Deciding whistleblower law's limits

The hundreds of thousands of privately held U.S. companies need to watch the Supreme Court case, Lawson v. FMR LLC, very closely. A decision embracing either the employee’s or the federal government’s position would have significant compliance implications for them. At issue is the reach of the whistleblower protections created by Sarbanes-Oxley. This case is the Court’s first attempt to parse the relevant statute text. No one disputes that employees of public companies are protected from retaliation when they blow the whistle on fraud within their company, but what about the employees of privately held companies that contract with public companies?

The law firm Littler Mendelson submitted one of the employer-side amicus briefs in the case; Edward T. Ellis, co-chair of Littler Mendelson’s whistleblowing & retaliation practice, explained the stakes in an interview with Corporate Secretary. (His answers have been edited slightly.)

CS: How will the case come out?

Ellis: It was difficult to determine from the oral argument how the case will come out, but the Court has three options.

One is the employee position, which is that once a [privately held] business has a contract with a publicly traded company, any employee whistleblowing activity within that business is protected. The most extreme scenario would be one posed by Justice Breyer: a public company hires a private company to mow its lawn. An employee at the lawn-mowing company complains to his employer that [his] company is fraudulently billing a different client—not the publicly traded company—and is fired in retaliation. If the employee’s argument in Lawson wins, then that lawn-mowing employee is protected.

The second option is management’s position, which is that only a public company’s employees are protected from retaliation. Thus the word "contractor" in section 806 (a) prohibits contractors of publicly held companies from retaliating against the public company's employees. Such retaliation could occur where a consultant or seconded employee is so situated in the publicly traded company that he or she is able to affect the employment or working environment of an employee of the publicly traded company. 

The third choice, which was argued by the federal government, is that an employee of a company that has a contract with a publicly traded company is protected from termination resulting from his or her report of fraud related to the contract with the publicly traded company. The Supreme Court judges appeared to me to have great sympathy with that position, but there’s absolutely no basis in the statute for that construction and some of the Justices acknowledged that in the argument.

CS: What are the implications of a decision upholding the employees’ view?

Ellis: If private contractors who contract with public companies are now covered, the impact on their compliance regimes will depend on the current level of the company’s sophistication. There’s enormous variation in the sophistication of the contractors. The more sophisticated companies already have good compliance systems; for some, it will be a bit of a wake up call.

In addition, if the employee or government’s argument wins, there will be a lot of litigation over what is a contract or who is a contractor. How many times does a guy have to mow the lawn to be a contractor?

CS: What should a private company do if the employee’s position is accepted by the Court?

Ellis: The private company should make sure that their human resources department is fully briefed on the potential for a lawsuit arising out of a termination involving someone who has made allegations of fraud. Once you’ve got the HR people trained, they should make sure that line management is trained to recognize the issues. Depending on which version the Court accepts, whoever is in charge of the contracts should be particularly sensitized because that would be likely where the issue occurs.

Remember, even if the decision goes the employee’s way, it’s not all of SOX that is being imposed on private companies that contract with public companies, just the whistleblower protections. And some of these companies may already be set up to handle whistleblower protections. For 25 or 30 years New Jersey has had an all-purpose whistleblower protection statute.

CS: Will any industry be more impacted than any other?

Ellis:  The impact of the decision will be much more acute if you’re a contractor in the financial industry, the health care industry, or in the defense industry because there’s more opportunity for the employees to allege fraud in those industries. By health care industry, I mean that broadly to include pharmaceutical companies, hospitals, etc.

Companies in those industries in particular will want to be sure to have a process for an employee to raise an issue internally. For other industries, it may be as simple as reviewing one more source of litigation risk at termination time.

Although the Court has until the end of June to issue a decision, a faster result is likely because the Court heard the oral argument on November 12, 2013.