalia expressed skepticism on that interpretation, finding it “peculiar” and questioning whether it was appropriate to “piece out” the statute in that manner.
Justice Breyer joined in questioning whether the petitioners’ interpretation provided workable guidance on the limitations of the statute’s reach. Schnapper first suggested that the term “contractor” could be read only to refer to ongoing relationships, not to any party that had ever signed a contract with a public company. Thus, a single contract might not qualify a non-public company as a “contractor” whose employees would be covered by the statute’s protections.
Appearing for the United States, Assistant to the Solicitor General Nicole Saharsky took up the issue of SOX’s limits and suggested that the concern about expanding the statute to cover gardeners or other domestic employees was misplaced, since such employees would be extremely unlikely to cover the kind of securities fraud that makes an employee’s whistleblowing “protected activity” under SOX.
Justice Sotomayor invited Schnapper to accept the limitation embraced by the district court, which would have been that a contractor’s employee could only bring a retaliation claim if terminated for raising concerns about fraud at the public company. But Schnapper resisted that interpretation of the statute, suggesting that SOX would cover a contractor’s employee even if she blew the whistle on fraud at the contractor. Justice Breyer also provided a suggested limitation, where a contractor’s employee would be entitled to protection only if the fraud had something to do with the contract with the public company. Again, Schnapper resisted the limitation, suggesting that such a reading simply wasn’t how Congress had worded the statute.
While Perry asserted that it was “universally accepted” that “some limitation” in the application of the statute was needed, not all Justices appeared to agree. Justice Scalia, for instance, asked Schnapper whether it would really be “a disaster” to interpret the statute to cover a domestic employee fired for whistleblowing.
Saharsky urged the court to resist the need to define precisely where SOX’s coverage might end, arguing that applying SOX to the employees of contractors of a public mutual fund would be a “fairly mainstream application” of the statute. Even though the Justices might be willing to accept this as a “mainstream” application, they indicated, as Justice Kennedy stated, that their opinion would “have to give a rule.” It would not “make any sense,” Justice Kennedy offered, to vindicate the petitioners’ claim without trying to illuminate the more basic questions about the scope of SOX’s protection.
None of the attorneys could offer an explanation for where the relevant statutory language originated. Nothing in the legislative history appeared to explain why the term “contractor” was included, leaving the critical ambiguity that has spawned this case.
Perry spent some time arguing the meaning of SOX by contrast to the whistleblower provisions of the Dodd-Frank Act, which Congress passed eight years after SOX. Dodd-Frank’s Section 922, which provides for, among other things, the possibility of a bounty and also additional whistleblower protection, was not limited with the same “public company” language as Section 806 of SOX.
At the heart of the case is a seemingly simple statutory provision that is unfortunately open to multiple interpretations. But the Court’s opinion may be grounded in policy concerns about how to interpret this particular statute. Schnapper described SOX as a “classic” employment law statute, which should be interpreted broadly to provide protection against retaliation. By comparison, Perry characterized the provision as a “simple regime” meant to protect an employee even if the public company itself goes bankrupt and a “workout contractor” is the only surviving entity capable of being forced to make a whistleblower whole.