Audit, Compliance and Risk Blog

Prosecutors rely on informants from time to time to identify wrongdoing and “make their cases.” But corporate fraud whistleblowers can face bleak futures: at best they may be ostracized from future promotions, at worst they may be terminated with no favorable recommendation. Section 806 of the Sarbanes-Oxley Act of 2002 (SOA) adds important protections for whistleblowers

“No [publicly traded] company…or any officer, employee, contractor, subcontractor, or agent of such company or nationally recognized statistical rating organization, 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 [whistleblowing] act done by the employee…”.

Over the last decade, however, agencies and courts have labored to interpret and apply this provision. This month the U.S Supreme Court addressed one of the many ambiguities in Section 806, deciding that Section 806 protects employees of privately held contractors and subcontractors—such as investment advisers, law firms, accountants—who perform work for a public company, when they blow the whistle about fraud relating to the public company. The case is Lawson v. FMR, LLC.

How Do Whistleblower Protections Work?

Section 806 allows an employee to file a complaint with the Department of Labor’s (DOL’s) Occupational Safety and Health Administration (OSHA) following retaliation for protected whistleblowing activity. OSHA, which also administers similar provisions under 21 other federal laws (I described these in my blog here), requires that the complaint include “prima facie showing that protected behavior or conduct was a contributing factor in the unfavorable personnel action alleged in the complaint,” based on the following:

1. Employee engaged in a protected activity or conduct—which involves attempts to inform higher authorities within the organization or a government agency, of corporate activities that the employee reasonably believes constitute a violation. 

2. Employer “knew or suspected, actually or constructively,” that the employee engaged in the protected activity.

3. Employee suffered an adverse personnel action. 

4. Circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action.

OSHA decisions on these complaints are appealable to the DOL’s Office of Administrative Law Judges for hearing and decision by an ALJ. ALJ decisions are appealable to the federal courts. Remedies include reinstatement, backpay (with interest), and compensatory damages with costs. Courts have refused to allow punitive damages

After courts’ split over the question whether whistleblower protections extend to a subsidiary or affiliate of a public company whose financial information is included in the consolidated financial statements of the public company, Congress responded with a provision of the Dodd-Frank Act of 2010, amending Section 806 to clarify that it does.

As of this writing OSHA and the federal courts remain split as to whether Section 806 applies to operations outside the United States is being litigated. Courts had also split as to whether employees of non-public contractors to public companies are protected—this month’s Lawson v. FMR, LLC decides that they are.

What Happened in the Lawson Case?

Jackie Lawson and Jonathan Zang were long-time employees of FMR, LLC, which is a privately held company that provides advisory and management services to the publicly traded Fidelity family of mutual funds. The Fidelity funds themselves have no employees. Lawson and Zang raised questions with their employer about inaccuracies in accounting for the funds, and subsequently suffered retaliation. They filed complaints with OSHA alleging whistleblower retaliation. After OSHA failed to act within the statutory time limit of 180 days, they filed suit in federal court. FMR moved to dismiss, arguing that its status as a privately held company meant that SOA Section 806 did not apply. The District Court denied the motion; on appeal, a split panel of the First Circuit Court of Appeals reversed, interpreting Section 806’s provisions to apply only on behalf of employees of public companies. Lawson and Zang sought review by the U.S. Supreme Court.

The Supreme Court applied principles of statutory interpretation, with four justices finding that both the plain language of the provision quoted above, and the legislative history (which remedied a lack of protections for whistleblowers involved in the Enron scandal, include employees of Enron’s auditors Arthur Andersen), indicate that Congress intended the provision to apply broadly. Two more justices rested on the plain language, without reliance on the legislative history. Three others dissented.

Self-assessment Checklist

Is my organization a publicly traded company, with shares listed on national securities exchanges and/or required to file periodic reports with the Securities and Exchange Commission (SEC)?

Does my organization provide services to a publicly traded company (such as investment advisers, law firms, accountants), through which my organization’s employees may learn information related to the client company’s SEC and/or other filings, or that might affect the company’s share value?

Does my organization have policies and procedures in place to protect employees who engage in whistleblowing activities if they have reason to believe that the organization or any of its clients is engaged in fraudulent activity?

• Following up on internal reports, complaints and whistleblowing?

• Not to not retaliate against employees who come forward?

• To protect the anonymity of reporting employees, as appropriate?

• To acknowledge reporting employees, as appropriate?

• To reward reporting employees, as appropriate?

Where Can I Go For More Information?

• Lawson v. FMR, LLC decision (on Supreme Court website) 

• OSHA’s whistleblower webpage 

• Text of Sarbanes-Oxley Act (on SEC website) 

Specialty Technical Publishers (STP) provides a variety of single-law and multi-law services, intended to facilitate clients’ understanding of and compliance with requirements. These include:

• Securities Law: A Guide to the 1933 and 1934 Acts and their Amendments, including Sarbanes-Oxley and Dodd-Frank

• SEC Disclosures Checklists Including Financial Statement, MD&A, and Sarbanes-Oxley Checklists

• Directors' and Officers' Liability

About the Author

Jon Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 25 years. He was involved in developing 16 existing products,including The Complete Guide to Environmental Law and Workplace Violence Prevention: A Practical Guide to Security on the Job.

photo credit: katerha via photopin cc