Arguing That Sarbanes Oxley’s Protection for Whistleblowers Only Covers Employees of Public Companies and Does Not Cover Employees of Private Companies With Whom a Public Company May Have a Contractual Relationship
In this case, which was before the Supreme Court on the merits, NELF, joined by Associated Industries of Massachusetts, filed an amicus brief supporting FMR. The issue was whether the Sarbanes-Oxley (SOX) whistleblower anti-retaliation provision applies to employees of a privately owned company that manages the FMR family of mutual funds, pursuant to a contractual relationship.
The case arises in the unusual, and perhaps unique context of the mutual fund industry, where mutual funds, which are public companies under the SOX definitions, have no employees of their own, but are managed pursuant to contractual agreement, by privately held management companies (in this case FMR and its subsidiaries). The case was brought by two former employees of FMR LLC and its subsidiaries (all of which are private companies) who sued under the SOX whistleblower protection provision, alleging that FMR unlawfully discharged them in retaliation for raising concerns about alleged inaccuracies in a draft SEC registration statement and alleged improper cost accounting methodologies with regard to the funds. Although the SOX provision is captioned “Whistleblower protection for employees of publicly traded companies,”(emphasis added), the plaintiffs argue that they are still covered as former employees of a private company because the statute, in its text states: [n]o [public] company. . ., or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee [who engages in protected whistleblowing activity].” Plaintiffs prevailed in Federal District Court, which ruled that the italicized language above meant that Congress intended to protect employees of private companies that contract with public companies. The First Circuit, reversed, in a thorough opinion by Chief Judge Lynch, who disagreed that the language expanded the provision beyond protecting employees of public companies.
NELF’s amicus brief bolstered Judge Lynch’s reasoning, by demonstrating through close textual analysis that, in fact, the SOX whistleblower provision does not protect the employees of a public company’s contractors or subcontractors, because those entities are included in the statute solely in their capacity as representatives of the public company and not as employers in their own right. Thus, while contractors and subcontractors cannot threaten or harass the whistleblowing employees of a public company, the provision does not protect the contractors’ and subcontractors’ own employees, such as petitioners here. This interpretation is compelled by the clear context of those key statutory terms. Contractors and subcontractors are included in a list of a public company’s traditional representatives and agents--“any officer, employee, contractor, subcontractor, or agent of such [public] company.” 18 U.S.C. § 1514A(a) (emphasis added). Under the basic canon of statutory construction, noscitur a sociis (“it is known from its associates”), a statutory term should be limited to a meaning that is consistent with its neighboring terms, to achieve a unified list of terms sharing a common purpose. Conversely, the noscitur a sociis canon counsels against interpreting a statutory term broadly, in isolation from its accompanying terms. Contractors and subcontractors should therefore be interpreted solely as representatives of the public company, consistently with the function of their neighboring terms--officers, employees, and agents of a public company.
NELF argued that, while contractors and subcontractors are indeed separate entities from the public company, they also resemble a public company’s officers, employees, and agents because they are contractually bound to serve the public company’s interests. In fact, SOX was enacted precisely to prevent the accounting and reporting abuses that apparently arose from the contractual relationship between certain prominent publicly traded companies and their accounting firms. Hence it is not surprising that Congress has protected a public company’s whistleblowing employee from the potential adverse actions of both his employer and the employer’s contractor.
In this connection, it should be noted that the SOX whistleblower provision is not limited to the employer’s tangible employment actions and instead covers all kinds of threats or harassment against the whistleblowing employee, actions that could be committed as much by a third-party contractor as by a representative of the employer.
NELF argued further that it should have been no surprise to Congress that many employees of the mutual fund industry, i.e., the employees of private investment advisors, would effectively fall outside the scope of the SOX whistleblower provision. Congress knew for several decades that mutual funds, which are considered public companies under the whistleblower provision, typically have no employees of their own. Instead, mutual funds generally rely on the contractual services of their investment advisers, many of which are private companies, as in this case. In fact, the Investment Company Act of 1940 was enacted precisely to regulate and prevent the potential abuses arising from this unique contractual relationship between mutual funds and their investment advisers. Significantly, the 1940 Act defines an “investment adviser” as one “who pursuant to contract with such [investment] company regularly furnishes advice to such company . . . .” 15 U.S.C. § 80a-2(20) (emphasis added). And Congress is presumed to know the state of existing law when it enacts a new statute. Thus, the SOX whistleblower provision’s effective omission of many employees of the mutual fund industry could hardly have been an oversight and may be interpreted as a deliberate policy choice.
Finally, NELF argued that, while the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) amended the SOX whistleblower provision in certain respects, Dodd-Frank made no changes whatsoever to the provision’s disputed “any officer” clause, which contains the only reference to contractors and subcontractors. Therefore, in amici’s view, Congress has yet to include the employees of private investment advisers within the scope of the SOX whistleblower provision. A decision in this case should therefore not be limited to claims arising under the SOX whistleblower provision before it was amended by Dodd-Frank in 2010. Instead, the Court’s decision should apply equally to claims arising after Dodd-Frank’s effective date, unless and until Congress provides otherwise.
On March 4, 2014, the Court, in a 6-3 opinion, decided against FMR. The majority held that whistleblower protection under SOX extends to employees of private contractors and subcontractors serving public companies. The majority concluded that the plain language and the underlying purpose of the statue supported this reading. The Court noted, for example, that the prohibited retaliatory actions under SOX—discharge, demotion, suspension, threats, harassment, or discrimination in employment terms and conditions—are actions that an employer takes against its own employees. The Court also observed that the statute’s enforcement procedures and remedies apply to the powers of an employer over its own employees. The Court also noted that the legislative record indicates Congress’ awareness that outside, contracting professionals, such as accounting and law firms, played a role in reporting fraud in the Enron scandal. Thus, fear of retaliation can deter reporting by the employees of Enron's contractors. Finally, the majority noted that its interpretation avoided insulating the entire mutual fund industry from liability under the whistleblower provision. The Court’s ruling therefore protects the employees of investment advisors, who are often the only witnesses to potential fraud involving mutual funds.
In this case, which was before the Supreme Court on the merits, NELF, joined by Associated Industries of Massachusetts, filed an amicus brief supporting FMR. The issue was whether the Sarbanes-Oxley (SOX) whistleblower anti-retaliation provision applies to employees of a privately owned company that manages the FMR family of mutual funds, pursuant to a contractual relationship.
The case arises in the unusual, and perhaps unique context of the mutual fund industry, where mutual funds, which are public companies under the SOX definitions, have no employees of their own, but are managed pursuant to contractual agreement, by privately held management companies (in this case FMR and its subsidiaries). The case was brought by two former employees of FMR LLC and its subsidiaries (all of which are private companies) who sued under the SOX whistleblower protection provision, alleging that FMR unlawfully discharged them in retaliation for raising concerns about alleged inaccuracies in a draft SEC registration statement and alleged improper cost accounting methodologies with regard to the funds. Although the SOX provision is captioned “Whistleblower protection for employees of publicly traded companies,”(emphasis added), the plaintiffs argue that they are still covered as former employees of a private company because the statute, in its text states: [n]o [public] company. . ., or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee [who engages in protected whistleblowing activity].” Plaintiffs prevailed in Federal District Court, which ruled that the italicized language above meant that Congress intended to protect employees of private companies that contract with public companies. The First Circuit, reversed, in a thorough opinion by Chief Judge Lynch, who disagreed that the language expanded the provision beyond protecting employees of public companies.
NELF’s amicus brief bolstered Judge Lynch’s reasoning, by demonstrating through close textual analysis that, in fact, the SOX whistleblower provision does not protect the employees of a public company’s contractors or subcontractors, because those entities are included in the statute solely in their capacity as representatives of the public company and not as employers in their own right. Thus, while contractors and subcontractors cannot threaten or harass the whistleblowing employees of a public company, the provision does not protect the contractors’ and subcontractors’ own employees, such as petitioners here. This interpretation is compelled by the clear context of those key statutory terms. Contractors and subcontractors are included in a list of a public company’s traditional representatives and agents--“any officer, employee, contractor, subcontractor, or agent of such [public] company.” 18 U.S.C. § 1514A(a) (emphasis added). Under the basic canon of statutory construction, noscitur a sociis (“it is known from its associates”), a statutory term should be limited to a meaning that is consistent with its neighboring terms, to achieve a unified list of terms sharing a common purpose. Conversely, the noscitur a sociis canon counsels against interpreting a statutory term broadly, in isolation from its accompanying terms. Contractors and subcontractors should therefore be interpreted solely as representatives of the public company, consistently with the function of their neighboring terms--officers, employees, and agents of a public company.
NELF argued that, while contractors and subcontractors are indeed separate entities from the public company, they also resemble a public company’s officers, employees, and agents because they are contractually bound to serve the public company’s interests. In fact, SOX was enacted precisely to prevent the accounting and reporting abuses that apparently arose from the contractual relationship between certain prominent publicly traded companies and their accounting firms. Hence it is not surprising that Congress has protected a public company’s whistleblowing employee from the potential adverse actions of both his employer and the employer’s contractor.
In this connection, it should be noted that the SOX whistleblower provision is not limited to the employer’s tangible employment actions and instead covers all kinds of threats or harassment against the whistleblowing employee, actions that could be committed as much by a third-party contractor as by a representative of the employer.
NELF argued further that it should have been no surprise to Congress that many employees of the mutual fund industry, i.e., the employees of private investment advisors, would effectively fall outside the scope of the SOX whistleblower provision. Congress knew for several decades that mutual funds, which are considered public companies under the whistleblower provision, typically have no employees of their own. Instead, mutual funds generally rely on the contractual services of their investment advisers, many of which are private companies, as in this case. In fact, the Investment Company Act of 1940 was enacted precisely to regulate and prevent the potential abuses arising from this unique contractual relationship between mutual funds and their investment advisers. Significantly, the 1940 Act defines an “investment adviser” as one “who pursuant to contract with such [investment] company regularly furnishes advice to such company . . . .” 15 U.S.C. § 80a-2(20) (emphasis added). And Congress is presumed to know the state of existing law when it enacts a new statute. Thus, the SOX whistleblower provision’s effective omission of many employees of the mutual fund industry could hardly have been an oversight and may be interpreted as a deliberate policy choice.
Finally, NELF argued that, while the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) amended the SOX whistleblower provision in certain respects, Dodd-Frank made no changes whatsoever to the provision’s disputed “any officer” clause, which contains the only reference to contractors and subcontractors. Therefore, in amici’s view, Congress has yet to include the employees of private investment advisers within the scope of the SOX whistleblower provision. A decision in this case should therefore not be limited to claims arising under the SOX whistleblower provision before it was amended by Dodd-Frank in 2010. Instead, the Court’s decision should apply equally to claims arising after Dodd-Frank’s effective date, unless and until Congress provides otherwise.
On March 4, 2014, the Court, in a 6-3 opinion, decided against FMR. The majority held that whistleblower protection under SOX extends to employees of private contractors and subcontractors serving public companies. The majority concluded that the plain language and the underlying purpose of the statue supported this reading. The Court noted, for example, that the prohibited retaliatory actions under SOX—discharge, demotion, suspension, threats, harassment, or discrimination in employment terms and conditions—are actions that an employer takes against its own employees. The Court also observed that the statute’s enforcement procedures and remedies apply to the powers of an employer over its own employees. The Court also noted that the legislative record indicates Congress’ awareness that outside, contracting professionals, such as accounting and law firms, played a role in reporting fraud in the Enron scandal. Thus, fear of retaliation can deter reporting by the employees of Enron's contractors. Finally, the majority noted that its interpretation avoided insulating the entire mutual fund industry from liability under the whistleblower provision. The Court’s ruling therefore protects the employees of investment advisors, who are often the only witnesses to potential fraud involving mutual funds.
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