This specific case – argued in November 12, 2013 and decided in March 4, 2014 in the United States Supreme Court – involved a privately-held subcontractor of a public company and their former employees. The question arose whether the subcontractor’s employees should have proper legal safeguard of the whistleblower’s protection provision of the Sarbanes- Oxley Act, when the claims of fraud involvement were through the public company itself. This case is a “uncertain language issue” where the scope of the Congress was too limited to see the dealings made in this case. The United States Supreme Court adjusted this language after the court case was concluded.
The plaintiffs were Jackie Lawson and Jonathan Zang, and the defendant was FMR LLC (dealing with advising and managing mutual funds), which was the subcontractor of Fidelity Investments (Fidelity). (Findlaw) They both separately sued their former employer, FMR LLC, Fidelity Investments’ subcontractor, claiming that they were fired due to retaliation for filing complaints regarding violations of Fidelity Investments (Fidelity) to their business and shareholders– acting as whistleblowers against the company’s contractor. FMR LLC defended their decision that it was not due to their filings, but purely on performance level and the Sarbanes-Oxley Act did not apply in this situation because the complaints were not about FMR LLC exclusively, but Fidelity Investments (Fidelity). In this paper, the legal issue, the relevant law, the court decision, and henceforth future cases will be addressed, and it will go in depth on why the Supreme Court held the district court’s decision to uphold the plaintiffs’ argument and why the Supreme Court extended the Sarbanes-Oxley Act protection to the privately-held companies’ employees as an amendment to the law.
Legal Issue and Relevant Law
The Sarbanes-Oxley Act (2002) was formed as a federal law of protection provision to keep companies from retaliation against their employees who filing reports of their dealings. (Beaty 731) It was signed by President George W. Bush with a majority of the House of Representatives and Senate supporting that bill. This law would be able to let employees file claims against their employees when the company does something that violates the Securities and Exchange Commission’s laws without relations against said employees. The fraudulent claims could be acts that violate sales of securities, insider trading, misappropriation of securities and/or funds, having false statements that hurt the company’s shareholders, and improper payments to officials among other things. Lawson and Zang both filed claims of violations of misuse of funds and misrepresentation of investment funds to their shareholders, or in other terms- “putative fraud relating to the mutual funds”. (Findlaw)
The Whistleblower Protection for employees of publicly-traded companies was under the Securities Exchange Act of 1934, Section 12, “No company [of]… any officer, employee, contractor, subcontractor, or agent of such company, or nationally recognized statistical rating organization may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee” (18 U.S. Code § 1514A). If the court ruled in favor the plaintiffs, the remedies would be the “reinstatement with the same seniority state”, the “amount of back pay, with interest”, and “compensation for any special damages sustained as a result of the discrimination” as well as any further punitive damages that the company is accountable for. (18 U.S. Code § 1514A).
The question whether the former FMR LLC employees would have that protection when the fraud claims were against the Fidelity Investment (Fidelity). Companies like Enron and WorldCom were famous for their part in whistleblower scandals, but the people that filed the claims were their own employees – not their subcontractor’s employees. The law did not address that issue upfront, and that were where the problem lies.
Labor laws, like the Sarbanes-Oxley Act, in general do specify the agent (Lawson and Zang) and their principal (FMR LLC) as their contract employment relation. Violating the public policy for wrongful discharge under bad reasons does constitute as a violation of the common law protection provision under employment security under said labor laws. (Beaty 725) The lawsuit claimed that they were treated unfairly, suffering “adverse employment action” (termination), and they formed substantial proof of ill-intentional decisions. (Beaty 756) If the whistleblowing claims were done by FMR LLC, not Fidelity Investments (Fidelity), and the labor law of the Sarbanes-Oxley Act would hold non-negotiable by standard terms of the law itself. But because the position was a bit more complex, the FMR LLC sought to terminate the plaintiffs believing that this law was not viable for this situation
The District Court rule in favor the plaintiffs because they believed that using the law loosely, the employees did have those protections, and they ordered FMR LLC. to compensate for their illegal termination of their employees. They in turn appealed to the appellate court saying that, in strict terms, the verdict cannot be held because the language used by the Securities Exchange Act of 1934. Because it did not specifically say anything about their contractor relationship with their own employees, they claim not to be liable for their employees. The appellate court, First Circuit, agreed and they reversed the judgement if the District Court’s decision. Because the case was under uncharted legal uncertainty, the Supreme Court looked over this case for those reasons. The Supreme Court in turn would have final say in the language of the law and could potentially open or close thousands of cases be involving the Sarbanes-Oxley Act and the whistleblower protection provisions in the future.
With the Supreme Court reviewing their arguments, each side had an angle that they presented and in true legal form were both technically correct. The plaintiffs acted on the legal responsibilities of informing the Securities of Exchange Commission because the contractor, Fidelity Investments (Fidelity) did violate certain codes and regulations which they should not have done. (Justia Law) The FMR LLC. claimed that the terminations for their employees had nothing to do with their whistleblowing acts themselves. Rather they were their legal means to let them go due to performance issues and process improvement plans that were not met. Zang was fired for “unsatisfactory performance” during his performance review, which he felt was an illegal attempt to punish him for his statement on Fidelity Investments (Fidelity)’s claims. Lawson resigned claiming that the company has constructively discharged her, but she too was influenced by FMR LLC because for her whistleblower statement for their contractor’s claims as a result. (Justia Law)
When the case was first brought up to the District Court, they denied the FMR’s motion to dismiss and found in favor of the plaintiffs under the extension of the Sarbanes-Oxley Act of subcontractor’s employees “apply[ing] to employees of contractors of public companies such as a mutual fund”. (Atkins) The defendant appealed to the First Circuit claimed that “contractors [were] not ordinarily positioned to take adverse actions against employees of the public company with whom they contract.” (Findlaw) Note that before this the Congress viewed the relationship between the employer-employee as the whistleblower and their own company. Because the relevant language of the law itself was uncertain regarding the whistleblower and their company’s contractor, the district court’s verdict and the appellate court’s verdict contradicted itself, the court case headed to the Supreme Court for their ruling.
The FMR’s defense argument stated that the law cannot be extended to the company’s contractors’ employees because it opened up huge portion of the service industry – like housekeepers, gardeners, babysitters, etc. Essentially, they tried to dissuade the court from extending this provision because of the “absurdity” of number of cases that they open up. If, for example, a housekeeper was fired for his/her complaint against the employer who works for a public company for fraud, then they contended that the company would then be liable for the housekeepers’ employment rights. FMR LLC’s position, however, was just theory-based argument and had no backing to support this claim. They maintained a “if one, then all” approach of frivolous cases, and they could not come up with any actual cases to support this argument. (Findlaw) They had nothing to show of the future projections of “floodgates for whistleblowing suits” if the Supreme Court leaning of the plaintiffs’ side when they asserted in their argument in court. (Findlaw)
Justice Ruth Bader Ginsburg addressed the majority opinion of the Supreme Court in favor of the plaintiffs; “Plaintiffs below…are former employees of private companies that contract to advise or manage mutual funds. The mutual funds themselves are public companies that have no employees. Hence, if the whistle is to be blown on fraud detrimental to mutual fund investors [Fidelity Investments (Fidelity)], the whistleblowing employee [Lawson and Zang] must be on another company’s payroll, most likely, the payroll of the mutual fund’s investment adviser or manager [FMR LLC]”. Justice Sonia Sotomayor countered the majority opinion arguing that the extension of the Sarbanes-Oxley Act would be an over-broad interpretation and not lawful. Justice Sotomayor presented a limited stance of the FMR LLC’s argument of extensive litigation in the future, and she did not want to supersede her decision over the Congress’s indistinctness; “In any case, that Congress could have spoken with greater specificity in both directions only underscores that the words Congress actually chose are ambiguous. To resolve this ambiguity, we must rely on other markers of intent.” (Justia Law)
Enron, in particular, was a key point in the trial. Because there was retaliation on the whistleblowers lodging complaints on the Enron scandal, the justices wanted to make sure that the company should not retaliated against their employees when they file complaints on corporate fraud. Additionally, with the language of the 2000 Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, the majority of the justices used that language to construct a relationship with the contractor and their subcontractors’ employees: “No…contractor or subcontractor…may discharge an employee or otherwise discriminate against an employee with respect to compensation, terms, conditions, or privileges of employment when the employee provides information regarding violations…to his or her employer or federal authorities.” (Justia Law). Adopting the “carriers” as the contractors and the “employee” as the subcontractor’s employee, they built a parallel relationship leading to a debatable amendment of the Sarbanes-Oxley Act’s law. Furthermore, the majority of justices did not want to protect whistleblowers only if they work for the company and not for the public company’s contractor as well.
In addition, the Supreme Court acknowledge the limited language given by the law, shouldering the fact that the Congress and the President could not foresee the various cases that may be brought, and did not intended to “have such a limited scope.” (Oyez) They also put in “built-in limitations” within the amended law. The Congress could limit the extension of the Sarbanes-Oxley Act for only professions that could be in contact or could detect fraud in a public company setting and it could limit fraud reports to people who implicate the interests of the public company’s investors. (Atkins) That way, FMR LLC’s argument was diminished largely due to the limited extension on which set of employees gets the protection of the labor law.
The Supreme Court looked into all possible avenues of the case, and they ruled in favor of the plaintiff’s agreement at the court decision of 6 justices for the plaintiffs and 3 justices for the defendants. Especially due to this distinctive court case where the mutual funds like Fidelity Investments (Fidelity) were “structured so they [had] no employees of their own”, the subcontractors’ employees were granted the extension of the law based of the nature of the situation. (Warren) This means that even privately-held companies working for a contractor would have to be cautious to employees’ claims of fraudulent concerns of Securities and Exchange Commissions’ laws.
Whistleblowers are very important to the Securities and Exchange Commissions because it leads them to unlawfully acts from companies; the employees feel comfortable coming forward because they know that they are not going to be fired or discriminated against due to the Sarbanes-Oxley Act. This ruling opens up channels largely for the financial sector side there more employees of subcontractors can go forth and file fraudulent acts against their company’s contractor. People and, in turn, governments are supportive of those who provide information on duplicitous deeds that could affect their businesses, and personal and professional lives, and this is a parallel effort on the Supreme Court on protecting those who speak up. (Harris)