Yesterday, the U.S. Supreme Court issued its first decision about the whistleblower protection in the Sarbanes-Oxley Act (SOX). In Lawson v. FMR, the Court decided that corporate fraud whistleblowers are protected when they raise concerns about violations of SEC accounting rules, even if they work for a contractor of a publicly traded company.
Justice Ginsberg wrote the majority opinion, joined by Justices Breyer, Kagan and Chief Justice Roberts. Her opinion goes farther by explaining the importance of deciding cases based on the remedial purpose of the law. For SOX, that purpose was to, “safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation[.]” Justice Ginsberg made this line the first line of her opinion, giving emphasis to the idea that the Court should help Congress reach the goals of the law.
Here is a prior blog post about how this case got to the Supreme Court:
Lawson had worked for the Fidelity organization for years, and she raised concerns about its cost accounting methods. These methods obviously affect the reports filed with the SEC. In 2006, while still working for Fidelity, she filed a whistleblower retaliation claim with OSHA. In September 2007, while her complaint was still pending with OSHA, she resigned and claimed that she was constructive discharged by Fidelity. In 2008, she brought her retaliation case to the U.S. District Court in Massachusetts. Zang let his case proceed further to a decision by an Administrative Law Judge (ALJ). He appealed to the Administrative Review Board (ARB) and then brought his case to the same court as Lawson’s case. The Fidelity companies made motions to dismiss, which the judge denied. The judge, however, granted special permission for the defendants to appeal before the case proceeded any further.
On appeal, the Secretary of Labor and the SEC both filed amicus briefs urging the Court of Appeals to agree that the Sarbanes-Oxley Act (SOX) covers Lawson and Zang.
On February 3, 2012, two judges of the U.S. Court of Appeals for the First Circuit dismissed the SOX whistleblower claims of Jackie Lawson and Jonathan Zang. The case is Lawson v. FMR, LLC, 670 F.3d 61 (1st Cir. 2012). To justify this dismissal, the two judge majority held that the SOX whistleblower statute was not remedial, that it is but a “relatively small part” of SOX, that the Department of Labor (DOL) deserves no deference in SOX cases, and that the SOX whistleblower protection does not apply to the employees of contractors of publicly traded companies. Judge Thompson, dissenting, got it right.
On page 2, Justice Ginsberg recognizes that at the motion to dismiss level, courts must take “the allegations of the complaint as true[.]” The Supreme Court did not require any special pleading, and did not apply the Iqbal or Twombly decisions.
On page 3, the Court sets out the purpose of SOX from the Senate Report No. 107-146. That purpose is to, “prevent and punish corporate and criminal fraud,protect the victims of such fraud, preserve evidence of such fraud, and hold wrongdoers accountable for their actions.” Congress was concerned that Enron had a “corporate code of silence” that “discourage[d] employees from reporting fraudulent behavior[.]” The lack of a whistleblower protection was “a significant deficiency[.]” On page 21, the Court said, “affording whistleblower protection to mutual fund investment advisers is crucial[.]”
Perhaps because Justice Scalia’s opinion disputed the whole idea of congressional intent, Justice Ginsberg noted in the first footnote that the Senate record was written by Senators Leahy (Democrat) and Grassley (Republican), and adopted by the whole Senate with “unanimous consent[.]”
On pages 8 and 26, Justice Ginsburg lauded the dissent in the First Circuit written by Judge Ojetta Rogeriee Thompson. This dissent said the First Circuit had “impose[d] an unwarranted restriction on the intentionally broad language of [SOX]” and “bar[red] a significant class of potential securities-fraud whistleblowers from any legal protection.” Quoting 670 F.3d 61 at 83. This is a nice honor for the new appellate judge who got it right.
On page 9, the Supreme Court makes clear that a split between one circuit and the Department of Labor is sufficient to grant certiorari. In my 2012 amicus brief asking the Supreme Court to accept this case, I had argued that it took the Fifth Circuit 21 years to recognize its error in Brown & Root v. Donovan, 747 F.2d 1029 (5th Cir. 1984) (denying protection to internal whistleblowing at nuclear power plants). “If we had to wait 21 years for correction of the decision below, untold financial scandals would grow unnecessarily large while employees were discouraged from raising concerns.” When the Supreme Court granted “cert” on May 20, 2013, it did not give its reasons. Now it has opened to the door to review in cases where a circuit disagrees with the Department of Labor. On page 28, note 21, Justice Ginsburg drives this point home saying, “the courts of appeals are not, of course, the only lodestar for determining whether a proposition of law is plainly established.”
On page 9, Justice Ginsburg reaches her main conclusion quickly. When SOX says “no … contractor … may discharge … an employee,” the natural meaning is that the contractor cannot fire its own employees. It is too bad that the First Circuit majority could not read this text for its natural meaning. “[W]e presume the operative language means what it appears to mean[.]” Page 10.
On pages 12-13, Justice Ginsburg reviews each of the ways SOX refers to “the employee” and “the employer” and concludes that Congress clearly meant to protect employees from discharges by their own employers. Prof. Eric Schnapper, who represented Lawson and Zang at the Supreme Court, developed this argument in rich detail in his merit brief. It is nice to see his insightful and detailed legal analysis pay off in the text of the majority opinion.
While I was confident, especially after the oral argument, about the outcome of this main issue, there was another important issue raised in the Lawson case. The First Circuit had said that it would not give deference to the views of the government agencies. Lawson challenged this holding and asked the Supreme Court to give deference to the ARB’s decision in Spinner. Justice Ginsburg declined to do that. In footnote 6, she recognizes that the dissent felt that the SEC should have any deference in SOX cases. She explains that since the Court agrees with the ARB’s conclusion that SOX does protect the employees of contractors, there is no need to decide what weight the ARB’s decision would have. Still, the SEC itself signed onto the federal government’s brief that said the Department of Labor should have deference in whistleblower issues. She says this, “view is hardly surprising given the lead role played by the DOL in administering whistleblower statutes.”
So while we do not have a formal holding giving Chevron deference to the DOL, we do have very quotable language here about why DOL should have deference. I suggest that we actually got something better than deference. Whistleblowers have a Supreme Court pronouncement that the remedial purpose of the law is the polestar for interpretation. On page 14, the majority opinion gives a clear enunciation of this principle:
There would be a huge hole, on the other hand, were the dissent’s view of §1514A’s reach to prevail: Contractors’ employees would be disarmed; they would be vulnerable to retaliation by their employers for blowing the whistle on a scheme to defraud the public company’s investors, even a scheme engineered entirely by the contractor. Not only would mutual fund advisers and managers escape §1514A’s control. Legions of accountants and lawyers would be denied §1514A’s protections. Instead of indulging in fanciful visions of whistleblowing babysitters and the like, the dissent might pause to consider whether a Congress, prompted by the Enron debacle, would exclude from whistleblower protection countless professionals equipped to bring fraud on investors to a halt. [Citations omitted.]
On page 16, the opinion states, “Our textual analysis of [SOX] fits the provision’s purpose.” That purpose is, “to ward off another Enron debacle.” Page 17.
This logic will help whistleblowers win a wide range of legal issues. Even in those few cases where the ARB has ruled against whistleblowers, such as on extraterritoriality, this reasoning can still be used on behalf of whistleblowers. This is a point I raised in my amicus briefs at the cert stage, and in the NELA and GAP amicus on the merits. The main heading of my cert stage amicus told the Court that, “protecting the employees of contractors is necessary to achieve the remedial purpose of SOX.”
The employers made much of their red herring arguments about how far a literal application of SOX might reach. They complained about giving protection to the personal employees of corporate executives. Justice Ginsburg noted that the DOL has long recognized SOX coverage for the employees of contractors, but this parade of horribles has not come to pass. On page 15, she says, “The issue, however, is likely more theoretical than real.” “Few housekeepers or gardeners, we suspect, are likely to come upon and comprehend evidence of their employer’s complicity in fraud.” In NELA’s amicus brief, we addressed this issue by saying, “The issue of whether a particular employee can provide information that reasonably relates to securities violations addresses the scope of protected activity, not coverage.”
On page 23, Justice Ginsburg says that if the Court is wrong, “Congress can easily fix the problem by amending [SOX.]” Having participated in many efforts to get Congress to amend laws to better reflect their remedial purposes, I would not say it is so easy. Sometimes the political winds align and Congress does act, such is with the Lilly Ledbetter Fair Pay Act of 2009. I am still waiting on Congress to correct the restrictive holdings in Garcetti v. Ceballos, Gross v. FBL and now University of Texas Southwestern Medical Center v. Nassar.
On page 24, the Court states, “The potential impact on shareholders of false or misleading registration statements needs no elaboration.” This sentence makes what I think is an obvious point: all concerns about the correctness of SEC filings are protected. Many companies have tried to argue that employee concerns are not protected unless they meet the company’s threshold of significance. For big companies, that threshold is a surprisingly high dollar amount. With this sentence, I hope that such arguments will no longer let companies off the hook for retaliating against those who raise concerns they consider to be too small. If it is big enough to cause retaliation, then it is big enough for SOX to correct.
On page 29, the Court’s majority opinion concludes with a finding that SOX and AIR 21 should be interpreted together. “The provisions’ parallel text and purposes counsel in favor of interpreting the two provisions consistently.” I hope this is a step toward a unified body of whistleblower law. Given that such laws serve “parallel” remedial purposes, it is logical that decisions under one law should apply to others. The Supreme Court has unified the law for awards of attorney’s fees, and whistleblower protection would be another area that deserves the efficiency and efficacy of becoming a single body of law.
Justice Scalia, joined by Justice Thomas, wrote a concurring opinion to take issue with a few of the statements made in the majority opinion by Justice Ginsburg. First, he disagrees with the whole idea of congressional “intent.” He lambasts use of the Senate Report because, “[m]any of them almost certainly did not read the report[.]” He presumes they did not agree with it. I noticed that in another decision written by Justice Scalia, he reached the right outcome without ever mentioning the law’s remedial purpose. Staub v. Proctor Hosp., 131 S. Ct. 1186 (2011). There, a jury held that Vincent Staub lost his job because of his need for leave to attend to his Army Reserves duties. Congress passed the Uniformed Services Employment and Reemployment Rights Act (USERRA) to protect service members, and encourage people to enlist through the promise of government protection of their jobs. However, one would never know this purpose from reading Justice Scalia’s opinion. For this reason, I am glad that Justice Ginsburg wrote the majority opinion for Lawson, and not Justice Scalia. Justice Scalia also disagrees with using AIR 21 to interpret SOX, and he rejects the idea of any “limiting principl[e]” as the text provides no basis for any limitation.
Justice Sotomayor wrote a dissent, in which Justices Alito and Kennedy joined. She recognizes in her first paragraph that SOX has a “core purpose” to “safeguard investors in public companies.” On page 20, she calls this “a laudable purpose.” So on the issue of whether the Supreme Court should consider a law’s remedial purpose, the vote is 7-2 in favor. However, Justice Sotomayor is moved by the employers’ claims of how contractor coverage can lead to “absurd results.” Apparently, she would not only change the language of SOX to limit the whistleblower protection, but she would have the Supreme Court adopt an interpretation that excludes all employees of all contractors. She thinks SOX “is ambiguous.” Page 3. This is a conclusion that even the First Circuit majority did not reach. It does give her freedom to explore the tools the Court would use to resolve an ambiguity. Sadly, she is more concerned about the possibility of a rare “absurd” application than she is about the many, many employees of contractors who raise issues at the core of SOX’s objectives. On page 12, she expresses concern that the majority decision creates, “a sweeping source of litigation[.]”
On page 14, her dissent notes that SOX, “protects the reporting of a variety of frauds—not only securities fraud, but also mail, wire, and bank fraud.” She neglects to note that some SOX cases can involve violations of SEC rules that have nothing to do with any fraud at all. Still, she recognizes that the majority decision opens coverage to “a large class of employees[.]”