Whistleblower Protection: First Circuit Rules on “Covered Employees”

In a recent ruling, the U.S. Court of Appeals for the First Circuit found that employees of private contractors and subcontractors working for public companies are not entitled to whistleblower protections. The Court found in Lawson v. FMR LLC that the whistleblower provisions of the Sarbanes-Oxley Act apply only to direct employees of public companies.  

For your reference, here’s a roundup of legal advisories on the ruling:

First Circuit Holds That Section 806 of the Sarbanes-Oxley Act Extends Only to Employees of Public Companies, Not Employees of Private Companies Who Are Contractors or Subcontractors for Covered Public Companies (Sheppard Mullin Richter & Hampton LLP)

“This decision, the first decision by a United States Court of Appeals on this issue, helps clarify the definition of ‘covered employee’ under whistleblower provisions of SOX. Plaintiffs Jackie Hosang Lawson and Jonathan M. Zang each brought separate actions in which they alleged unlawful retaliation by their employers in violation of the whistleblower protections of Section 806 of SOX.” Read the full update»

First Circuit Ruling Limits Whistleblower Protection Under Section 1514A(a) of the Sarbanes-Oxley Act to Employees of Public Companies (Sutherland Asbill & Brennan LLP)

“Specifically the court looked to the title of § 806, which is entitled ‘Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.’ The court found that ‘[f]rom that alone, it would be odd to read § 1514A(a) as covering employees of private companies.’ Furthermore, the court found ‘[i]t unlikely Congress intended the term “Civil action to protect against retaliation in fraud cases” in the heading of § 1514A(a) to be broader than the terms of “Protection” discussed in the title of section 806.”” Read the full update»

1st Circuit Answers Question of First Impression: SOX Whistleblower Protection Does Not Extend to Employees of Public Company Contractors or Subcontractors (Venable LLP)

“Judge Thompson issued a scathing dissent. From her perspective, the relevant statutory text is ‘no…contractor…may discharge…an employee.’ Not only is ‘an employee’ not limited to ‘employees of publicly held companies,’ but in her view the majority’s interpretation rendered the term contractor ‘superfluous.’ The dissent also noted that under the majority’s approach, employees of private contractors have no legal recourse against their employers’ retaliatory acts which is problematic in the context of mutual funds as they rarely have employees.” Read the full update»

Related Commentary and Analysis

How to Handle Whistleblower Claims and Try to Avoid a Retaliation Lawsuit (Snell & Wilmer L.L.P.)

“The number of retaliation claims continues to rise as do the protections and rewards provided to employees who act as whistleblowers. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), whose final rules took effect in August 2011, created monetary awards for whistleblowers who provide original information to the Securities and Exchange Commission or Commodity Futures Trading Commission regarding corporate fraud or misconduct, strengthened the whistleblower protection provisions already in place in the Sarbanes Oxley Act and the False Claims Act and created additional whistleblower retaliation causes of action.” Read the full update»

How to Avoid Whistleblower Claims Under Dodd-Frank — Practical Tips for Financial Institutions (Lane Powell PC)

“Financial institutions now face greater exposure to regulatory investigations because the SEC rules make it more difficult to resolve concerns early through internal channels before incurring significant costs. As the National Association of Corporate Directors pointed out in comments to the SEC, the rules encourage employees to bypass their own institution’s compliance department in their eagerness to inform the SEC of suspected foul play. Accordingly, even institutions with well-established internal fraud and compliance reporting procedures should consider more aggressive steps to encourage internal reporting — and perhaps even reward whistleblowers who promptly report concerns to their employer, rather than the SEC.” Read the full update»

Health Law Alert: Blowing the Whistle on Whistleblowers (Ober|Kaler)

“The False Claims Act creates strong financial incentives for whistleblowers to file lawsuits. Successful whistleblowers have obtained multi–million dollar payouts. Sometimes, however, a whistleblower – in his or her attempt to strike it rich – crosses an ethical line and suffers the consequences.” Read the full update»

DOL Confirms SOX Whistleblower Protections Do Not Apply Extraterritorially (Littler)

“At a time when the extraterritorial reach of U.S. regulations seems to grow at a rate faster than the economy, U.S. employers breathed a sigh of relief when the U.S. Department of Labor’s Administrative Review Board confirmed by a 3-2 vote that the whistleblower provision of Title VIII of the Sarbanes-Oxley Act (SOX) has no extraterritorial application.” Read the full update»

Latest on Dodd-Frank’s Whistleblower Rules (Snell & Wilmer L.L.P.)

“According to the SEC, it has received 334 whistleblower tips since August 2011, when the SEC’s final rules implementing Section 21F became effective. The most common complaint categories were market manipulation (16.2 percent), corporate disclosures and financial statements (15.3 percent) and offering fraud (15.6 percent)… Although no whistleblower awards have been announced to date, the SEC’s Office of the Whistleblower has posted notice of over 200 applicable enforcement judgments and orders issued from July 21, 2010 (when Dodd-Frank became law) through December 1, 2011.” Read the full update»

Businesses Must Adopt Whistleblower Policies and Procedures to Avoid Liability (Ryan Siney)

“Whistleblowers can be a valuable source of information regarding problems within your organization, and the type of information gleaned from whistleblowers can far exceed the details uncovered through internal and external audits or regulatory examinations. Whistleblowers’ reports also create legal risks as to the status of the whistleblowers and require a process that can separate the wheat from the chaff.” Read the full update»

SEC Launches Whistleblower Bounty Program (Sheehan Phinney Bass + Green PA)

“On August 12, 2011, the U.S. Securities and Exchange Commission (‘SEC’) put into effect new rules which establish a program of monetary bounties for whistleblowers that bring original information to the attention of the SEC about major frauds involving violations of the securities laws. Under the new rules, whistleblowers are entitled to receive a bounty equal to between 10% and 30% of the amount of any sanctions imposed as a result of their report to the SEC or certain other regulatory agencies.” Read the full update»


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