Last week, the Supreme Court heard oral argument in Lawson v. FMR. This is the first Sarbanes-Oxley (SOX) corporate fraud whistleblower case to be heard by the High Court. The transcript is now available here.
The issue is whether the text of SOX’s whistleblower protection covers the employees of the contractors of publicly traded companies. The First Circuit Court of Appeals said, “no,” even though SOX says that it covers, “any officer, employee, contractor, subcontractor, or agent of such company[.]” The First Circuit said this phrase prohibits the contractors from firing the employees of the publically traded company, and has no effect on the contractor’s treatment of its own employees. I criticized this decision when it was issued in this prior blog post.
University of Washington law professor Eric Schnapper presented the argument for whistleblowers Jackie Lawson and Jonathan Zang. Schnapper was able to get out four iron clad reasons why this text in SOX has to cover the employees of the contractors. No justice questioned these four iron clad reasons. These four reasons are, (1) it renders the statutory language regarding contractors virtually meaningless, (2) it renders that language with regard to contractors in the mutual fund industry literally meaningless, (3) it has the implausible consequence of permitting the very type of retaliation that we know Congress was concerned about – retaliation by an accountant such as Arthur Andersen, and (4) it renders incoherent the remedial provisions regarding the burden of proof and an affirmative defense.
While Justice Breyer gave him some tough questions about how far SOX’s language would reach, he later suggested the First Circuit’s narrow construction was too narrow. “Oh, that itself is a big limitation. Huge,” he said at page 40. At pages 44-45, he stated, “if, in fact, the fraud is related to the contract or by certain kinds of contractors who do investment work, who do all kinds of important work for the company, why shouldn’t it be covered? I mean, and the language, of course, does say what I read, as you agreed. It says a contractor.”
Instead, Justice Alito resorted to “reductio ad absurdum,” the logical fallacy of taking an argument to an extreme to ridicule it. One of Schnapper’s particular talents in Supreme Court advocacy is crafting the argument that gets the Court to rule for the employees without pushing the Court any farther than it needs to go. Schnapper applied his talent in redirecting Justice Alito to Lawson and Zang’s position as accountants in the thick of the public company’s deceptive disclosure. When Justice Alito pressed again, Schnapper noted that the different context could yield a different result. Schnapper thereby minimized the time spent on the unhelpful hypothetical and noted that the different contexts could lead to different results that have not been fully briefed in this case.
Justice Scalia called it “peculiar” to have a different rule for officers than for contractors. But he pointed to a way out by asking, “is it as much of a disaster as — as your opponent suggests? That is to
say, would — would a firing for something that had nothing to do with the securities laws be swept in?” Justice Scalia picked up on a point made by the National Employment Lawyers Association (NELA) and the Government Accountability Project (GAP) in their amicus brief (which I co-wrote with Scott Oswald, Kelly Kruse, Michael Anderson, Tom Devine and Rebecca Hamburg). A SOX case requires both coverage and protected activity, and very few of the covered employees have engaged in any protected activity.
To me, the scope of protected activity is sufficient to explain why the gardener is unlikely to face SOX liability. As a practical matter, OSHA received only 168 cases last year – even while the Department of Labor policy calls for covering the employees of contractors. So, we are not seeing any floodgate. Assistant Solicitor General Saharsky made this point during her portion of the argument.
Justice Scalia told FMR’s attorney (at p. 35), “the problem that I have is if – if the statute does not cover contractors’, subcontractors’, firing of their own people, what – what coverage does it have? A subcontractor usually cannot fire somebody from the principal company that’s traded on the exchange.”
Chief Justice Roberts asked (p. 42), “What about the butler who does, in fact, hear all this information about a conspiracy and wire fraud?” He is clearly thinking about the need to protect employees who do come forward with evidence of fraud.
Justice Sotomayor touched on the remedial purpose of SOX at pp. 41-42: “So doesn’t that drama reduce itself if we accept the government’s limitation that it has to do only with the fraud related to the public company? … Because that was the center of this bill — what motivated this bill.” At page 44, she addressed the deference issue noting that, “we’re not being asked to give deference to the Petitioner. We’re being asked to give deference to the government.” At page 49, FMR’s attorney claimed, “Remember the overall purpose of the statute is disclosure by public companies. It is not protection of investors, as some at times have said.” Thankfully, the NELA/GAP brief explained how the purpose of SOX was to protect investors, and the whistleblower provision was a “crucial” part of serving that purpose.
Justice Alito (at page 45), asked FMR’s attorney if there is any basis to limit the scope of protection to frauds by the publicly traded company. “It is not in the terms of the statute,” FMR’s attorney conceded. That prompted Justice Scalia to say, “It’s a very sensible limitation. Unfortunately, it’s not there.”
Overall, the justices each expressed that they would be looking to apply the plain language of SOX to protect those employees SOX meant to protect. Whether the Court will look for a “limiting principle” that is not in the text of SOX remains unknown, but the Court has good reasons to say that Lawson and Zang are covered and the coverage of others can be decided by the the Department of Labor, subject to future court review.