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Financial Services Alert
First Circuit Limits SOX Whistleblower Coverage to Employees of Public Companies

In an important case of first impression, the First Circuit recently ruled that whistleblower protection under Section 806 of the Sarbanes Oxley Act (“SOX”) is generally limited to employees of public companies.  Lawson v. Fidelity Mgmt. & Research, LLC, No. 10-2240, 2012 WL 335647 (1st Cir. Feb. 3, 2012).  Chief Judge Lynch authored the opinion, overturning the District Court’s decision below, and reigning in an expansive interpretation of Section 806 that would have extended whistleblower protection to employees of private companies that enter into contractual relationships to provide goods or services to public companies. 

The central issue in the case was one of statutory interpretation: what did Congress mean in Section 806 when it provided that “[n]o company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 . . . , or that is required to file reports under section 15(d) of the [Act] . . . , 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 in the terms and conditions of employment because of” the employee’s protected whistleblowing activity?  18 U.S.C. § 1514A(a) (emphasis added).  For purposes of its opinion, the First Circuit referred to companies registered under Section 12 of the Securities Exchange Act of 1934 (the “1934 Act”) or filing reports under Section 15(d) of the 1934 Act as “public companies.”

The plaintiffs in the case were both employees of privately held investment advisers (the “Advisers”).  The Advisers had entered into advisory contracts with certain mutual funds, which by virtue of the ongoing public offering of their shares under the Securities Act of 1933 were required to file reports with the SEC under Section 15(d) of the 1934 Act, making them public companies for Section 806 purposes.  Plaintiffs claimed that they were terminated or constructively terminated in retaliation for engaging in whistleblowing protected by Section 806.  Section 806 protects, among other things, providing information “regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities or commodities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by . . . a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct) . . . .”  Plaintiffs claimed that the Advisers retaliated against them in violation of Section 806 for, among other things, complaining about cost accounting methodologies used and alleged inaccuracies in a registration statement drafted by the Advisers for certain mutual funds.  Plaintiffs alleged that they reasonably believed when they complained that they were blowing the whistle on violations of federal securities laws or SEC rules or regulations. 

Plaintiffs argued that they were protected from retaliation by Section 806 because that provision covers employees of private companies that enter into contracts or subcontracts with a public company.  In addition to denying that it had taken any adverse employment action against plaintiffs because of their alleged protected activities, the Advisers countered that plaintiffs were not covered by Section 806 because they were not public company employees.  Section 806 coverage, the Advisers argued, does not extend beyond employees of public companies.

The First Circuit agreed with the Advisers.  The court based its decision on Section 806’s plain language, its title and caption, SOX’s language outside of Section 806, and SOX’s legislative history.  The court also recognized Supreme Court precedent counseling against overly broad interpretations of securities laws that exact burdens on American companies beyond those intended by Congress.

Section 806’s Plain Language

The First Circuit held the Advisers’ to be the “more natural reading” of Section 806.  Section 806, the court found, first enumerates the employers that are covered—publicly traded companies with a class of securities registered under section 12 or those that file reports with the SEC under section 15(d)of the Securities Exchange Act (the “Act”).  Section 806 then enumerates a list of representatives of the employer that, along with the public company itself, may not retaliate against an employee for engaging in protected whistleblowing activity.

To read Section 806 differently, the court noted, would lead to anomalies.  To accept plaintiffs’ reading that because Section 806 prohibits retaliation by “any officer, employee, contractor, subcontractor, or agent” of a public company, it must also protect employees of those entities against retaliation, one would have to accept that Congress intended to protect employees of employees and employees of officers from whistleblower retaliation.  Of course, employees and officers do not typically have employees.

Section 806’s Title and Caption

The First Circuit next considered Section 806’s title and caption.  Section 806’s title states that it concerns “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.”  Section 806’s caption similarly provides: “Whistleblower protection for employees of publicly traded companies.”  Neither the title nor the caption suggest that Congress intended Section 806 to extend to protect employees of private companies.  This “double limitation,” the court found, “strongly work[ed] against plaintiffs’ interpretation.”  And consideration of the title and caption was appropriate, the court found, because neither contradicted the plain meaning of Section 806’s text.  Rather, they shed light on that meaning.

SOX’s Other Text

Congress’s textual choices elsewhere in SOX, the court found, confirmed its intent to limit Section 806’s scope to employees of public companies.  The court’s review of SOX’s text beyond Section 806 revealed that when Congress intended whistleblower coverage to extend to employees of private companies, it knew how to do so clearly.  For example, in Section 1107, Congress broadly criminalized retaliation for whistleblowing directly to law enforcement officers regardless of who the whistleblower works for.  The First Circuit noted that Section 806’s scope “is, by contrast, conspicuously narrow.”

Strict Interpretation of Securities Laws

In interpreting Section 806, the First Circuit was guided by the Supreme Court’s admonishment “not to give securities laws a scope greater than that allowed by their text.”  See, e.g., Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 772 (2008); Pinter v. Dahl, 486 U.S. 622, 653 (1988).  The court found that the plain language, title, and caption of Section 806 show that Congress “did not intend coverage to reach beyond employees of public companies.”  The court recognized the Supreme Court’s direction “to be particularly attentive to such language choice in interpreting the securities laws.”

The First Circuit rejected plaintiffs’ argument that the remedial purposes behind SOX required it to interpret Section 806 broadly to protect employees of private companies that enter into contracts or subcontracts with public companies.  To do so, the court held, would contravene Supreme Court precedent by elevating SOX’s remedial purposes above Section 806’s actual text.

Legislative History

Despite finding that Section 806’s text and principles of statutory interpretation alone confirm the Advisers’ interpretation of Section 806, the First Circuit also considered the legislative history behind the provision.  The court recognized that Section 806 evolved as a response to the Enron disaster, which of course involved whistleblower retaliation in an attempt to cover up shareholder fraud at a large public company.  Nowhere in Section 806’s legislative history did Congress suggest that it sought to extend whistleblower protection to employees of private companies.

Deference to DOL and SEC Rejected

Finally, in reaching its decision, the First Circuit refused to defer to the positions of the U.S. Department of Labor and Securities and Exchange Commission, both of which filed amicus briefs in support of plaintiffs’ broad interpretation of Section 806.  Administrative deference was inappropriate in this case, the court held, for several reasons: (1) Congress did not delegate authority to the DOL or SEC to interpret the term “employee” in Section 806; (2) even if it had, deference would be inappropriate because the term “employee” is not ambiguous; and (3) both the DOL and the SEC interpretations of Section 806 lacked the “power to persuade.”

Conclusion

The First Circuit held that Section 806 whistleblower protection is generally limited to employees of public companies, and does not extend to employees of private companies that enter into contracts or subcontracts with public companies.  The decision overturns a sweeping interpretation of Section 806, an interpretation that would have subjected every private company, large or small, with any type of contract or subcontract to provide goods or services to a public company to the burdens and costs associated with complying with and defending litigation arising from Section 806.

                             * * * The Advisers were represented in this matter by Goodwin Procter. * * *

© 2014 Goodwin Procter LLP. All rights reserved. This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP, Goodwin Procter (UK) LLP or their attorneys. Prior results do not guarantee similar outcome.

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