Opinion

Alison Frankel

Business groups to SCOTUS: Protect us from whistleblowers!

By Alison Frankel
October 10, 2013

Sarbanes-Oxley was enacted as a response to the collapse of Enron, and one of its intentions was to encourage employees to keep their companies honest. SOX included specific provisions for whistleblower reporting, as well as prohibitions on corporate retaliation against employees who bring concerns to their supervisors. That’s all straightforward enough when the purported whistleblowers are employees of public companies. But what about employees of private businesses doing work for public companies – like, say, the audit firm Arthur Andersen in the Enron scandal? If an accountant or any other employee of a private business is fired after detecting and reporting supposed wrongdoing uncovered in the course of providing services to a public company, can the employee sue under SOX?

That question is now before the U.S. Supreme Court in Lawson v. FMR, which is scheduled for oral argument on Nov. 12. The case turns on a hypertechnical point of statutory interpretation: When Congress barred retaliation against “an employee of such company” did it mean just an employee of a public company, or did it intend the words also to encompass employees of contractors or subcontractors? The law clearly prohibits retaliation by private contractors and subcontractors working for public companies, but the dispute involves whether the private companies are barred only from acting against employees of the public companies or also against their own employees.

In a split decision in February 2012, the 1st Circuit Court of Appeals ruled SOX anti-retaliation protections apply only to employees of public companies, tossing whistleblower anti-retaliation suits by two former employees of private Fidelity investment advisory companies that provide services to Fidelity mutual funds. (Mutual funds are covered by SOX because they file reports to the Securities and Exchange Commission.) But the Department of Labor, in an Administrative Review Board ruling in May 2012, advised that SOX’s whistleblower protections apply broadly and cover private employees. The Supreme Court granted certiorari to the former Fidelity employees, Jackie Lawson and Jonathan Zang, last May.

If you read their merits brief, filed by law professor Eric Schnapper of the University of Washington, or the response brief of the Fidelity entities, filed by Gibson, Dunn & Crutcher, you’ll find yourself in a grammatical thicket. So the best way to understand the expansive reading of SOX, advocated in both the Lawson brief and the Justice Department’s amicus brief, filed by the solicitor general on behalf of the Department of Labor and the SEC, is to hark back to Arthur Andersen and Enron. “Congress enacted the Sarbanes-Oxley Act in the wake of the collapse of Enron Corporation,” the DOJ brief said. “One particular concern was that contractors and subcontractors, such as Arthur Andersen, were active participants in Enron’s fraud and its cover-up. When employees of those contractors attempted to report fraud, they were retaliated against. Congress enacted (protections) so that these insiders would be willing to report fraud and violation of SEC rules. For the statute’s protection to be effective, it must apply not only to employees of public companies, but also to contractor and subcontractor employees.” Lawson’s brief noted that under the 1st Circuit’s narrow reading of SOX, Arthur Andersen would have been permitted to fire any auditor who voiced concerns about Enron’s fishy accounting or refused to shred documents once the company fell under investigation. That surely cannot have been Congress’s intention, the brief said.

That seems reasonable to me, but not to a plethora of business groups that filed amicus briefs this week in support of Fidelity and the 1st Circuit majority. The Chamber of Commerce, the Society for Human Resource Management, the National Federation of Independent Business, and the Securities Industry and Financial Markets Association are among the amici arguing that small businesses will suffer if they’re exposed to SOX whistleblower suits. Congress deliberately shielded small business from the law, they argue, so expanding SOX’s coverage is contrary to congressional intent.

“Petitioners and the government advance a sweeping interpretation…that would extend those whistleblower provisions to millions of employees of private contractors and subcontractors; they assert that this interpretation is necessary to achieve SOX’s investor-protection goals,” wrote the Chamber’s counsel from Jones Day. “But Congress’s purpose in enacting SOX was not to protect investors at any and all costs and regardless of any competing interest; rather, Congress sought to advance investor protection through those targeted measures that do not unduly burden small businesses.”

The human resources group, represented by Littler Mendelsohn, laid out some of the supposed burdens its members will face if they’re forced to worry about anti-retaliation suits by fired whistleblowers. “Human resource professionals would have to invest substantial time and resources in learning the basics of securities and corporate law,” the brief said. “These professionals would also have to conduct complicated, far-reaching and expensive internal investigations, overwhelming HR professionals who are already busy with the demands of human capital strategy and workplace compliance. Disgruntled employees or those fearing an imminent adverse action could be tempted to assert contrived allegations of fraud to cloak themselves in the protections (of SOX), in an effort to dissuade their employer from taking lawful actions.”

There’s no mention in the Chamber or human resources society briefs of the cautionary Arthur Andersen example cited by the Justice Department and the former Fidelity employees, which seems like a telling omission. Private audit firms obviously have a role in protecting investors, so how is it contrary to SOX’s goal of averting fraud at public companies to prohibit auditors from firing accountants who report misconduct?

Or, for that matter, lawyers. What if you worked at a firm with significant revenue from a client you suspected of chicanery? Would you be more likely to report your concerns up the chain at your firm or to the general counsel’s office if you knew the firm couldn’t fire you?

I should note that there’s a chance the Lawson case will end up focusing more on the issue of agency deference than statutory interpretation, since the Labor Department Administrative Review Board has issued a ruling. Proponents of the contrary 1st Circuit view argue that the agency is entitled to no deference because Congress didn’t grant the Labor Department policymaking power in SOX. In fact, the Fidelity brief describes the Justice Department’s bid for deference as “one of the most sweeping power-grabs in the annals of administrative law.”

(Reporting by Alison Frankel)

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