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Supreme Court Says SOX Can Fit Almost Anyone

March 5th, 2014 · No Comments

NOTE: A version of this post first appeared on Law360.com.  The author, R. Scott Oswald, was counsel of record on an amicus curiae brief filed in this case.

Supreme CourtIn deciding Lawson v. FMR LLC, the first whistleblower case they have heard under the Sarbanes-Oxley Act (SOX), the justices of the U.S. Supreme Court agreed that the law’s ambiguous anti-retaliation provision offered two alternatives, both unappealing:

  • Either it doesn’t protect a large class of whistleblowers — in many cases, the people most likely to discover financial wrongdoing;
  • Or it protects virtually anyone hired by a publicly traded company or by its employees, either directly or indirectly, and forbids reprisal for a huge range of fraud reports.

Led by Justice Ruth Bader Ginsburg, a 6-3 majority unflinchingly chose the broader interpretation, instantly giving SOX “a stunning reach,” in the words of a dumbfounded dissent by Justice Sonia Sotomayor.

By refusing to sacrifice the remedial purpose of SOX — even in the face of possible “overbroad applications” — the Court’s opinion yesterday set a generous tone for the interpretation of other disputed whistleblower statutes.

Passed in 2002 in the wake of the Enron scandal, SOX sets strict standards for financial behavior by publicly traded companies and, as codified in Section 1514A of the U.S. Code, protects “employees” against retaliation for blowing the whistle on a number of specific violations.

Lawson asked the question: Which “employees,” exactly, are protected?

Does SOX protect only whistleblowers employed directly by a public company that is suspected of wrongdoing? Or does it also shield whistleblowers who work for privately held contractors or subcontractors hired by the suspected company or even — crucially, for the dissenting justices — hired by its officers and employees?

Until yesterday, the law could be read either way.  In recent years, the Obama administration supported the broader construction — but it never went as far as today’s decision, which held that the text of SOX demands protection not just for professionals such as accountants who are hired on contract by public companies, but even for hypothetical domestic workers who are hired by such companies’ employees.

Justice Ginsburg said this was the only viable outcome based on the statute itself, on Congressional intent, and on previous interpretations of similar laws.

In her dissent, Justice Sotomayor spun fretful scenarios in which babysitters might use SOX to sue the parents who hire them, if those parents happen to work for Wal-Mart Stores, a public company. Such a result would be “absurd,” she said, and Congress could not have intended it.

Yet as long as such domestic employees allege a wrong that is covered by SOX, the law does shield them from workplace retaliation such as firing or demotion, the Court said — with emphatic backup from a concurrence written by Justice Antonin Scalia and joined by Justice Clarence Thomas, both notable sticklers on statutory language.

Justice Ginsburg called the domestic-worker result a “curiosity [of] drafting,” which she said Congress could easily fix if it wanted, but mainly dismissed the dissent’s fears as “fanciful” and “likely more theoretical than real.”

Anyhow, she said, the alternative — failing to protect “countless professionals equipped to bring fraud on investors to a halt” — was far worse.

“[I]t would thwart Congress’ dominant aim,” she wrote, “if contractors were taken off the hook for retaliating against their whistle-blowing employees, just to avoid the unlikely prospect that babysitters, nannies, gardeners, and the like will flood [government enforcement offices ] with 1514A complaints.”

Justice Ginsburg left open the possibility that the Court might later impose some common-sense limits on the scope of a valid SOX complaint — but found it unnecessary to do so in Lawson, since the plaintiffs’ allegations “fall squarely within Congress’ aim.”

The decision was a clear win for Jackie Hosang Lawson and Jonathan Zang, the whistleblowers in this case; the Court effectively reinstated their complaints, which now may proceed to trial.

Ms. Lawson and Mr. Zang had worked for different parts of privately held FMR, the financial giant behind Fidelity’s mutual funds; each had raised flags about possible wrongdoing at publicly traded Fidelity funds. Mr. Zang was later fired, while Ms. Lawson says she was effectively forced to resign.

But since neither plaintiff worked directly at a fund — like most mutual funds, Fidelity’s funds are standalone corporations with no direct employees — FMR claimed it was free to retaliate against them for reporting their concerns: SOX simply did not protect them.

(FMR never admitted the retaliation; the case has not gotten that far yet.)

The Lawson decision speaks to the anti-retaliation provisions of SOX alone, but is notable for its strong focus in both opinion and dissent on divining Congressional intent — a key factor in interpreting any law, but especially important for whistleblower provisions, which aim to encourage behavior that’s easily silenced if courts are too miserly in their reading.

Justice Ginsburg’s analysis throws into doubt, for instance, the authority of last July’s high-profile decision by the U.S. Court of Appeals for the Fifth Circuit in Asadi  v. G.E. Energy (USA) L.L.C., which held that the Dodd-Frank Act doesn’t protect employees until they report corporate misdeeds to the Securities and Exchange Commission (SEC) via prescribed channels.

That narrow opinion conflicts directly with more permissive holdings from lower-level federal courts in other jurisdictions — and with rules set by the SEC itself, which believes that Dodd-Frank protects employees who report wrongdoing in ways specified by other whistleblower laws, including SOX.

Compared to Lawson, Asadi seems an easier call: While Dodd-Frank’s language isn’t perfect, it doesn’t require choosing between two seemingly unintentional outcomes; at worst it’s a showdown between the law’s purpose and, perhaps, its letter.

Yesterday’s decision also enhances the authority of other appellate opinions — most notably the Tenth Circuit’s holding in Lockheed Martin Corp. v. Brown last summer, which found that SOX protects whistleblowers who flag any type of wrongdoing enumerated in the statute, not just fraud that hurts shareholders of the accused company.

That opinion, which declined to hold the Obama administration to old employer-friendly SOX standards enforced by President George W. Bush, now seems wholly uncontroversial under Lawson, which went far further than Lockheed.

The six-justice majority in Lawson presented an unusual ideological mix, teaming Justice Ginsburg with fellow liberal-leaners Stephen Breyer and Elena Kagan but also with conservatives Scalia and Thomas, plus Chief Justice John Roberts.

The minority, similarly, was an odd match: Liberal Justice Sotomayor drew support from conservative Samuel Alito and Justice Anthony Kennedy, who is more typically a swing vote.

Future whistleblower opinions are likely to reshuffle, however: While supporting Justice Ginsburg in her textual analysis of SOX — indeed, while rejecting any judicial weakening of it — Justice Scalia’s concurrence also ridiculed the whole idea of Congressional intent as “fiction,” excusing himself (along with Justice Thomas) as the other justices pored over legislative reports.

Here Justice Scalia showed his clear disdain for Congress. He started mildly enough, saying that what truly matters is the law itself: “[W]e are governed by what Congress enacted rather than by what it intended.”

Then he became pointed. Congress has no intent for his fellow Justices to parse, he wrote:  “On most matters of detail that come before this Court, I am confident that the majority of Senators and Representatives had no views whatever on how the issues should be resolved — indeed, were unaware of the issues entirely.”

What’s more, he said, reports and statements from Congress provide an unconvincing fossil record of this nonexistent intent: “Many [members of Congress] almost certainly did not read the report of hear the statement, much less agree with it — not to mention the Members of the other House and the President who signed the bill.”

Nonetheless, concluded Justice Scalia, Justice Ginsburg was correct on the law in Lawson: SOX provides broad protection, and the plaintiffs deserve their day in court — “the statute’s text is clear.”

Tags: Dodd-Frank Act · Federal Whistleblower Legislation · Retaliation · Sarbanes-Oxley · The Employment Law Group, P.C. · Whistleblower Protection