First Circuit Limits Sarbanes-Oxley's Whistleblower Protection
By Sara E. Costello, Litigation News Associate Editor – March 28, 2012
Employees of private companies that contract with public companies cannot take advantage of the Sarbanes-Oxley Act’s (SOX) protection for whistleblowers, the U.S. Court of Appeals for the First Circuit recently held in Lawson v. FMR LLC. Noting that this case “raises important questions of first impression,” the court reached its conclusion relying primarily on statutory interpretation.
Seeking Whistleblower Protection under 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.
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.
The defendants moved to dismiss the cases, arguing, in part, that SOX’s whistleblower provision, 18 U.S.C. § 1514A, did not cover Lawson and Zang. Specifically, they argued SOX protects only 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.
Addressing both cases in one order, the U.S. 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 then took up the issue on interlocutory appeal under 28 U.S.C. § 1292(b).
First Circuit Limits Application to Employees of 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 found it persuasive that both the title and caption of SOX’s whistleblower provision specifically reference “employees of publically traded companies.”
Analyzing other provisions in SOX, the First Circuit concluded that when Congress “wished to enact broader whistleblower protection elsewhere, it explicitly did so.” Thus, the court reasoned that the “choice by Congress to provide limited coverage in § 1514A(a) was not inadvertent.” The First Circuit also contrasted § 1514A(a) with other broader whistleblower statutes that clearly protected “employees of contractors to the entities regulated by those statutes.”
The First Circuit further supported its analysis by examining the legislative history of the statute. The Senate Judiciary Committee report associated with § 1514A “makes clear that Congress’s primary concern was the Enron debacle, which involved the stock of a highly visible publicly traded company,” noted the First Circuit. The appellate court also pointed to a statement by Senator Patrick Leahy that the provision “would provide whistleblower protection to employees of publicly traded companies who report acts of fraud.”
Advocacy by Agencies Ineffectual
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.
“Congress chose not to give authority to the SEC or the DOL to interpret the term “employee” in § 1514A(a),” the court stated, so “there is no basis” for deference under Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc. Further, the appellate court found that deference was not necessary because the definition of “employee” in the statute is not ambiguous.
The First Circuit explained that it was “bound by what Congress has written.” But if “Congress intended the term “employee” in § 1514A(a) to have a broader meaning,” the court noted, “it can amend the statute.”
The opinion of the three-judge First Circuit panel was not unanimous. Judge O. Rogeriee Thompson in a dissenting opinion, argued that the statute “plainly protects whistleblower employees of contractors of public companies.” Sharply critical of the majority opinion, Judge Thompson noted that the ruling improperly bars “a significant class of potential securities-fraud whistleblowers from any legal protection.” The majority is wrong to “impose an unwarranted restriction on the intentionally broad language” of the statute and ignore the views of the relevant agencies, Judge Thompson argued.
Was the Statute Properly Interpreted?
Though this case presents a “tough question,” the majority opinion “got it right,” says John R. Bielema, Atlanta, vice-chair of the ABA Section of Litigation’s Commercial and Business Litigation Committee. The “main driving force” behind the First Circuit’s interpretation is the “title and caption of the statute—they are pretty unambiguous,” Bielema notes. The dissenting opinion is “well-written, but it is driven by the policy belief that whistleblowers should be protected,” he continued. When interpreting a statute, Bielema contends that the only thing courts should consider is “What does the text mean?”
SOX’s Whistleblower Protection Still an Open Question
After the First Circuit’s ruling, Lawson and Zang filed petitions seeking rehearing and rehearing en banc. In general, whistleblower statutes are written very broadly and “courts struggle with their interpretation,” says Brian W. Koji, Tampa, vice-chair of the Section of Litigation’s Employment and Labor Relations Law Committee. Koji predicts that there may be a split within the circuits regarding the scope of SOX’s whistleblower protection.
Koji wouldn’t be surprised if some of the circuits find the dissenting opinion persuasive. “This sets the stage for it to be resolved by the Supreme Court, assuming that Congress does not amend the statute first,” observed Koji.
Keywords: whistleblower, Sarbanes-Oxley Act, SOX, First Circuit, whistleblower protection
- » Chris W. Haaf and Monica C. Platt, "2011 Sees Focus on Whistleblowing and Dodd-Frank Claims," ABA’s Business Law Section’s Online Resource (Jan. 2012).
- » Debra Cassens Weiss, "Sarbanes Misused, Expert Says," ABA Journal (Aug. 3, 2007).