The Sarbanes-Oxley Act of 2002 (“SOX” or “the Act”) was enacted in the wake of the financial scandals that occurred in the nineteen-nineties and early aughts. SOX was a response to the brazen behavior of companies like Enron that, in conjunction with their accounting firms, engaged in massive fraud to inflate their supposed value. When these companies later filed for bankruptcy, their shareholders and workers lost billions of dollars. Subsequent criminal convictions of scoundrels like Kenneth Lay did little to comfort those who lost large portions of their pensions.
Among other things, SOX was written so as to protect whistleblowers-people who report unlawful or dishonest behavior-at publicly traded companies. Section 1514A of the Act protects such whistleblowers from demotion, harassment, and termination, among other things:
No [public company]…or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee…because of [whistleblowing or other similar activity]
Note that Section 1514A includes not only officers and employees: It also includes contractors and subcontractors of such companies. This language therefore raises the question: Does Section 1514A protect workers at privately held companies that contract with publicly held companies? (This is a fair question. The title of SOX, after all, is “Whistleblower Protection for Employees of Publicly Traded Companies.” It does not mention anything about contractors or subcontractors.)
On March 4, 2014, the United States Supreme Court held that Section 1514A does apply to privately held companies where such companies contract with publicly held companies. In Lawson v. FMR LLC (2014) 134 S.Ct. 1158, the plaintiffs were employees of privately held companies that provide services to Fidelity mutual funds. Fidelity mutual funds are public companies. However, mutual fund companies typically do not have any employees. Instead, they utilize independent investment advisers. Those advisers then handle the day-to-day operations, such as investment decisions, reports for shareholders, and filing with the SEC.
One of the plaintiffs who provided services to the Fidelity mutual fund companies, Jackie Lawson, claimed that she had experienced a series of retaliatory actions due to concerns that she had raised about cost accounting methodologies used by her company. The other, Jonathan Zang, claimed that he had been terminated for complaining about issues in a draft SEC document. The First Circuit Court of Appeal found that SOX did not protect either Lawson or Zang, and dismissed their claims. (2012) 670 F.3d 61.
The Supreme Court reversed, holding that both Lawson and Zang were covered by SOX, despite the fact that they were not employees of a public company. The Court noted that it was unlikely that Congress meant to protect employees of publicly traded companies from retaliation by contractors and subcontractors, while not protecting employees of those contractors and subcontractors. The Court also noted that Congress was aware, when it passed SOX, that employees of outside companies played an important role in reporting fraud at public companies.
Finally, the Court noted that it had been the fear of retaliation that had deterred the employees at Enron’s contractors from reporting the fraud they observed. Those employees included individuals who worked at law firms, accounting firms, and business consulting firms. (The Court’s reference to those types of companies would appear to signal that such employees may also be subject to the protections of SOX if their employers contract with public companies.)
Lawson therefore is a major win for whistleblowers. A question remains as to whether SOX is limited to complaints that relate to work that a contractor or subcontractor does for a public company. Nonetheless, SOX is a powerful tool. A related statute, 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) makes it illegal for companies to retaliate against employees who blow the whistle to federal agencies. SOX and Dodd-Frank together provide much needed protection for employees who are brave enough to stand up to illegal, unethical, or dishonest conduct in the workplace.
SOX and Dodd-Frank claims involve technical procedures that must be followed before lawsuits can be filed. If you are a whistleblower, or think that you may be covered by one or both of these laws, please feel free to call the attorneys at Hunter Pyle Law for a free initial consultation. We can be reached at 510.444.4400, or by email at firstname.lastname@example.org.