Lawson et al. v. FMR LLC: Sarbanes-Oxley’s Whistleblower Protection Is Limited to Employees of Publicly Traded Companies

In a split decision, the First Circuit recently held that Sarbanes-Oxley’s whistleblower protection is limited to employees of publicly traded companies and thus excludes employees of a publicly traded company’s contractors. In Lawson et al. v. FMR LLC, 670 F.3d 61 (1st Cir. 2012), a case of first impression, the Court ruled against two fund investment advisors who blew the whistle on a publicly-traded mutual fund which contracted for their services.

Background

Two employees of defendant FMR LLC, which is affiliated with Fidelity Investments, each filed actions against FMR alleging retaliation for whistleblowing.  The first plaintiff, Zang, worked as an investment advisor to a related but legally separate Fidelity mutual fund.  Zang raised concerns to management about alleged inaccuracies in a draft registration statement for certain Fidelity funds, and was fired in July 2005.  Zang alleged retaliation under SOX’s § 1514A(a) in a compliant filed with OSHA, which has enforcement powers over that statute.  After losing before an administrative law judge and seeking review before the Department of Labor’s administrative review board, Zang filed an action in district court. Id. at 63-64. 

The second plaintiff, Lawson, was also an employee of an FMR subsidiary.  Lawson raised concerns about cost accounting methodologies to her employer, and resigned her employment in 2007, alleging constructive discharge.  She also filed an action in district court. Id. at 64. 

In district court, defendant FMR and its affiliates (“FMR”) moved to dismiss, arguing that the plaintiffs were not “employees” as defined under § 1514A(a).  The court denied the motion to dismiss, holding that § 1514A(a)’s protections extend to employees of “private agents, contractors and subcontractors to public companies” and that the plaintiffs pled sufficient facts to show that they met the elements of the statute. Id. at 64-65.  FMR asked for an interlocutory appeal on the definition of “employee” and the court certified a controlling question of law to the First Circuit, which granted review. Id. at 65. 

Analysis

The issue for the Court was whether § 1514A “applies to an employee of a contractor or subcontractor of a public company, when that employee reports activity which he or she reasonably believes may constitute a violation” of federal anti-fraud statutes relating to shareholders. Id. at 65.  The relevant part of § 1514A reads:

SEC. 806. PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES WHO PROVIDE EVIDENCE OF FRAUD.

(a) In General.—Chapter 73 of title 18, United States Code, is amended by inserting after section 1514 the following:

§ 1514A. Civil action to protect against retaliation in fraud cases (a) Whistleblower protection for employees of publicly traded companies.—No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. § 78l ), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 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…

Id. at 66. 

Statutory Text Limits Protection to Employees of Public Companies

The first step of the majority’s analysis focused on whether the text of the statute clearly defined the regulated and protected classes, concluding that only employees of the defined “public companies” are protected by the statute. Id. at 68.  FMR argued that the statute limited the protected class to only those employees of the public company, and that the list of “officer, employee, contractor, subcontractor, or agent” denoted the regulated class. Id. at 67.  The plaintiffs argued that the protected “employee” includes both the employees of pubic companies and employees of those public companies’ officers, employees, contractors, sub-contractors, or agents.  Id. at 67-68. 

The majority stated that FMR’s reading is the more “natural reading,” arguing that the plaintiff’s interpretation would create “anomalies” – “if an employee of ‘any’ contractor, subcontractor, or agent is protected, Congress must, by the same reasoning, have intended to protect the employee of ‘any’ officer or employee of a public company.”  Id. at 69.  In other words, the majority found that to accept the plaintiffs’ reading of the statute, awkward protected classes would be created, such as “employees of employees” and “employees of officers,” and thus rejected the plaintiffs’ reading of the statute. 

Majority Finds that No Mention of Employees of Contractors Excludes Their Protection

The majority then gave strong weight to the title and caption of the statute, arguing that the title “Protection for Employees of Publicly Traded Companies” was a strong and clear signal of a narrow definition – protection limited to employees of publically traded companies and no others. Id.  The Court’s dicta seemingly found that a lack of any additional guidance beyond “employees of publicly traded companies” cut against a broader interpretation to include contractors of such companies. 

The majority further noted that SOX regulated non-public entities in separate sections of the legislation, and thus Congress could have regulated contractors and sub-contractors in a similar fashion but declined to so. Id. at 71. 

Moreover, the majority rejected the plaintiffs’ reading of the statute even in light of the remedial nature of the whistleblower statute.  While acknowledging the general rule that remedial statutes should be interpreted broadly, the majority argued that the plaintiffs’ interpretation “goes far beyond the problems Congress wished to remedy,” and thus did not find any basis to give weight to the plaintiffs’ definition.  Id. at 75-76. 

Majority Finds No Support for Broad Protections in Legislative History

In examining the legislative history of SOX, the majority pointed to references of protecting “employees of publicly traded companies,” and thus concluded that the absence of any additional language regarding contractors meant that Congress did not intend to extend such protection to contractors of publicly traded companies. Id. at 77-78. 

The majority also pointed to the subsequent Mutual Fund Reform Act of 2004 (MFRA), which would have added explicit protection for investment advisors and underwriters to the protected class of the statute.  Id. at 79.  The MFRA was not passed into law, but the majority was careful not to conclude that such a proposal was indicative that Congress thought the protections were not yet written into the statute.  Id.  However, the majority seemed persuaded that Congress’ lack of discussion of contractors or subcontractors in the protected class indicated that the statute did not include them.

Court Rejects Agency Readings of the Statute

The majority also rejected any deference to agency positions under Chevron or Skidmore rules. Id. at 82.  The majority cited several reasons, including that 1) Congress did not give authority to the SEC or Department of Labor to interpret the term “employee”; and 2) the definition of “employee” was not ambiguous, and thus no deference was owed. Id. 

In concluding that the statute’s protected class was limited to employees of publicly traded companies and not their contractors or subcontractors, the majority punted to Congress to amend the statute if it felt the Court’s interpretation was not correct. Id. at 83. 

Dissent Finds Support for Broader Interpretation

For the dissent, Judge Thompson contrasted the majority’s statutory analysis with the Court’s own recent opinion in United States v. Ozuna-Cabrera.  In that case, the Court analyzed an identity theft statute and declined to give much consideration to title names or interpret Congressional references to the statute as narrow terms of art. Id. at 84.  The dissent argued that the majority’s analysis was flawed because 1) the majority’s analysis made a word in the statutory text redundant, which is against general rules of statutory interpretation; 2) Congress explicitly enacted narrower whistleblower protection elsewhere in the statute but did not do so here; 3) the statute’s title and caption (“Whistleblower Protection for Employees of Public Companies”) does not explicitly limit the statute, and thus does not support the majority’s narrow interpretation; and 4) the purpose of SOX is to encourage whistleblowing and nothing in the legislative history points to narrowing the protection to only employees of public companies.  Id. at 84-87. 

The dissent also argued that in statutory analysis, courts assume that “at the time of the statute’s enactment, Congress was well aware of courts’ and agencies’ interpretations of existing law.”  The dissent pointed out that the Department of Labor, which has adjudication authority over whistleblower claims, previously defined “employer” to include contractors.  Congress declined to change that definition when it passed SOX. Id. at 91. 

The dissent also takes the majority to task over its rejection of any Skidmore analysis, arguing that the statute is not unambiguous and thus allows a Skidmore deference to an agency’s interpretation.  Id. at 92.  “A statute that is susceptible of multiple interpretations and whose meaning requires over thirty pages to explain is neither clear nor unambiguous by definition.”  Id.  Under Skidmore, the dissent says the Court must consider “the thoroughness evident in [Labor’s] consideration, the validity of its reasoning, and its consistency with earlier and later pronouncements.”  Id.  The dissent found these factors to weigh in Labor’s favor, and thus the dissent deferred to the DOL’s regulations, which allow whistleblower protection to employees of contractors of public companies.  Id. at 93.

Conclusion
The Court’s holding, limiting whistleblower protection to employees of publicly traded companies, has widespread implications for the financial services industry, its employees, and the corporate structures of SOX-regulated entities.  Contact experienced securities counsel to see how Lawson may affect your securities practice. 

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Josh Lawler

Kevin A. Malcolm

Also See:

Amgen Inc. v. Connecticut Retirement Plans & Trust Funds: Supreme Court Sides with Investors in Securities Fraud Class Action

Gabelli v. SEC: Unanimous Supreme Court Rejects Extending Statute of Limitations in SEC Enforcement Actions

In re Rigel Pharmaceuticals, Inc.: Ninth Circuit Increases Difficulty for Investors to Sue Drug Companies Based on Clinical Trial Results

Mastick v. TD Ameritrade, Inc.: Court Upholds Use of California Arbitration Act in Contracts Governed by California Law

Matrixx Initiatives, Inc., et al. v. Siracusano: Securities Plaintiffs Can Use Inferences to Show Materiality and Scienter at the Pleading Stages