Supreme Court Holds That Sarbanes-Oxley Whistleblower Provision Applies To Employees Of Investment Advisers And Other Private Companies

On March 4, 2013, the Supreme Court issued an opinion with broad implications for mutual funds and certain other SEC-regulated companies that conduct business through or with privately-held entities (such as investment advisers and managers), as well as the private companies that do business with them. In Lawson v. FMR LLC,1 the Court held that the whistleblower provision of the Sarbanes-Oxley Act of 2002 ("Section 1514A")2 protects employees of private companies that contract with public companies.3 This reversed a First Circuit decision holding that Section 1514A protects only employees of a public company.4 The decision, as the majority explicitly indicated, impacts mutual funds and their privately-held investment advisers, as well as accountants, law firms and other privately-held companies that serve as contractors or subcontractors to public companies.

Background

Lawson involved claims of retaliation by two former employees of private companies (collectively, "FMR") that managed and advised certain mutual funds. Mutual funds generally have no employees; rather, the funds contract with investment advisers like FMR to handle day-to-day operations (e.g., making investment decisions, preparing reports for shareholders, and filing reports with the SEC).5 The plaintiffs in Lawson alleged that they were discharged by FMR after raising concerns about the mutual funds' cost accounting methodologies and inaccuracies in draft SEC registration statements.6 They initially filed administrative complaints against FMR alleging retaliation and, after the expiration of the 180-day period specified in 18 U.S.C. § 1514A(b)(1), filed suit in the United States District Court for the District of Massachusetts.7

After the district court denied FMR's motion to dismiss, FMR appealed, and a divided panel of the First Circuit reversed.8 The plaintiffs appealed, asking the Supreme Court to address the question of whether Section 1514A "shield[s] only those employed by the public company itself, or . . . employees of privately held contractors and subcontractors [as well]—for example, investment advisers, law firms, accounting enterprises—who perform work for the public company."9

The 6-3 Opinion

Justice Ginsburg delivered the majority opinion for the Court,10 which held that Section 1514A "shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors."11 The majority...