First Court of Appeals to Face Question Rules that Employee of Private Contractor of Publicly-Traded Company is Not Protected by Section 806 of Sarbanes-Oxley Act
By Ted Olsen
Section 806 of the Sarbanes-Oxley Act ("SOX")* provides that companies with a class of securities registered under Section 12 of the Exchange Act or that are required to file reports under Section 15(d) of the Exchange Act, may not discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee because the employee gives any information regarding a violation of Securities and Exchange Commission rules or regulations or participates in an SEC investigation of shareholder fraud. The prohibition also states that no "officer, employee, contractor, subcontractor, or any agent of such company," may engage in any of the prohibited actions. The "contractor, subcontractor" language has raised the question of whether employees of contractors and subcontractors of public companies are protected by Section 806. In the first court of appeals case to face the issue, the First Circuit (by a 2-1 vote) recently ruled they are not protected. Lawson v. FMR LLC.** The Court's majority held that SOX's protection is limited to employees of public companies - those with a class of securities registered under Section 12 or those required to file reports under Section 15(d) - and does not extend to employees of private companies contract or subcontract with those public companies.
Lawson involved two plaintiffs in two different cases. One plaintiff (Zang) was employed by Fidelity & Management Research Co., which contracts with certain of the Fidelity mutual funds to serve as investment adviser or sub-adviser. Fidelity is required to file Section 15(d) reports with the SEC; FMR is not publicly traded and need not file such reports. Zang alleged that he had been fired by FRM in retaliation for raising securities law compliance concerns he reasonably perceived about inaccuracies in a draft revised registration statement for certain Fidelity funds. The second plaintiff (Lawson) was employed by Fidelity Brokerage Services, LLC, a private subsidiary of FMR. She alleged she was constructively discharged in retaliation for raising concerns regarding cost accounting methodologies. The two cases were consolidated by the U.S. District Court for the District of Massachusetts, and the district court denied the defendant employer's motion to dismiss. In a rare interlocutory appeal, the dispositive issue presented to the First Circuit was whether Section 806 extends protection to the employees of contractors and subcontractors of publicly-traded companies.
The Court's majority relied first on the plain language of Section 806 - the language describes employees of publicly-traded companies as the protected individuals, and does not protect the employees of contractors and subcontractors of such publicly-traded companies. Further, the majority ruled that the "contractors, subcontractors" language merely describes some of the persons or entities that are prohibited from taking illegal action against the protected employees of the public companies. The title and caption of Section 806 were also found to support this interpretation. Section 806 is titled "Protection for Employees of Public Traded Companies Who Provide Evidence of Fraud." Subpart (a) of § 1514A also contains the caption, "Whistleblower protection for employees of publicly traded companies."
The majority also noted that Congress, when it wishes to do so, expressly extends whistleblower protection to persons other than the employees of public companies. Examples include Section 1107 of SOX ("Retaliation Against Informants") and the later-enacted Dodd-Frank Wall Street Reform and Consumer Protection Act. The legislative history of Section 806 also included numerous statements regarding the protection of employees of public companies who report acts of fraud.
The dissenting opinion read the key statutory language much differently, boiling it down to "no . . . contractor . . . may discharge . . . an employee," and found nothing in the statute limiting the term "employee" to one employed by a public company.
Although other circuits may not follow, the majority decision in Lawson is a very favorable first step for private employers that do business with publicly-traded companies, private businesses that might otherwise face litigation under Section 806 of SOX.
* Codified at 18 U.S.C. § 1514A(b)(1)(B),
** No. 10-2240 (1st Cir. Feb. 3, 2012).
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©2012 Sherman & Howard L.L.C. March 1, 2012