Whistleblower Claims: Issues for 2014

, New York Law Journal


Philip Berkowitz
Philip Berkowitz

Sarbanes Oxley's creation of a new category of federal whistleblowers is now more than 10 years old, and Dodd-Frank's expansion of those rights is going on four years, but the rights of individuals to bring whistleblower claims, the appropriate standards of proof, and how employers may defend these claims, continue to bedevil litigants and the courts.

The year 2014 is likely to be a watershed one for resolving a number of these key issues. In its first SOX whistleblower case, the U.S. Supreme Court will clarify whether all contractors and subcontractors of publicly traded companies are covered by SOX—rendering the employees of all these entities potential whistleblowers.

Another controversial issue in 2014, reflecting a circuit split, is whether a whistleblower, to be protected by SOX, must first file a claim with the Securities and Exchange Commission.

Other simmering issues, which I will call the Platone/Paraxel Paradox (for reasons to become evident): To state a claim, must a whistleblower specifically identify a violation of one of the six criminal statutes enumerated in SOX? Must a SOX whistleblower allege fraud against shareholders?

The reader, we presume, is aware that SOX prohibits publicly traded employers (and their privately held subsidiaries) from retaliating against employees who provide information and/or assist in an investigation of an employer's violation of SOX, SEC regulations or securities fraud. Dodd-Frank, similarly, prohibits retaliation against whistleblowers who possess a "reasonable belief" that he or she provided information that "relates to a possible securities law violation."

We also assume knowledge of Dodd-Frank's "bounty" remedy for whistleblowers who voluntarily provide original information to the SEC. If the information leads to an SEC enforcement action and recovery of more than $1 million, the informer may collect a monetary award ranging between 10 percent and 30 percent of the monetary sanctions collected.


The Supreme Court has before it, in Lawson v. FMR,1 the issue of whether Congress, by including the words "contractor" and "subcontractor" in the list of entities that may not retaliate against whistleblowers, meant to extend SOX whistleblower protection to every business entity that has a contractual relationship with a publicly traded company.

In Lawson, the plaintiffs worked for privately held investment advisors to publicly owned Fidelity mutual funds. They claimed they were retaliated against, in violation of SOX, for complaining internally about alleged financial improprieties. The federal district court in Boston denied the defendants' motion to dismiss on the basis that SOX only reaches employees of public companies, holding that the employing entities were contractors to a public company, and that employees were protected. But the court certified the question for interlocutory appeal. The U.S. Court of Appeals for the First Circuit reversed, holding that SOX applies only to employees of public companies.

The U.S. Department of Labor's Administrative Review Board (ARB) subsequently rejected the First Circuit's interpretation in Spinner v. David Landau & Associates, holding that an auditor who was fired by a privately held firm could bring a SOX claim because the firm provided compliance services to a public company.2 The Lawson plaintiffs petitioned the Supreme Court for further review, and on Nov. 12, 2013, the justices heard oral argument. At argument, the justices seemed to recognize that Congress could not have intended SOX to cover all employees of every "officer, employee, contractor, subcontractor, or agent" of a public company, and that some "limitation" was necessary.

Justice Stephen Breyer asked early in the argument whether SOX would apply to a gardener with three employees that spends one day a week cutting a public company's lawn, if one employee complained about alleged fraud completely unrelated to the public company. Resolution of this question may play a key part in the final decision. The plaintiffs argued that SOX would apply, because, they said, Congress intended, in the wake of the Enron scandal, to protect every employee of a contractor or subcontractor and every report of fraud.

The employers argued that only employees of public companies are protected. This position, though, would deprive contractors' employees of any protection, and arguably makes the "contractors" and "subcontractors" language in Section 806 superfluous. The government as amicus asserted that while Congress intended to cover employees of contractors, this was only in the capacity of fulfilling the contract with the public company. Under this theory, Breyer's gardening employees would be covered if they were reporting fraud in connection with the contractor's work for the publicly traded company, but not if they were reporting fraud unrelated to the publicly traded company.3

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