Sarbanes-Oxley Whistleblower Protections Limited By Divided Panel Of First Circuit Court Of Appeals

In Lawson v. FMR LLC, 670 F.3d 61 (1st Cir. 2012), a divided panel of the U.S. Court of Appeals for the First Circuit held on February 3, 2012 that employees of private companies that contract with public companies cannot take advantage of the whistleblower protections of the Sarbanes-Oxley Act (“SOX”).

SOX includes protection for whistleblowers who provide evidence of violations of either federal securities law, U.S. Securities and Exchange Commission (“SEC”) rules and regulations, or any “federal law relating to fraud against shareholders.” Relying on SOX, plaintiffs, Lawson and Zang, each separately sued their corporate employers for unlawful retaliation.

Plaintiffs, Lawson and Zang, worked for “private companies that provide advising or management services by contract to the Fidelity family of mutual funds.” The Fidelity mutual funds are public companies that are required to file reports under the Securities Exchange Act of 1934. The mutual funds, which have no employees of their own, were not named in the lawsuits. Perhaps importantly, neither Lawson nor Zang were employed by companies that normally would be deemed unrelated to Fidelity. Plaintiff, Zang, was employed by Fidelity Management & Research Co. (later renamed FMR Co., Inc.), a subsidiary of Fidelity Management & Research Co. Meanwhile, plaintiff, Lawson, was employed by Fidelity Brokerage Services, LLC, a private subsidiary of FMR Corp., which was succeeded by FMR, LLC. FMR Co., Inc. and FMR, LLC, which also were known as the Fidelity Management companies, entered into contracts with certain of the Fidelity mutual funds to serve as investment advisers or sub-advisers. As investment advisers to the funds, the Fidelity Management companies were subject to the provisions of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1, et seq.

The defendants moved to dismiss the cases, arguing that SOX’s whistleblower provision, 18 U.S.C. § 1514A, did not cover Lawson and Zang. The defendants specifically argued that SOX only protects employees of public companies and not the employees of private companies that contract (or subcontract) with public companies. The plaintiffs countered that “Congress meant to cover all whistleblowers” in SOX.

The United States District Court for the District of Massachusetts rejected the defendants’ theory and held that SOX protects “employees of private agents, contractors, and subcontractors to public companies.” The First Circuit reversed the district court, finding that the “protected employee” within § 1514A(a) “refers only to employees of the public companies.” Focusing on the text of the statute, the Court noted that SOX’s whistleblower provision specifically references “employees of publicly traded companies.” The First Circuit also held that where Congress “wished to enact broader whistleblower protection elsewhere, it explicitly did so” and the “choice by Congress to provide limited coverage in § 1514A(a) was not inadvertent.” The First Circuit contrasted § 1514A(a) with other broader whistleblower statutes that clearly protected “employees of contractors to the entities regulated by those statutes.”

Both the SEC and the U.S. Department of Labor (“DOL”) supported the plaintiffs’ broader interpretation of the statute. The First Circuit, however, gave no deference to the views of the federal agencies. In so holding, the First Circuit noted that “Congress chose not to give authority to the SEC or the DOL to interpret the term “employee” in § 1514A(a)….” The First Circuit also explained that it was “bound by what Congress has written” and if “Congress intended the term “employee” in § 1514A(a) to have a broader meaning …, it can amend the statute.”

The Honorable O. Rogeriee Thompson did not join the majority in this opinion. In a dissenting opinion, Judge Thompson argued that the statute “plainly protects whistleblower employees of contractors of public companies.” Judge Thompson reasoned that the ruling improperly bars “a significant class of potential securities-fraud whistleblowers from any legal protection.” In so arguing, Judge Thompson stated that the majority is wrong to “impose an unwarranted restriction on the intentionally broad language” of the statute and ignore the views of the SEC and DOL.

After the First Circuit’s ruling, the plaintiffs, Lawson and Zang, filed petitions seeking rehearing and rehearing en banc. On its face, the decision appears somewhat perverse, especially since the Fidelity mutual funds do not have employees of their own and, to serve the purposes of SOX, it would seem appropriate to extend the protection to subsidiary/contractor companies, especially where, as here, the public companies engaged in alleged wrongdoing have been structured in a manner so that they do not have any employees of their own and, thus, could be deemed immunized from the whistleblower protections of SOX. SFMS will monitor this important decision under SOX and whether the First Circuit chooses to hear the case en banc. Ultimately, it may be necessary for the Supreme Court to resolve this important and obviously close issue.