Sarbanes-Oxley Whistle-Blower Provision May Extend to Privately Held Companies

The Supreme Court ruled earlier this month in Lawson v. FMR LLC that two former employees of privately held companies were entitled to the protection of the SOX whistle-blower provisions.  This decision was made based on the employees allegations that their private company employers retaliated against them after they reported alleged shareholder fraud.  Private employers are now faced with another regulation that may impact them and employers should consider how and if the act applies to their organization and whether to develop policies to avoid violations of the act.

The Sarbanes–Oxley Act of 2002, also known called Sarbanes–Oxley, “Sarbox” or “SOX”, is a United States Federal Law that enhanced standards for all U.S. public company boards, management and public accounting firms. The bill was enacted as a reaction to a number of major corporate and accounting scandals. One portion of SOX is a whistle-blower section that provides protection against demotion, discharge or discrimination for employees who “blow the whistle” on conduct the employee reasonably believes constitutes mail, wire and bank fraud, securities fraud, or a violation of any SEC rules and regulations. The whistle-blower section protects employees who make a complaint to the authorities as well as employees who pursue an internal complaint. In the Lawson case, although Lawson argued that they were not governed by SOX and the whistle-blower protection section, of “SOX” The Supreme Court rejected Lawson’s argument and held that SOX creates a cause of action for employees of non-public companies that perform work for public companies. 

What Should Private Employers Consider?

All private employers should determine if they are a vendor, subcontractor or contractor for a public company and then review policies and ensure there is at a minimum a policy in place which prohibits retaliation against employees who engage in protected activity including whistle-blowing regarding items covered by SOX. The policies should also have a process in place that encourages whistle-blowing and that protects employees who use the whistle-blowing process from retaliation.