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SCOTUS Extends the Sarbanes-Oxley Protections

“To safeguard investors in public companies and restore trust in the financial markets following the collapse of Enron Corporation, Congress passed the Sarbanes-Oxley Act of 2002. One of the Act’s provisions protects whistleblowers

[by providing]. . . ‘[n]o [public] company . . ., or any . . . contractor [or] subcontractor . . . of such company, may discharge, demote, suspend, threaten, harass, or . . . discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity].’ 18 U. S. C. §1514A(a).” Lawson et al. V. FRM, LLC, et al. No. 12–3. Argued November 12, 2013—Decided March 4, 2014. Lawson arose from the separate claims of two former employees of private companies that provide advisory and management services to “the Fidelity family of mutual funds.”During the course of their employment with Fidelity Brokerage Services, LLC and Fidelity Management & Research Co., respectively, subsidiaries of FMR, LLC, Jackie Lawson and Johnathan Zang both raised concerns over certain practices they believed were of concern to the funds managed by their employers. Lawson alleged in her suit that she suffered a series of adverse employment actions amounting to constructive discharge after raising concerns about the cost accounting methods being used to overstate expenses, while Zang alleged he was fired after raising concerns over an inaccurate SEC registration statement concerning certain Fidelity funds. The entities with whom Lawson and Zang were employed were independent private companieswith whom the Fidelity funds contracted to manage and advise those funds. Essentially, Lawson and Zang alleged that Sarbanes-Oxley prohibits private companies, not otherwise covered by the act, from taking any adverse employment action against an employee for their “whistleblowing activity.”

The Supreme Court agreed, holding that when a privately owned company performs work for a public company, the privately owned company’s employees, such Lawson and Zang, are covered by the provisions of 18 U.S.C. Section 1514A. Although the majority opinion, written with Justice Ruth Bader Ginsberg, gave little credence to FMR’s arguments that the holding would “open the flood gates” to potential litigation by every employee of any small business contracting with a public company to perform services who reports potential fraud, Justices Sotomayor, Kennedy, and Alito seemed to disagree. Writing in dissent, Justice Sotomayor wrote: “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.” Justice Sotomayor’s Dissent, Lawson et al. V. FRM, LLC, et al.

It remains to be seen whether the Court’s decision in Lawson will have the sweeping implications that Justices Sotomayor, Kennedy, and Alito believe it will, or whether its holding will be confined to outside professionals, such as attorneys, accountants, and advisors performing work on behalf of public companies.

Whether and when the provisions of the Sarbanes-Oxley Act apply to your business, or the potential dismissal or other adverse employment actions against your employees can require a complex, professional analysis. To understand the rules and make informed decisions about your company and its employees, you need the services of a knowledgeable attorney. Michael Leonard, Esq. of San Diego Corporate Law is that attorney. To schedule a consultation with Mr. Leonard to discuss whether a particular person is an independent contractor or employee, or to discuss any other business-related matter, you can contact him by visiting San Diego Corporate Law or by telephone at (858) 483-9200.

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