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Private firms will face more retaliation litigation if Sarbanes-Oxley is extended

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Private companies likely would face increased retaliation litigation should the U.S. Supreme Court extend the Sarbanes-Oxley Act's whistle-blower protections to the privately held contractors of public companies.

The possibility arose last month when the Supreme Court agreed to consider an appeal of the February 2012 ruling in Jackie Hosang Lawson et al. v. FMR L.L.C. et al. In that case, a panel of the 1st U.S. Circuit Court of Appeals ruled that employees of privately held contractors working for public firms are not protected by SOX's whistle-blower anti-retaliation provision.

Because there has been no split among the various appeals courts on the issue, some observers say the Supreme Court's decision to review the case is unusual. It could signal that at least four judges — the number needed to accept certiorari — are uncomfortable with the court ruling.

However, others suggest the high court may have decided to take the case because the 1st Circuit's ruling contradicts a Department of Labor administrative review board ruling on the issue and the court may be inclined to uphold the appeals court.

The 1st Circuit's ruling focuses on separate lawsuits, both brought by former employees of private contractors that advise and manage the Fidelity family of mutual funds operated by Boston-based FMR Corp. Both plaintiffs allege retaliation for reporting fraud.

The plaintiffs contend they are covered under Section 806 of SOX.

“We conclude that only the employees of the defined public companies are covered by these whistle-blower provisions,” as indicated in the statute, despite plaintiffs' contention that they are covered by the law, the 1st Circuit ruled. Had Congress intended to provide this coverage to private companies, “it would have done so explicitly,” it said.

“In our view, the 1st Circuit correctly concluded that the statute is limited to employees of publicly traded companies,” FMR said in a statement.

The high court review is “a little bit of a surprise” because “usually the Supreme Court waits for a circuit split before granting cert on a legal issue,” said Jonathan F. Cohn, a partner with law firm Sidley Austin L.L.P. in Washington. “Presumably there were at least four justices who were troubled enough by the lower court's ruling that they thought immediate review was warranted despite the lack of a circuit split.”

The Supreme Court may view the 1st Circuit's ruling as “overreaching” the parameters of SOX, said Thomas O. Gorman, a partner with Dorsey & Whitney L.P. in Washington.

Others, however, say the court may have accepted the case because of the 1st Circuit's disagreement with a May 2012 Department of Labor administrative review board ruling in Thomas Spinner v. David Landau & Associates L.L.P. In that case, the board said whistle-blower protection extends to contractors, subcontractors or agents of publicly traded companies even if they are not public themselves.

Lloyd B. Chinn, a partner with Proskauer Rose L.L.P. in New York, said the Labor Department's administrative review board “has been extremely aggressive in its interpretation of Sarbanes-Oxley, and I think it's at least possible that the court will take this opportunity to pare back” the board's interpretation of the issue.

“It is a fairly good time from business' perspective for this to go to court” and there is a “decent chance” the Supreme Court will uphold the 1st Circuit ruling as a business-friendly court that tends to take a stricter “constructionist view” of the law, said Beth Golub Joffe, of counsel at Stokes Lawrence P.S. in Seattle.

However, “This court, under Chief Justice Roberts, has been surprisingly employee-friendly when it comes to retaliation cases, and the court has read retaliation protection very broadly,” said Richard Moberly, a law professor at the University Of Nebraska College Of Law in Lincoln.

He cited, among others, the Supreme Court's 2011 ruling in Eric L. Thompson vs. North American Stainless L.P., where it held that an employee linked to a co-worker who has alleged discrimination also should be protected from workplace retaliation.

Observers note that the mutual fund industry is structured so that while the funds themselves are publicly held, none has employees, only private contractors, and all the advisory and management companies with which they deal are privately held. Under the 1st Circuit ruling, employees in the mutual fund industry “end up being inadvertently excluded” from whistle-blower protection, said Rosanne Felicello, principal attorney at Felicello Law P.C. in New York.

Should the Supreme Court extend relation protection to whistle-blowers at private firms, that would open the door to “costly litigation for countless companies in a way that will do little to advance the purposes behind Section 806,” the U.S. Chamber of Commerce's National Chamber Litigation Center in Washington said in an amicus brief filed in the 1st Circuit case. It also would be at odds with “reasonable employer expectation.”

However, Geoffrey C. Rapp, a law professor at the University of Toledo School of Law in Ohio, said even if the 1st Circuit ruling is upheld, “the best approach is never to tolerate retaliation” and to have a system in place for workers to air complaints.