On March 4, 2014, the U.S. Supreme court in Lawson v. FMR, LLC, 134 S.Ct. 1158, held in a 6-3 decision that employees of a private company that is a contractor or subcontractor of public company are entitled to whistleblower protections under §806 of the Sarbanes-Oxley Act (SOX). The Court reversed the prior decision of the First Circuit Court of Appeals and resolved an important split among authorities about the scope of SOX coverage.

Plaintiff Lawson and co-plaintiff Zang were employees of a company that provided services to mutual funds. Both complained that they were fired after complaining to their employers about concerns related to the mutual fund’s cost accounting methodology including the overstatement of expenses and federal filings. Both sued their employers under SOX Section 806.

FMR moved to dismiss the complaint on the basis that it was not a public company subject to SOX. The district court denied the motion. The district court held that SOX protects as whistleblowers not only employees of public companies that raise concerns, but also private agents and contractors of public companies. The Court of Appeals for the First Circuit in a 2-1 decision reversed the district court’s decision and found that the private employer was not covered.

The Supreme Court disagreed. The Court’s analysis focused on 18 USC §1514A(a) its language that “No [public] company . . ., or any . . . contractor [or] subcontractor . . . of such company, may discharge, demote, suspend, threaten, harass, or . . . discriminate against an employee because of [whistleblowing activity].” Relying on the legislative history and remedial purpose of SOX, which was enacted following the Enron collapse, the Court found that the broader interpretation including employees of private companies should prevail.

The dissent, written by Justice Sotomayor, noted that the Court’s opinion, which is devoid of any limiting principle, could be stretched to cover absurd situations. For instance, Justice Sotomayor suggested that a babysitter could sue her employer, who happens to work at a public company, if the employer stops using her after she complains that the employer’s child is engaged in an “Internet purchase fraud.” In another example, Justice Sotomayor said that an employee of a business with a contract with a public company under the majority’s reasoning might have a cause of action after being demoted if the employee had previously complained that a non-public company sent a fraudulent invoice to the employer. Significantly, in the last example, the purported protected conduct had nothing to do with the public company.

The Court’s decision is an important one for any private company or contractor that provides services to a public company. Private companies must review their whistleblower policies and begin to retrain Human Resources and managers to be aware of this potential protection. When considering the risks to the employer of any adverse employment action, these employers must now consider the potential for a SOX whistleblower-retaliation claim.