First Circuit Panel: No Sarbanes-Oxley Whistleblower Protection for Employees of Public Companies' Contractors

In a case of first impression, a First Circuit panel reversed a district court's decision on the scope of those subject to protection under the Sarbanes-Oxley Act's whistleblower provision. The plaintiffs, who alleged unlawful retaliation by their corporate employers, were two employees of private companies acting under contract as advisers to and managers of mutual funds. At issue was the scope of employees subject to protection under SOX Section 806, and the district court concluded that employees encompasses employees of private companies that are contractors or subcontractors to public companies and who engage in protected activity. The district court limited its interpretation to employees reporting violations related to fraud against the shareholders. The court then granted the employers' motion to certify for interlocutory appeal the issue of the whistleblower provision's applicability to the plaintiffs. Lawson v. FMR LLC, No. 10-2240,

The panel stated that it interpreted the statute differently and reversed the district court's decision. The panel concluded that only the employees of the defined public companies are covered by the whistleblower provisions, and if Congress intended a broader meaning, it could amend the statute. First, the principles of statutory interpretation led the panel to interpret the provision as unambiguously in favor of limiting its protection only to employees of public companies. The panel observed that the plain words of the title and captions of the section, which refer to protection for employees of publicly traded companies, are statements of congressional intent and strongly conflicted with the plaintiffs' interpretation.

The text of Section 806 identifies covered employers as having a class of securities registered under Exchange Act Section 12 or as filing file reports with the SEC pursuant to Exchange Act Section 15(d). These public companies, the panel explained, may not retaliate against their employees who engage in protected activity. Section 806 also lists representatives of employers, including contractors and subcontractors, who are also barred from retaliating against employees of a public company. It did not logically follow, the panel stated, that retaliation against employees of contractors and subcontractors was barred.

The panel then observed that Congress explicitly enacted broader protection for whistleblowers in other SOX provisions, such as in Section 1107's prohibition against retaliation against informants, but chose different and more limited language for Section 806. Also, in portions of SOX where Congress addressed the private entities and their employees, it did so explicitly. In short, as the panel wrote: ``Had Congress intended to extend § 1514A whistleblower coverage protections to the employees of private companies that have contracts to provide investment advice to funds organized under the Investment Company Act, it would have done so explicitly. In that regard, the panel noted earlier federal whistleblower protection statutes that explicitly extended their coverage to employees of contractors.’’ The panel also cited the Supreme Court's admonition to lower courts not to give securities laws greater scope than allowed by their text.

The panel's interpretation was bolstered further by the legislative history of this and other sections of SOX. According to the panel, the Senate committee report for the bill that became Section 806 was primarily concerned with the collapse of Enron, and only mentioned protecting employees of publicly traded companies who reported fraud. Section 806 was later amended by the Dodd-Frank Act to extend whistleblower coverage to employees of public companies' subsidiaries and employees of statistical rating organizations. The panel viewed this amendment and the associated remarks by senators as confirming its interpretation the only covered employees are those of publicly traded companies. The panel then determined that, since the term employee was not ambiguous, it would not defer to any contrary determination by an administrative agency.

In a dissent, Judge Thompson said that the panel's unwarranted restriction on the intentionally broad language of the Sarbanes-Oxley Act would bar a significant class of potential whistleblowers from legal protection. The dissenting judge read the text as including the contractors' employees in this case. The judge did not find any restriction limiting the statute's application to employees of publicly held companies and remarked that the majority's interpretation rendered the word contractor in the statute superfluous in a way that contradicted previous analyses of statutes in the First Circuit. The judge also noted that Congress was explicit where it intended to regulate public entities only, and that the choices of different mechanisms for different entities supported the plaintiffs' reading of statute. Continuing, the dissent stated that the title of the statute gets the majority nowhere. The judge viewed the title as merely describe a specific application of a generally applicable statute.

This post was contributed by my colleague Rodney Tonkovic