Lawson v. FMR LLC: The Supreme Court Expands The Class of Employees Who Qualify as Whistleblowers
On March 4, 2014, in Lawson v. FMR LLC, the Supreme Court drastically expanded the class of potential whistleblowers protected under the Sarbanes-Oxley Act (SOX). In doing so, the Court’s opinion set a generous tone for the interpretation of other disputed whistleblower statutes.
Passed in 2002 in the wake of the Enron scandal, SOX set 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. The purpose of SOX is to, “prevent and punish corporate and criminal fraud, protect the victims of such fraud, preserve evidence of such fraud, and hold wrongdoers accountable for their actions.” In passing SOX, Congress was hoping to stop situations such as Enron’s corporate code of silence that discouraged employees from reporting fraudulent behavior.
Lawson asked an important question: Which “employees,” exactly, are protected? Does SOX protect only whistleblowers employed directly by a publicly traded company that is suspected of wrongdoing? Or does it also protect whistleblowers who work for privately held contractors or subcontractors hired by the suspected company or even whistleblowers hired by its officers and employees?
Until the Lawson decision, the law could be read either way. Lawson held that SOX whistleblower protection provisions extend to employees of privately owned companies performing contract services for publicly traded companies who raise reasonably based concerns to their supervisors about fraud adversely affecting shareholders of the public company. The Lawson decision indicates 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 broad protection was the only viable outcome based on the statute itself, on Congressional intent, and on previous interpretations of similar laws. Ginsberg said that the alternative — failing to protect “countless professionals equipped to bring fraud on investors to a halt” — was far worse than potential overreach of SOX.
The decision was a clear win whistleblowers and especially for Jackie Hosang Lawson and Jonathan Zang, the whistleblowers in the case. 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, defendants claimed that Lawson and Zang were not protected under SOX. The Lawson decision allows Lawson, Zang, and countless other potential whistleblowers to bring a claim under SOX.
The Lawson decision speaks to the anti-retaliation provisions of SOX alone. However, the Justice’s analysis can be viewed as questioning prior court rulings that have limited whistleblower protections of other statutes.
Justice Ginsburg’s analysis throws into doubt, the U.S. Court of Appeals for the Fifth Circuit decision 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. Therefore, an employee who reports his concerns to a supervisor (and not the SEC) may not be protected under Asadi precedent. It is important for potential whistleblowers to note that Asadi 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.
The analysis in Lawson also enhanced previous court decisions which were favorable to whistleblowers. For example, the Tenth Circuit’s holding in Lockheed Martin Corp. v. Brown, held that SOX protects whistleblowers who flag any type of wrongdoing enumerated in the statute, not just fraud that hurts shareholders of the accused company. The Lockheed opinion, which may have previously been an outlier not followed by other courts, now seems wholly uncontroversial under Lawson.
Lawson expands whistleblower protections not only to employees like Zang and Lawson who work for privately held companies in the mutual fund industry. It also may protect a variety of other employees who support publicly traded companies, such as employees at law firms and accounting firms who prepare filings and disclosures for publicly-traded companies.
The Lawson decision is so important because represents an important win for whistleblowers by expanding the class of potential whistleblowers under SOX.