Is SOX Limited To Public Companies

Today we released a video discussing whether SOX is limited to securities fraud. We discussed the split of authority on the issue.

Another question is whether SOX Coverage is limited to employees of public companies. We discuss this in our paper, as well.

In Lawson v. FMR LLC, 670 F.3d 61 (1st Cir. 2012), the plaintiffs alleged that their former employers, private companies that contracted with public companies, had retaliated against them for raising concerns about potential federal securities laws violations. The district court denied the defendants’ motions to dismiss, holding that the SOX whistleblower protection provision applies not only to employees of public companies, but also to employees of private companies that contract or subcontract with public companies. In an interlocutory appeal, a divided panel of the First Circuit reversed. Becoming the first federal court of appeals to address the issue, the First Circuit held in a lengthy opinion that the SOX whistleblower protection provision applies only to employees of public companies, not to employees of private companies that contract with public companies.

On May 31, 2012, the ARB expanded the coverage of the whistleblower provisions in Section 806 of the SOX to apply to employees of private businesses that contract with publicly traded companies. Spinner v. David Landau & Assocs. LLC, No. 10-111, 2012 WL 2073374 (ARB May 31, 2012). In doing so, it rejected the First Circuit’s decision in Lawson.

Complainant Thomas Spinner was an internal auditor for David Landau & Associates (DLA), a private auditing firm. DLA contracted with S.L. Green Realty Corp. (S.L. Green), a publicly traded company, to provide auditing services. In September 2008, DLA assigned Complainant to perform full-time auditing services for S.L. Green, and terminated his employment around a month later.

Spinner filed a complaint with OSHA, claiming DLA violated Section 806 by discharging him for reporting “internal control and reconciliation problems” at S.L. Green to DLA. OSHA concluded that, as a contractor of S.L. Green, DLA was covered by Section 806, but that DLA established that it would have terminated Spinner’s employment even if he had not engaged in protected activity. Spinner appealed to an ALJ, and DLA moved for summary decision, arguing it was not covered by Section 806 and it would have discharged Spinner regardless of his alleged protected activity. The ALJ granted DLA’s motion, concluding it was not a covered entity, and Spinner appealed to the ARB.

The ARB reversed and remanded, concluding DLA was covered by Section 806. In doing so, the ARB reviewed the relevant statutory language and the corresponding regulations. The ARB noted that Section 806 does not explicitly limit protection to employees of public companies, and stated that if Congress intended such a limitation, it could have defined “employee” accordingly or otherwise included language to make this limitation clear. The ARB further indicated that nothing in SOX’s legislative history indicates that Section 806 should be limited to employees of public companies.

The ARB declined to adopt the First Circuit’s recent decision in Lawson, which held in a case of first impression that Section 806 did not apply to employees of private companies that contract with public companies. The ARB took the following positions: (i) the First Circuit’s interpretation would result “in an entirely implausible reading” of Section 806 because, for example, Section 806 provides for reinstatement and a contractor could not reinstate an employee of the public company; (ii) the caption of Section 806, “employees of publicly traded companies,” is not determinative; (iii) other whistleblower protection statutes that do not define “employee” have been construed to cover employees of contractors; and (iv) employees of contractors fit within the definition of “employee” in the applicable regulations (29 C.F.R. § 1980.101 defines “employee” as “an individual presently or formerly working for a company or company representative,” and “company representative” is defined as “any officer, employee, contractor, subcontractor, or agent of a company”).

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