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Supreme Court Upholds Sarbanes-Oxley’s Whistleblower Protections

March 6, 2014

The Supreme Court said Sarbanes-Oxley’s whistleblower protections extend to people who work for contractors to public companies, not just the companies.The ruling may have broad implications for accountants and legal advisers to public companies and other businesses registered with the SEC.

In a 6-3 decision, the U.S. Supreme Court on March 4, 2014, upheld the whistleblower protections of the Sarbanes-Oxley Act of 2002, ruling that they extend to people who work for contractors to public companies.

“The Sarbanes-Oxley Act contains numerous provisions aimed at controlling the conduct of accountants, auditors, and lawyers who work with public companies,” said Justice Ruth Bader Ginsburg’s majority opinion. “Given Congress’ concern about contractor conduct of the kind that contributed to Enron’s collapse, we regard with suspicion construction of §1514A to protect whistleblowers only when they are employed by a public company, and not when they work for the public company’s contractor,” in reference to Section 806 of Sarbanes-Oxley, which bars retaliation against employees who uncover corporate wrongdoing.

Justice Sonia Sotomayor’s dissent said the ruling gave the law enacted in the wake of the Enron and Worldcom accounting scandals too broad a reach.

“As interpreted today, the Sarbanes-Oxley Act authorizes a babysitter to bring a federal case against his employer, a parent who happens to work at the local Walmart, a public company, if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud,” wrote Sotomayor in an opinion that was joined by Justices Anthony Kennedy and Samuel Alito.

The decision inLawson v. FMR LLCwas based on a complaint by two former employees of FMR Corp. affiliates, Jackie Lawson, who worked for Fidelity Brokerage Services LLC for 14 years, and Jonathan Zang, who spent eight years as a portfolio manager for Fidelity Management & Research Co. and later FMR Co. FMR Corp. owns Fidelity Investments’ mutual funds, and Fidelity Management & Research is the funds’ adviser.

Lawson, a senior director of finance, accused management of overstating costs and harming shareholders.Zang said mistakes were made in the registration statements for some funds.Both accused Fidelity of firing them in retaliation for their complaints, and filed petitions under Sarbanes-Oxley.

FMR responded that because it’s privately held, it wasn’t subject to Sarbanes-Oxley’s provisions for public companies.The company also said if Congress meant for Section 806 to apply to contractors’ employees, it wouldn’t have expanded the protections in Section 922 of the Dodd-Frank Act in 2010.

“To accept petitioners’ and the government’s position in this case, the court would have to conclude that this was a pointless act of legislation,” wrote FMR in its court filing.

Justice Ginsburg’s decision noted that both the judge who dissented from the U.S. Circuit Court of Appeals decision in FMR’s favor and the Labor Department’s Administrative Review Board interpreted Sarbanes-Oxley to have a broader reach.

The decision may have implications for other fund managers, given that Fidelity’s corporate structure, with separate legal entities for the funds, the retail distribution to investors, and the management of the portfolios, is similar to how many fund companies are organized.

“The wisest mutual funds, investment advisers, and investment managers saw this coming and already have in place codes of conduct and anti-retaliation polices,” said Daniel Westman, a partner in McLean, Virginia, with the law firm Morrison & Foerster LLP. “The companies who were holding out and were hoping that this wouldn’t come out the way that it did, they’re certainly going to have to react.The ruling is not limited to the mutual fund industry.The logic of it applies to any industry.”

In the near term, the most likely outcome is another hearing in U.S. District Court in Boston, where Fidelity is based.

“You’re talking about getting to first base,” said Stephen Kohn, executive director for the National Whistleblowers Center, which submitted a brief supporting Lawson and Zang. “In almost all employment cases, usually the easiest thing to establish is that the person is an employee.Once you’ve established that they’re an employee, you still have to prove protected activity.”

The former Fidelity employees will also have to prove that the executives who had them fired knew about their complaints and that they’re dismissals were in retaliation to the complaints, which Kohn noted is still a high burden of proof.

For its part, Fidelity is conceding nothing.

“There has been no determination of the merits of either former employee’s claims by any of the courts,” said Vincent Loporchio, a Fidelity senior vice president, in an emailed comment. “The allegations were unfounded when they were made, and they continue to be unfounded today.”

The Lawson decision is the second time in the past four years that the court ruled on a key Sarbanes-Oxley provision.In June 2010, the court by 5-4 upheld the law’s constitutionality inFree Enterprise Fund and Beckstead and Watts LLP v. Public Company Accounting Oversight Board,although it also said the law violated the Constitution’s separation of powers provisions because the SEC’s ability to remove board members was so limited.