First Circuit Holds that Private Companies’ Employees not Entitled to Whistleblower Protections Under SOX

Former employees of private companies that act under contract as advisers to and managers of mutual funds organized under the Investment Company Act of 1940 filed suit against their respective employers for unlawful retaliation after they were terminated. The employees claimed that they were entitled to the whistleblower protection provision within the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1514A) (“SOX”) because they had reported potential fraud and security violations. The employers contested this, arguing that SOX’s protections did not extend to employees of private companies, and filed motions to dismiss the lawsuits.The district court disagreed with the employers, holding that this particular provision of SOX did protect employees of private companies that are contractors or subcontractors to “public companies" (as defined under the Act), where those employees were reporting violations relating to fraud against shareholders.

The employers appealed. The First Circuit Court of Appeals agreed with the employers and reversed the district court’s ruling.

On appeal, the parties agreed that the whistleblower provision of SOX at issue did provide protection to employees of “public companies,” however, the question of first impression before the Court of Appeals was whether Congress intended the whistleblower provisions of section 1514A to extend to employees of a contractor or subcontractor to a public company and who engage in protected activity. The employers argued that the plain language of the statutory provision makes clear that such protections are not extended to private companies’ employees, like Plaintiffs herein. The employees, however, argued that the statue makes clear that they are covered because it references protections for those who are the employees of public companies’ officers, employees, contractors, subcontractors, or agents.

Ultimately, upon examination of the plain language of the statute, as well as the caption and title of the statute, the First Circuit Court of Appeals agreed with the employers and found that only the employees of the defined public companies are covered by the whistleblower provisions, and that the references to the “officer, employee, contractor, subcontractor, or agent of such company” (as relied upon by the employees) merely refers to who is prohibited from retaliating or discriminating, and is not a definition of who is a covered employee.