US Supreme Court Blows the Whistle on Fidelity and Expands the Field for Whistleblower Coverage

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By George Gilligan, UNSW

SYDNEY: 11 March 2014 - Whistleblowing can be contested and highly political in all jurisdictions. Currently in Australia there is an inquiry by the Senate Economics References Committee into the performance of the Australian and Securities Investment Commission (ASIC). The immediate trigger for this inquiry was an Estimates hearing in June 2013 before the Senate Economics Legislation Committee in which a number of Senators expressed their dissatisfaction about how the ASIC had responded to whistleblowers within Commonwealth Financial Planning (CFP), who had first tipped-off ASIC about alleged wrongdoing within CFP in October 2008 as reported on the CLMR portal.

The purpose of this article however is not analyse the current Senate Inquiry into the ASIC and practice in Australia regarding whistleblowers, but rather to consider a 4 March 2014 US Supreme Court decision, Lawson et al v FMR LLC et al (The Lawson case) about what scope of protection against retaliation should be available for whistleblowers. This is a US decision but it is quite feasible that its repercussions may influence policy and practice regarding whistleblowers in other jurisdictions in the future. The Lawson case centres on Jackie Lawson and Jonathan Zang, who sued their former employer FMR LLC alleging that they had been retaliated against because they had made complaints about processes and behaviour within FMR. FMR are collectively private companies that manage or advise mutual funds, in this case various Fidelity Worldwide Investment (Fidelity) mutual funds that are registered separately and obliged to file reports with the US Securities and Exchange Commission (SEC). Fidelity manages investments of more than AU$302.5 billion (total as at 31 December 2013), for millions of investors around the world - from major institutions to private individuals.

Thus the argument of Lawson and Zang was that they should be covered as whistleblowers under the provisions, especially §1514A(a) of  the Public Company Accounting Oversight and Investor Protection Act (2002) which is more commonly referred to as the Sarbanes-Oxley Act (SOX). SOX had been passed in 2002 after a series of spectacular financial scandals including Enron and World.Com, which stimulated a large drop in public confidence in business and prompted the US Congress to pass legislation on corporate liability. Under  SOX, not only are companies required to ensure that there are secure and confidential processes for the reporting of accounting and auditing irregularities, but also there are criminal penalties available, (including up to ten years imprisonment), for those proven to have retaliated against a whistleblower.

The US Supreme Court found 6:3 in favour of Lawson and Zang, in a decision which decided that whistleblower protections apply not only to publicly traded companies but also to subcontractors that do business with them. It is important to note given recent history in the US Supreme Court that commentators agree that the decision in the Lawson case is neither split along Democrat: Republican appointee, nor ideological lines. The case will now return to the lower courts for further litigation. Vincent Loporchio, a spokesman for Fidelity has stated that the claims by Lawson and Zang were ‘unfounded’ and that Fidelity has a long history of encouraging employees to report their concerns, but nevertheless a significant implication for the whistleblower protection provisions of SOX is that: ‘..the ruling expands the scope of the provision from roughly 5,000 companies to several million, including small businesses.’ The Lawson decision therefore appears to be an extremely significant one which merits unpicking some of its detail and consider what its implications may be.

§1514A of SOX protects whistleblowers under these terms:

‘No [public] company . . . , 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 [whistleblowing or other protected activity].’

In delivering the majority verdict in the Lawson case Justice Ginsburg states:

‘This case concerns the definition of the protected class: Does §1514A shield only those employed by the public company itself, or does it shield as well employees of privately held contractors and subcontractors—for example, investment advisers, law firms, accounting enterprises— who perform work for the public company?  We hold, based on the text of §1514A, the mischief to which Congress was responding, and earlier legislation Congress drew upon, that the provision shelters employees of private contractors and subcontractors, just as it shel­ters employees of the public company served by the con­tractors and subcontractors.’

So, the majority view seems to bring amongst others, accounting firms, investment advisers and law firms under the canopy of the SOX §1514A whistleblower protection provisions and does not allow them shelter behind any veil because they may not be public companies, rather partnerships or some other business structure. However, there was some dissonance within the majority view. For example two of the majority six, Justice Scalia with Justice Thomas concurring, did not endorse what they described as:

 ‘..the Court’s occasional excur­sions beyond the interpretative terra firma of text and context, into the swamps of legislative history. Reliance on legislative history rests upon several frail premises. First, and most important: That the statute means what Congress intended. It does not…. Second… That there was a congressional “in­tent” apart from that reflected in the enacted text. On most issues of detail that come before this Court, I am confident that the majority of Senators and Representa­tives had no views whatever on how the issues should be resolved—indeed, were unaware of the issues entirely. Third: That the views expressed in a committee report or a floor statement represent those of all the Members of that House. Many of them almost certainly did not read the report or hear the statement, much less agree with it—not to mention the Members of the other House and the Presi­dent who signed the bill.’

Justices Scalia and Thomas are obviously wary of the entire concept of Congressional intent and humorously sceptical about how immersed in the detail of a Congressional report or floor statement the entire Congress and indeed the President might be. Nevertheless, despite these stated concerns Justices Scalia and Thomas supported the majority decision and thus it is interesting to note some of Justice Ginsburg’s insights into the reasoning behind the decision-making of the majority justices:

‘Congress borrowed §1514A’s prohibition against retalia­tion from the wording of the 2000 Wendell H. Ford Avia­tion Investment and Reform Act for the 21st Century (AIR21), 49 U. S. C. §42121. That Act provides: “No air carrier or contractor or subcontractor of an air carrier 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 “relating to air carrier safety” to his or her employer or federal authorities. §42121(a)(1). AIR 21 has been read to cover, in addition to employees of air carriers, employees of contractors and subcontractors of the carriers. Given the parallel statu­tory texts and whistleblower protective aims, we read the words “an employee” in AIR 21 and in §1514A to have similar import.’

The comparison of the SOX and AIR statutes is important and interesting, not only because of the similar drafting terms used in both statutes, but also because it links the issue of air safety to investment safety. There is universal support for the notion that planes should not drop out of the sky and widespread acceptance of the fact that not only employees, but also contractors and subcontractors should receive protection if they blow the whistle on practices by an air carrier that if not exposed may lead to planes dropping out of the sky. The majority decision in the Lawson case thus suggests a powerful argument that should not similar protections be available to help prevent/or expose fraud or other activities that might cause an investment scheme or investment actor to fall out of the sky?  The Lawson case was against FMR, collectively private companies that contract to manage or advise mutual funds.

As the majority decision in Lawson stresses, mutual funds are public companies with no employees and so if FMR’s interpretation of §1514A were to be accepted it would ‘..shrink to insignificance the provision’s ban on retaliation by contractors..’ an interpretation the majority found unpersuasive. Justice Ginsburg on behalf of the majority noted that not only would the Court’s reading of §1514A ‘..avoid insulating the entire mutual fund industry from §1514A... but also that there was ‘..scant evidence that today’s decision will open any floodgates for whistleblowing suits outside §1514A’s purposes.’

The focus of the Supreme Court in the Lawson case was upon the mutual fund industry, but commentators note that its implications spread much further across US business more generally. For example, Matt Matule, a partner at Skadden Arps Slate Meagher & Flom LLP believes that the decision: ‘..ought to give private companies pause to re-evaluate what they have in place, to be sure their policies exist and are consistent with this decision..”; and Lloyd Chinn co-head of the whistleblowing and retaliation group at Proskauer Rose LLP. “Your company’s exposure to a [Sarbanes-Oxley] whistleblower claim is no longer governed by whether you’re a public company or not….Any private employer who happens to be a contractor of a public company is subject to a suit.’ The dust is yet to settle on the Lawson case but the early indications are that it will prompt US businesses, whatever their organisational structure to examine forensically their policies and practices regarding whistleblowing. Also it is quite likely that non-US businesses will similarly be casting a wary eye of how they operate within the US in light of the Lawson decision.

Once that dust has settled, and if the Lawson decision does indeed prompt a surge in whistleblower protection suits against private companies or partnerships for example, then there may well be increased attention paid by the US Congress and the media to the dissenting view led by Justice Sotomayor, with Justices Kennedy and Alito joining in that dissenting view. Justice Sotomayor describes the majority decision reliance on statutory context as unconvincing, §1514A of SOX as ‘deeply ambiguous’ and argues for a narrower reading of SOX because:

‘The Court’s interpretation gives §1514A a stunning reach. As interpreted today, the Sarbanes-Oxley Act authorizes a babysitter to bring a federal case against his employer—a parent who happens to work at the local Walmart (a public company)—if the parent stops employ­ing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud. And it opens the door to a cause of action against a small business that contracts to clean the local Starbucks (a public company) if an employee is demoted after reporting that another nonpublic company client has mailed the cleaning company a fraudulent invoice.’

It remains to be seen whether scenarios such as the babysitter and contract cleaner ones described above emerge post-Lawson. If they do, then it is quite likely that the potential response by the US Congress to the Lawson decision flagged by Justice Sotomayor in her closing remarks also will emerge: ‘… just as Congress has added further protections to the system it originally designed when necessary, so too may Congress now respond to limit the far-reaching implications of the Court’s interpretation.’ The Lawson case focused on issues of fraud, so for example it may be that the treatment of whistleblowers and how their revelations regarding alleged shareholder fraud are dealt with is the first significant terrain in which the repercussions of the Lawson decision are played out. Professional firms such as auditors and lawyers and their personnel, amongst others, have been put on judicial notice that even allowing for the competitive commercial reality within which these individuals and their organisations must function, they also must have a weather eye on the processes and scope for protection that they provide regarding whistleblowers.

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