(CN) – The employees of private contractors working for public companies are not entitled to whistleblower protections under the Sarbanes-Oxley Act, the 1st Circuit ruled in a split decision.
Jackie Lawson and Jonathan Zang claim they were fired after raising concerns about potential securities fraud at the publicly owned and traded Fidelity mutual funds.
Both were employed by a private contractor, Fidelity Management and Research — which later changed its named to FMR Corp — or its subsidiary Fidelity Brokerage Services, which provide contracted advising and management services to the Fidelity family of funds.
Lawson and Zang sought whistleblower protection under Section 806 of the Sarbanes-Oxley Act titled “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.”
A federal court in Boston sided with Lawson and Zang, who argued that SOX whistleblower protection provisions of Section 806 extend to employees of private agents, contractors, and subcontractors to public companies.
FMR countered that the text of the section made it clear congress only meant to protect the employees of public companies from retaliation by the company, its agents, contractors and subcontractors.
The majority of a three-judge panel of the appellate court agreed with FMR citing the plain language of the section and its title, other provisions within SOX and the intent of congress in drafting the act.
Section 608 states that no company required to register under the Securities and Exchange Act or “any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee” who reports what they reasonably believe to be a violation of securities laws.
Writing for the majority Chief Judge Sandra Lynch said that the “more natural reading” of the section “goes to who is prohibited from retaliating or discriminating, not to who is a covered employee.”
She rejected Lawson and Zang’s argument that because the section forbids retaliation by public companies and their contractors it must, logically, also forbid retaliation against an employee of the same, “As a matter of logic, the conclusion does not follow from the premise.”
Citing Supreme Court precedent Judge Lynch said the appellate court was required to use the limiting language of section titles and captions to interpret the meaning of legislative text.
Lynch said that from the title of the section alone – “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud” – “it would be odd to read [subsection 1514A] as covering employees of private companies. It is unlikely Congress intended the term “Civil action to protect against retaliation in fraud cases” in the heading of subsection 1514A to be broader than the terms of the ‘Protection’ discussed in the title.”
The language of section 806 was “conspicuously narrow” Lynch said, where elsewhere in SOX congress provided forbade retaliation against a broad class of informants.
Lynch quoted Sen. Patrick Leahy of Vermont who said, during senate hearings, that the provisions of the section “would provide whistleblower protection to employees of publicly traded companies who report acts of fraud.”
During hearings on Dodd-Frank, Sen. Ben Cardin of Maryland said, “The whistleblower provisions of the Sarbanes-Oxley Act protect employees of the publicly traded companies from retaliation by giving victims of such treatment a cause of action which can be brought in Federal court.”
Both statements, Lynch found, support the idea that congress specifically limited whistleblower protections to employees of publicly traded companies.
In conclusion, Judge Lynch wrote: “If we are wrong and Congress intended the term ’employee’ … to have a broader meaning than the one we have arrived at, it can amend the statute. We are bound by what Congress has written.”
In a scathing 23-page dissent Circuit Judge O. Rogeriee Thompson called the majority’s opinion a “faulty statutory-interpretation exercise” and “judicial overreaching of the highest order” because it imposed “extra-textual” limitations on the statute.
“Looking to the plain language of the statute, one can only conclude that there is no restriction limiting the statute’s application to employees of publicly held companies,” Thompson wrote: “Boiling the statute down to its relevant syntactic elements, it provides that ‘no … contractor… may discharge … an employee.’ The statute does not limit its coverage to ‘an employee of a publicly held company’ – it just refers broadly to ‘an employee.'” [Ellipses in original]
Citing the 1st circuit’s recent expansive reading of titles in United States v. Ozuna-Cabrera, Thompson said, “the statute’s title and caption do not compel a limited reading of its language; instead, the majority’s strained reading comes ‘at the expense of the text itself.”
“The title,” she later wrote, “does not purport to apply any explicit limitations (e.g., ‘whistleblower protection for employees of pubic companies only’) but merely describes a specific and common application of a more generally applicable statute.”
Continuing with her theme, Thompson noted that in most instances the language of SOX specifically exempted people or entities from whistleblower protections. This, she said, served to “highlight the correctness of a broad reading of section 806.”
As for legislative intent, Thompson argued that none of the comments cited by the majority indicated an exclusive intent to protect employees of publicly traded companies.
“The majority’s reference to Senator Cardin’s statement is a textbook example of their imputing an intent to limit where none is evident,” she wrote: “Specifically, Senator Cardin’s statement says that ‘the whistleblower provisions of the Sarbanes-Oxley Act protect employees of the publicly traded companies,’ the majority say this statement ‘confirms that the covered employees are only those of publicly traded companies.’ …the word ‘only’ would indeed indicate limiting intent – if it appeared in Senator Cardin’s statement (or, for that matter, in absolutely any relevant legislative materials whatsoever). But it does not, so neither does any limiting intent.”
Thompson also excoriated the majority for all but ignoring Department of Labor regulations adopting a broad reading of section 806, and its friend of the court brief urging the appellate court to do the same.
To Thompson, this lack of deference to agency regulations violated 1st Circuit precedent and flip-flopped the majority’s claim that the plain language of the text was restrictive.
“To sum the whole thing up,” Thompson wrote, “section 806 plainly protects whistleblower employees of contractors of public companies; digging deeper into the section’s context and legislative history only confirms the breadth of section 806’s protections; considered agency views further support a broad read of the statute; and the majority have had to work very hard to reject not only our own precedent but also the views of the other branches of government, to say nothing of grammar and logic.”
The case was remanded to the district court with instructions to dismiss Lawson and Zang’s suits.