The Supreme Court agreed to hear a significant case concerning the coverage of the Sarbanes-Oxley whistleblower provisions. The central issue to be determined is whether an employee of a privately held contractor or subcontractor of a public company is protected from retaliation by Section 806 of the Act. Lawson v. FMR LLC, No. 12-3 (S.Ct. Cert. granted May 20, 2013).
Petitioners-plaintiffs are Jackie Lawson and Jonathan Zang, employees of the Fidelity mutual fund complex. Ms. Lawson was employed for fourteen years, most recently as the senior Director of Finance. Mr. Zang has been employed by Fidelity for several years, most recently with FMR Co., Inc. as an equity research analyst. The Respondent-defendants are privately held FMR, Co., Inc. and a number of its subsidiaries which operate the Fidelity group of mutual funds. Each publically held fund is a separate entity, registered with the SEC under Section 15(d) of the Exchange Act. Those funds have no employees. Rather, the directors of the fund contract with a privately held investment adviser which conducts all the activities of the fund.
Ms. Lawson initially raised concerns with FMR Co. in 2005 regarding the calculation of expenses. The amount of the expenses impacts the profits and ultimately the fees. Ms. Lawson objected to the amount of the expenses and the failure to disclose the methodology used to calculate them. Her complaint claimed that about $100 million was being improperly treated as an expense. After raising a series of objections she resigned claiming that the working environment was intolerable because of harassment.
Mr. Zang worked most recently for FMR as an equity research analyst. In 2005 he initially objected to a Statement of Additional Information which was being prepared for filing with the SEC, claiming it was inaccurate. The Statement was revised in accord with Mr. Zang’s objections. He also objected to the manner in which certain so-called “veiled index funds” were operated – funds which were essentially unmanaged index funds but for which Fidelity improperly collected a management fee. After the Statement was revised and filed he was terminated. He filed a complaint with OSHA as did Ms. Lawson. Both later filed actions in district court.
The district court rejected motions to dismiss filed by Fidelity. Its opinion centered on the term “employee” in the statute and the legislative history. The statute specifies that it protects an “employee” but fails to specify by whom that person must be employed. The legislative history, however, shows that Congress was particularly concerned with employees of institutions working for public companies, the court concluded thus supporting a reading of the statute which extends protection to employees of contractors. Subsequently, an application for an interlocutory appeal was granted.
The First Circuit reversed in a 2-1 decision. The majority concluded that the most natural reading of the term “employee” in the statute is that it only covers those at public companies. That conclusion was based largely on the title of the statute and caption which refer to “employees of publicly traded companies.” The Court declined to give deference to the decision of the Department of Labor in Spinner v. David Landau & Assocs., LLC, Nos. 10-111, 10115, 2012 Wl 1999677 (ARB May 31, 2012) which is to the contrary. The dissent, in contrast, argued that the statute plainly applies because a contractor of a public company terminated a whistleblower.
Before granting certiorari the Supreme Court requested the views of the United States. The Solicitor General argued that while the First Circuit decision is incorrect, the High Court should not take up this issue now. First, the Solicitor told the Court that the “statutory text identifies a broad range of entities and person who are prohibited from engaging in retaliation – a public company or ‘any officer, employee, contractor, subcontractor, or agent’ of such a company.” (internal quotations eliminated). Thus, by its plain terms, the statute is not delimited in the manner found by the First Circuit. This broad reading of the text is supported by the legislative record of the statute which was enacted in the wake of the Enron Corporation debacle and its deception which was facilitated by its outside auditors, Arthur Anderson.
Second, to the extent the statute is vague, the determination of the Department of Labor, which is charged with administering it, is entitled to Chevron deference. The decision in Spinner held that employees of contractors are entitled to protection.
Finally, while the First Circuit is incorrect, the Court should decline to hear the case at this time, according to the Solicitor. Presently, there is no conflict among the circuits. The lack of a conflict, coupled with the infrequency with which the federal courts have had to deal with this question, suggests that now is not the appropriate time for the Court to take up this issue.
Nevertheless, the Court decided to hear the case next term.
ABA Seminar: Fifth Annual FCPA Update: Protecting Your Business in the Future: Lessons from the New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion will focus on building effective compliance systems and conducting M&A due diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta, Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director, FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA members attending live in Washington who pre-register by sending an e-mail to firstname.lastname@example.org). Webcast Nationally by the ABA. For further information please click here.