Lawson v. FMR, LLC

Issues 

Does the Sarbanes-Oxley Act, 18 U.S.C. § 1514A, which forbids publicly traded companies, mutual funds, and contractors or subcontractors of such companies from discriminating or retaliating against an employee because of certain protected conduct, protect an employee of a privately-held contractor or subcontractor of a public company?

Oral argument: 
November 12, 2013

Jonathan Zang and Jackie Hosang Lawson sued their respective Fidelity employers, alleging that the companies retaliated against them for reporting what they believed to be securities law violations. Section 1514A of the Sarbanes-Oxley Act protects employees of public companies from retaliation after the employee “blows the whistle” on the company. Zang and Lawson argue that § 1514A should also apply to employees of private contractors and subcontractors contracting with public companies, since these employees may be in the best position to report problems. FMR LLC argues that Congress only intended § 1514A to apply to public employees, and that extending coverage would result in an unmanageable amount of litigation. The First Circuit ruled that § 1514A protects only public employees, and that Congress must expand coverage if it wants to cover employees of private contractors. The Supreme Court will address whether and to what extent Sarbanes-Oxley provisions apply to private companies. The Court’s decision will impact employees of private companies that contract with public companies, and whether private employees will be protected from retaliation if they report securities violations to the Securities Exchange Commission.

Questions as Framed for the Court by the Parties 

Is an employee of a privately-held contractor or subcontractor of a public company protected from retaliation by § 1514A? 

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Facts

Petitioners Jonathan M. Zang and Jackie Hosang Lawson worked for private companies that provide advising or management services to the Fidelity family of mutual funds (“Fidelity funds”). See Lawson v. FMR LLC, 670 F.3d 61, 63 (1st Cir. 2012). Zang worked for Fidelity Management & Research Co. and later for a subsidiary called FMR Co., Inc. (collectively, the “Fidelity Management companies”). See id.Fidelity funds contract with Fidelity Management companies to serve as investment advisors. See id. These companies are subsidiaries of FMR LLC (“FMR”). See id.

The Fidelity funds are registered with the Securities Exchange Commission (“SEC”) and comply with the Securities Exchange Act of 1934 (“1934 Act”). See id. Shareholders own the mutual funds and a single Fidelity Mutual Fund Board of Trustees oversees fund management. See id.The Fidelity funds do not have employees of their own. See id. 

In July 2005, FMR terminated Zang’s employment. See id.Zang alleged that he lost his job as retaliation after he raised concerns about inaccuracies in a draft registration statement for some Fidelity funds, which he believed violated federal securities laws. See id. Zang filed a complaint with the Occupational Health & Safety Administration (“OHSA”) of the Department of Labor (“DOL”), pursuant to the Sarbanes-Oxley Act (“SOX”), claiming that his discharge violated 18 U.S.C. § 1514A(b)(1)(A). See id.

OSHA dismissed Zang’s claim, finding that although he was a covered employee entitled to whistleblower protections under § 1514A, the type of conduct he engaged in was not protected. Zang appealed to an Administrative Law Judge (“ALJ”). See id.The ALJ concluded that § 1514A did not protect Zang because the statute’s definition of “employee” does not include the employee of a privately-held contractor. See id. at 63–64. Zang subsequently filed a complaint in federal court. See id. at 64.

Lawson was an employee of Fidelity Brokerage Services, LLC, a subsidiary of FMR, until 2007, when she resigned claiming that she had been constructively discharged. See id.The previous year, Lawson had filed several complaints with the companies and OSHA alleging that her employer retaliated against her for raising concerns about cost-accounting methods. See id. A year after filing her complaints with OSHA, Lawson notified the DOL that she sued her employers in the United States District Court of Massachusetts. See id.

FMR and its subsidiaries are private companies. See id.They argue that Zang and Lawson are not employees covered under § 1514A and, alternatively, that Zang’s and Lawson’s conduct is not protected under § 1514A(a)(1). See id. The district court held that the SOX whistleblower protection provisions of § 1514A extend to employees of private agents, contractors, and subcontractors of public companies. See id. at 65. Specifically, the court found that Zang and Lawson proved that their private company employers were contractors, subcontractors, or agents of publicly-held investment companies and that their conduct fell under the protected activities in § 1514A(a)(1). See id.

On interlocutory appeal, the First Circuit Court of Appeals reversed the district court and found that the whistleblower provisions only cover employees of public companies See id. at 68. Further, the court held that Congress did not intend for § 1514A to protect employees of private companies that provide investment advice to funds, so Zang and Lawson are not protected employees. See id. at 73.

Zang and Lawson filed a petition for a writ of certiorari, which the Supreme Court granted on May 20, 2013.

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Discussion

Zang and Lawson argue that employees of private companies, specifically private contractors for mutual funds, should be protected by § 1514A’s whistleblower provision because mutual funds have no employees; rather mutual fund management and advising is done through private companies whose employees are in the best position to know when securities laws are violated. See Brief for Petitioners at 40. On the other hand, FMR argues that the SOX whistleblower provisions only protect employees of publicly-held companies, and that extending coverage to private companies would create excessive litigation and exceed Congress’s intent. See Brief for Respondents at 30. The Supreme Court’s resolution of the case implicates whether and to what extent SOX provisions apply to private companies and whether employees of private companies that contract with public companies will be protected from retaliation if they report securities violations to the SEC.

PROMOTING AND PROTECTING WHISTLEBLOWERS

Zang, Lawson, and supporting amici argue that § 1514A of SOX should protect private contractor and subcontractor employees working with public companies. See Brief for Petitioners at 10–11; see Brief of Amicus Curiae the United States in Support of Petitioners at 12; see Brief of Amici Curiae National Employment Lawyers Association and Government Accountability Project (“NELA and GAP”) in Support of Petitioners at 3. The United States argues that the SOX provisions are supposed to prevent public companies, “or any officer, employee, contractor, subcontractor, or agent of such a company” from retaliating against any employee who reports fraud. See Brief of the United States at 12. The United States notes that if private employees are not covered, outside auditors, accountants and lawyers will not be protected from retaliation even though they may be in the best position to report corporate wrongdoing. See id. at 21. Similarly, Zang and Lawson argue that protection is necessary in the field of mutual funds, where employees of private companies can best report corporate wrongdoing because they serve as investment advisors and carry out day-to-day operations. See Brief for Petitioners at 40. In essence, the United States claims, not protecting employees of private companies that contract with public companies would undermine SOX’s goal of protecting whistleblowers. See Brief of the United States at 25–26.

FMR counters that the SOX whistleblower provisions were not meant to protect any and all employees from retaliation if they report potential violations to the SEC. See Brief for Respondents at 31. FMR notes that Congress intended for SOX to apply exclusively to public companies, not private companies, which make up a “vast majority of companies across the country.” Id. at 31. FMR claims that if SOX protects any contractor or subcontractor or agent, then it also protects any employee of any officer or employee of the public company. See id. at 19–20. As a result, FMR argues, if the Court holds that SOX extends to private companies, it would open the floodgates to millions of lawsuits, and companies would be unable to handle the litigation. See id. at 32, 40. 

PURPOSE OF SOX

Zang and Lawson argue that protecting employees of private companies will help the country avoid a collapse of the mutual fund market similar to the Enron scandal. See Brief for Petitioners at 55–56.In support of Zang and Lawson, the United States explains that the SEC created the whistle-blowing sections of SOX to encourage outside accountants, auditors, and lawyers to report securities law violations. See Brief of the United States at 21. Indeed, the National Employment Lawyers Association (“NELA”) and Government Accountability Project (“GAP”) explain in a joint brief that because of a “corporate code of silence,” advisors and lawyers outside Enron failed to report fraudulent activities and thus failed to prevent that company’s collapse. See Brief of NELA and GAP at 7. As such, NELA and GAP argue that to avoid another Enron, the SOX provisions should extend to private-company employees to encourage these employees to speak up. See id. at 17–18. The United States adds that not only are these employees in the best position to recognize and report securities violations, but private-contractor employees may be the only people who can report securities violations and protect public interests when it comes to mutual funds. See Brief of the United States at 21–22.

FMR argues that the SOX whistleblower provisions are meant to protect public companies, and that if Congress wants to protect private employees, it can do so by explicitly expanding SOX’s reach. See Brief for Respondents at 34. FMR notes that Congress addressed accountant and lawyer obligations for reporting when it created special provisions and responsibilities for these outside employees. See id. at 41. FMR also notes that the Dodd-Frank Wall Street Reform and Consumer Protection Act protects all employees from retaliation, which suggests that Congress can extend the scope of protection to private company employees if it chooses. See id. at 43. However, Congress failed to enact the Mutual Fund Reform Act of 2004, which shows that when Congress had the chance to expand protection to private employees, it chose not to. See id. at 37. 

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Analysis

The issue in this case is the meaning of the word “employee” in Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”), codified at 18 U.S.C. § 1514A. Zang and Lawson argue that “employee” should be interpreted to mean the employees of privately-held contractors and subcontractors of public companies. FMR LLC argues that the meaning of “employee” is limited strictly to employees of public companies.

Definition of “Employee” Under Section 1514A

Section 1514A was enacted to protect whistleblowers. It states in relevant part: “(a) Whistleblower protection for employees of publicly traded companies.--No [public] company . . . or any . . . officer, employee, contractor [or] subcontractor . . . 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 any lawful act done by the employee . . . .”  

Zang and Lawson argue that where Congress includes particular language in one section of a statute but omits it in another section, it is generally presumed that Congress acts intentionally in doing so. Brief for Petitioners at 33. Thus, they note that the first use of the word “employee” in the statute is modified by the phrase “of such company.” Id. at 32.This, they argue, is understood to mean that employees of public companies cannot retaliate against whistleblowers. Id. at 32. However, they claim, the second use of the word “employee” is not limited by the phrase “of such company,” which indicates that these “employees” are protected from being retaliated against. Id.Because this latter use of the term “employee” is not modified by “of such company,” Zang and Lawson argue, this omission is intentional and stands for the proposition that the employees protected from retaliation include the employees of contractors and subcontractors. Id. at 32. 

FMR argues, however, that where Congress uses the same word in the same section of a statute, then it is presumed that the words share the same meaning. Brief for Respondents at 18.Thus, because the first instance of the word “employee” refers to the employees of public companies, the subsequent use of “employee” must have the same meaning. Id. at 17. They point out that Zang and Lawson, as well as the government, concede that the statute would not reach the employees of officers—for example, an officer’s domestic servants. Id. at 20.FMR argues, however, that neither party has offered any “principled basis” for holding, on the one hand, that an officer’s employees would not be covered and, on the other hand, why a contractor’s employees would be covered. Id.They conclude that it would be extraordinary for Congress to use the word “employee” in different ways within a single sentence. Id.In order for the statute to be coherent, FMR asserts that the term “employee” must be given the same construction for all secondary actors covered by the statute—officers, employees, contractors, subcontractors, and agents. Id. at 21.

Zang and Lawson further contend that when a statute imposes duties on a company with respect to its “employees,” the law is ordinarily referring to that company’s own employees. Brief for Petitioners at 15–16. They focus on the types of activities that the statute prevents contractors and subcontracts from engaging in—namely, discharging, demoting, suspending, threatening, harassing, or otherwise discriminating against an employee. They argue that these actions are ones that a company would normally be expected to engage in against its own employees, not those of another company. Id. at 21–22.Specifically, Zang and Lawson argue that discharge, demotion, and suspension are what the Supreme Court described in Burlington Industries, Inc. v. Ellerth as “tangible employment actions,” which can only be taken by a person acting as an agent of the company. See id.at 23–24; 524 U.S. 742 (1998). Similarly, they look to Section 42121(b) of Title 49, which implements procedures for enforcement actions under § 1514A. See id.at 34-35. They argue that those provisions suggest that § 1514A refers to the employees of contractors and subcontractors, not action taken by a contractor against the employee of a public company. See id.at 35. For example, Zang and Lawson point out that one of the remedies for a violation of § 1514A is the reinstatement of the wrongfully discharged employee. See id.at 36. They argue that even if a contractor would have the authority to fire the employee of a public company, the contractor normally would be in no position to reinstate the fired employee and restore his or her previous terms, conditions, and privileges. See id. at 34–37

FMR counters Zang and Lawson by arguing that there is nothing unusual in imagining a situation in which a contractor would be able to fire or take other action against an employee of a public company. Brief for Respondents at 26–27. Indeed, FMR contends that § 806 of SOX was enacted in order to deal with the situation where a company contracts with a specialist to “deal” with nettlesome employees – that is, where the company hires an outsider to systematically fire its employees. Seeid.at 24–25. In this situation, FMR contends that § 806 is intended to give the fired employee a private right of action against his or her employer, principally, and against the contractor who fired him or her in the event that the employee goes bankrupt, as did Enron. Id. 

THE STATUTORY HEADINGS  

The parties also focus on the title and headings of the statute. Section 806 of SOX is titled “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud,” and subsection (a) of § 1514A begins with the following description: “Whistleblower protection for employees of publicly traded companies.” 

Zang and Lawson point out that although these two section headings refer to “public employees,” the heading for § 1514A titled “Civil action to protect against retaliation in fraud cases” does not. Brief for Petitioners at 42.Zang and Lawson rely on the Supreme Court’s 1947 decision in Brotherhood of Railroad Trainmen v. Baltimore & O.R.Co., in which the Court referred to the heading of a statute section as “but a short-hand reference to the general subject matter involved.” Id.at 47–48; 331 U.S. 519. They conclude that the most sensible interpretation is that the drafters of SOX simply chose to refer to the first type of company listed – public companies – in an attempt to capture in a few words a provision that applied to employees of four types of firms. Thus, the headings do not preclude concluding that employees of private contractors and subcontractors are protected under 1514A. See id.at 48–49. 

FMR responds by arguing that Trainmen establishes the supremacy of the statutory text and headings only in cases of conflict and does not preclude a court from using titles and headings to confirm the apparent meaning of the text. Brief for Respondents at 23.They argue that, here, there is no conflict between the statutory text and the headings. Id.Rather, FMR contends that Congress made it very clear by mentioning “employees of publicly traded companies” in the headings for sections 806 and 1514A(a) that the “employees” covered by the statute are those of public companies. Id.at 21–22.   

WHETHER THE ADMINISTRATIVE REVIEW BOARD’S INTERPRETATION OF § 806 IS DUE CHEVRON DEFERENCE?

Zang and Lawson argue in the alternative that if the Court finds that § 1514A is ambiguous, then it should uphold the Administrative Review Board’s (ARB) interpretation of that provision in Spinner v. David Landau and Associates, LLC. Brief for Petitioners at 61. They contend that the ARB’s decision is entitled to deference under Chevron U.S.A. Inc.v. NRDC. Id. at 61; 467 U.S. 837 (1984). Specifically, Zang and Lawson argue that the Secretary of Labor is responsible for enforcing § 1514A and that parties are entitled to a “hearing on the record.” Zang and Lawson contend that Chevron deference is due to an agency decision when a statute authorizes the agency to engage in adjudication and the agency’s decision is reasonable. Accordingly, Zang and Lawson conclude that because the Department of Labor is authorized to engage in adjudication with respect to § 1514A claims, Chevron deference is due here. See id.at 61–63.

FMR, however, argues that the ARB’s decision is not entitled to Chevron deference. FMR contends that under Supreme Court precedent, agency adjudication is a permissible mode of policymaking only where the agency has been delegated the power to make law or policy by other means. See Brief for Respondents at 46. Here, FMR contends that the Department of Labor has no policymaking role under SOX; rather, its role is limited to investigating and adjudicating actions under Section 806 of the SOX. See id. at 49. Thus, FMR argues that because the Court has never deferred to an adjudicative decision made by a tribunal within an agency that lacks policymaking authority, doing so here would break new and dangerous ground. Id.at 51. 

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Conclusion

This case asks the Court to interpret the whistleblower provisions of the Sarbanes-Oxley Act of 2002. Specifically, the Court must decide whether Section 806 of SOX, which prevents retaliation by public companies against employees who engage in certain whistleblowing activity, extends to the employees of privately-held contractors and subcontractors of public companies. In essence, this case asks the Court to consider the basic purpose of SOX and how far its whistleblower protections extend. By clarifying SOX’s whistleblower protection, the Court’s decision will impact whistleblower activity and the relationship between public companies and privately-held contractors and subcontractors. The Court’s decision may also compel Congress to revise SOX’s whistleblower provisions.

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Acknowledgments 

Additional Resources 

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