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U.S. Supreme Court Extends Sarbanes-Oxley Whistleblower Protection to Employees of Privately-Held Companies

On March 4, 2014, the U.S. Supreme Court ruled in Lawson v. FMR LLC, No. 12-3 that “whistleblower” protection under the Sarbanes-Oxley Act of 2002 extends to the employees of a public company’s private contractors and subcontractors.

The Sarbanes-Oxley Act was enacted in the wake of the Enron scandal largely to protect investors in public companies and to restore trust in financial markets.  Among other things, Sarbanes-Oxley protects “whistleblowers,” providing that: “No [public] company…or any…contractor [or] subcontractor…of such company, may discharge, demote…[or] discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity].” 18 U.S.C. § 1514A (a).  There are other Sarbanes-Oxley provisions, however, that directly affect more than simply public companies, notably changes to the criminal code enhancing penalties for all mail and wire fraud.

The extent to which Sarbanes-Oxley governs private companies continues to develop.  In Lawson, the plaintiffs, former employees of a private company that contracted with publicly-traded mutual funds, alleged that their employer, FMR LLC, retaliated against them for reporting alleged fraud by an FMR client.  The district court rejected FMR’s argument that the Sarbanes-Oxley protects only employees of public companies. On appeal, a divided panel of the First Circuit reversed, finding that while FMR was a contractor under § 1514A, that provision only protected public company employees.

The Supreme Court reversed in a 6-3 decision, holding that “§ 1514A extends whistleblower protection to employees of privately held contractors who perform work for public companies.”   The Court found that “clear from the legislative record is Congress’ understanding that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron’s contractors.”

Justice Ginsburg delivered the opinion of the Court, in which Chief Justice Roberts and Justices Breyer and Kagan joined. Justice Scalia, joined by Justice Thomas, filed an opinion concurring in principal part and concurring in the judgment. And Justice Sotomayor filed a dissenting opinion, in which Justices Kennedy and Alito joined.

Following the Lawson decision, privately held companies should carefully review their policies to ensure that they protect employees from retaliation for the reporting of fraud or other dishonest behavior by their customers and clients, especially customers and clients that are public companies.

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