Justices Seek Middle Ground in Whistleblower Case

NOTE: A version of this post first appeared on Law360.com.  The author, R. Scott Oswald, was counsel of record on an amicus curiae brief filed in this case.

In oral arguments for the first whistleblower case they have heard under the Sarbanes-Oxley Act (SOX), justices of the U.S. Supreme Court quickly locked onto the important issue: How to interpret SOX’s anti-retaliation provisions without gutting the law — or expanding it without limit.

Led by Justice Stephen Breyer, the hour-long discussion on November 12 — here’s the official transcript — paid scant attention to the most extreme formulations of both sides in Lawson v. FMR LLC. Instead the Court seemed to spend its time groping toward a middle ground that would mostly favor employees.

Oral arguments can be misleading, and several justices didn’t share any substantive thoughts. Still, the discussion appeared to signal an eventual remand to the trial court along with some common-sense guidelines about when SOX does — and does not — protect various types of employee.

That would be a win for Jackie Hosang Lawson and Jonathan Zang, the whistleblowers in this case; they could likely bring their retaliation complaints to trial.

More important, it would show that the nation’s highest court isn’t inclined to block the Obama administration’s expansive take on the anti-retaliation provisions of SOX and other laws.

Passed in 2002 in the wake of the Enron scandal, SOX sets strict standards for financial behavior by publicly traded companies and, as codified in Section 1514A of the U.S. Code, protects “employees” against retaliation for blowing the whistle on a number of specific violations.

Lawson asks the question: Which “employees,” exactly, are protected?

Does SOX protect only whistleblowers employed directly by a public company that is suspected of wrongdoing — or does it also shield whistleblowers who work for privately held contractors or subcontractors of the suspected company? The law can arguably be read either way; in recent years, the Obama administration has supported the broader interpretation.

The Lawson plaintiffs each had worked for different parts of privately held FMR, the financial giant behind Fidelity’s mutual funds; each had raised flags about possible wrongdoing at publicly traded Fidelity funds. Mr. Zang was later fired, while Ms. Lawson says she was effectively forced to resign.

But since neither plaintiff worked directly at a fund — Fidelity’s funds are standalone corporations with no direct employees — FMR claimed it was free to retaliate against them for reporting their concerns: SOX simply did not protect them.

(FMR didn’t admit the retaliation; the case has not gotten that far yet.)

Each side held to its absolute position. Arguing for Ms. Lawson and Mr. Zang, Eric Schnapper, a professor and scholar at the University of Washington School of Law, came under immediate fire for contending that an employee at a contractor could claim protection for alleging virtually any kind of fraud — even if the fraud, in the words of a skeptical Justice Breyer, “has absolutely nothing to do with the contract.”

Justice Breyer aimed similar incredulity at Mark Perry, who argued for FMR, when the lawyer claimed that Congress had deliberately omitted accountants from SOX protection — even though retaliation against truth-telling accountants at Arthur Andersen, an Enron contractor, was a key part of the very scandal that inspired SOX.

Mr. Perry never backed off, however, and he refused to entertain the idea that SOX might protect employees of contractors or subcontractors subject to some Court-formulated “limitations” — a word used repeatedly during the session.

Mr. Perry facetiously called the limitations concept “fascinating,” but he suggested to Justice Breyer that the Supreme Court wasn’t the place to raise it “for the first time.” The U.S. Congress would be a more appropriate forum, he lectured the justices.

Alone among the advocates, Nicole Saharsky, an assistant to the U.S. Solicitor General, came prepared to talk about the possibility of limitations — and as a result her amicus curiae argument for the United States was the most fruitful.

Despite the fact that the U.S. had supported Ms. Lawson and Mr. Zang, Ms. Saharsky admitted that protection isn’t limitless for whistleblowers at contractors and subcontractors. By the same token, she noted, it isn’t non-existent. This judge-friendly approach seemed to engage the justices, who began to grapple with possible ways to “skin that cat,” as Justice Breyer put it.

Must the alleged fraud be “relating to the public company?” asked Justice Samuel Alito.  Or “related to the contract?” asked Justice Breyer.

Maybe, Ms. Saharsky replied, but maybe an “expert agency” should also be allowed to determine the finer points. “We still have to give a rule,” objected Justice Anthony Kennedy, seemingly ready to do so. “Unless you come up with some … limiting principle,” agreed Justice Antonin Scalia, “… I’m not inclined to go along.”

Ms. Saharsky quickly obliged, laying out for Justice Scalia several limits that she said are already enforced by the Department of Labor, which administers the anti-retaliation provisions of SOX — and reassuring the justices that “no floodgates have been opened.”

Chief Justice John Roberts, a critic of administrative overreach, forced Ms. Saharsky to moderate her sketch of the Labor Department’s authority, but her general point still resonated: SOX can withstand some common-sense limitations on its protections, and such limitations are much better than a blanket denial of SOX protection to many whistleblowers.

By the end of arguments, after Mr. Schnapper had given a brief rebuttal to Mr. Perry, several things remained clear:

• The discussion was admirably substantive and never deviated from the purpose and proper scope of SOX’s whistleblower protections.
• It was not a showdown, as some (including this author) had suggested it might be, over the proper relationship between the federal courts and administrative agencies or boards.
• Neither did it deteriorate into a ritualistic parsing of semicolons, despite some mention by Mr. Perry of commas and subordinate clauses.
• The justices seemed uninterested in either extreme of the argument; the middle ground was where they engaged.
• The Court showed no animus for an expansive view of whistleblower laws — though it may want to erect some guardrails.

Overall, the takeaway for employee advocates was positive. Assuming that the Court hands down a decision that echoes oral arguments, the Obama-era “sea change” in favor of whistleblowers remains a gathering force in employment law.

Tagged: Administrative Review Board (ARB), Enforcement Bodies, Sarbanes-Oxley Act (SOX), Whistleblower Laws (Federal)