The United States Supreme Court issued a landmark decision today in Lawson, et al. v. FMR, LLC, et.al., expanding whistleblower protections under the Sarbanes-Oxley Act of 2002 (SOX) to employees of private companies who are subcontractors or contractors for public companies. The eight-to-one decision, with a majority opinion delivered by Justice Ginsburg, is the first describing the scope of protection from retaliation for securities-fraud whistleblowers. In its decision, the Court highlighted that employees of contractors and subcontractors for public companies, including lawyers, mutual fund managers, and accountants, have often been exposed to retaliatory measures such as discharge and demotion for engaging in whistleblower activities, due to gaps in federal whistleblower protections. No more.
The Court granted certiorari to address the specific question of whistleblower protections in SOX applied to employees of privately-held companies working as contractors and subcontractors for public companies. SOX was enacted to safeguard investors in public companies and restore trust in financial markets. The specific provision of the Act, § 1514A, states that “no [public] company…, or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].” The case arose on the heels of Senate reports and investigations of the Enron scandal showing widespread retaliation against investment bankers, brokers, and accounting firm professionals who raised concerns of potential securities fraud. As the Court explained, "The Sarbanes-Oxley Act contains numerous provisions aimed at controlling the conduct of accountants, auditors, and lawyers who work with public companies. [Citations] Given Congress’ concern about contractor conduct of the kind that contributed to Enron’s collapse, we regard with suspicion construction of §1514A to protect whistleblowers only when they are employed by a public company, and not when they work for the public company’s contractor." Slip Op. at 3.
Plaintiffs, Julie Lawson and Jonathan Zang, are former employees of different FMR, LLC, subsidiaries. FMR is a private company that contracts to advise and manage the Fidelity family of mutual funds. While the mutual funds are public companies, as is common in the mutual fund industry, the funds have no employees themselves who would otherwise act as gatekeepers to detect or deter fraud. Lawson alleged that she suffered adverse actions culminating in constructive discharge as a result of raising concerns that her employer overstated expenses associated with operating mutual funds. Zang also alleged that his employment was terminated after reporting inaccuracies concerning certain funds managed by the company in a statement intended for the SEC.
The Supreme Court decision today reverses the First Circuit Court of Appeals’ split decision holding that the term "employee" in § 1514A whistleblower protections refers only to employees of public companies and does not cover a contractor’s own employees. The decision paves the way not only to prevent future fraud on investors in public companies, but also provide meaningful remedies to whistleblowers subjected to retaliatory measures by their employers - whether such are publicly-held companies or not.
Employees of privately-held contractors and subcontractors exposing securities fraud in public companies may now seek remedies such as reinstatement or backpay for retaliation resulting from protected whistleblower activity. If you have experienced retaliation as a result of whistleblowing activity at your employer that contracts or subcontracts for a public company, contact Adetunji Olude.
Tuesday, March 4, 2014
Justice Liu Leads the Questioning as California's Supreme Court Hears Oral Argument in Duran v. US Bank
Hundreds waited in line and packed into the California Supreme Court today to hear oral argument on Duran v. US Bank, the most important case on the manner of proving a class action yet to be heard in California. The sitting judges of Alameda County’s Complex division were barely able to squeeze into the Court after waiting in line with non-profit advocacy organization leaders, plaintiffs’ and defense practitioners, and classes full of high school and law students. The crowd was dwarfed, however, by the millions around the state who will be impacted by the Court’s anticipated decisions on whether: in a wage and hour misclassification class action, the defendant has a due process right to assert its affirmative defense against every class member; whether a plaintiff can ever make class claims if a defendant has such a due process right; and whether statistical sampling, surveys and other forms of representative evidence can prove classwide liability in such a case. At stake in Duran is no less – if the Supreme Court decides the questions presented – than whether the class action is a viable mechanism in California for proving violations of law by a company or agency against a large group of people. Whether or not all of the justices were prepared to address this monumental question, Justice Goodwin Liu appeared ready.
In Duran, the plaintiffs alleged that Business Banking Officers (BBOs) at US Bank were misclassified as exempt from overtime and other California wage requirements based on the notion that they are outside salespeople, when, in fact, they were expected to, and did, spend the bulk of their time selling from inside the bank branches. After long and contentious litigation, the plaintiffs prevailed at trial before Judge Robert Freedman of the Alameda County Superior Court’s complex division, winning close to $15 million for over 200 BBOs. The trial court heard testimony from a survey of 19 randomly selected BBOs, plus the two named plaintiffs, plus about 17 defense witnesses, and received thousands of documents. US Bank refused to agree to any trial plan where the trial court would determine liability based on a selection of witnesses in the class action, but insisted that they had a constitutional right to call every class member individually to be heard on liability.
Experts determined that the sampling methodology used would have a 13% margin of error in determining liability based upon the 21 class members’ testimony, but, the trial court weighed the evidence and determined that, with the case as presented, the “point estimate” was that 100% of the class was misclassified as exempt. In other words, as between US Bank being liable to 87% and 100% of the class, the proof supported a conclusion that 100% of the class was misclassified.
Justice Liu immediately keyed in on the key issue, asking Edward Wynne, plaintiffs’ counsel, whether it was acceptable that up to 13% of the liability could be erroneous, based upon the margin of error. Wynne and Michael Rubin, who argued for the plaintiffs and amici (including the Impact Fund and the California Employment Lawyers Association), respectively, emphasized the 100% point estimate, based upon not only the experts, but upon the numerous other sources of common evidence of liability – corporate documents, the sample testimony of BBOs, adverse inferences from missing documents, and the testimony of US Bank’s own officials.
Importantly, Wynne and Rubin argued that even if some of the class members were not misclassified (as some had testified in declarations that the court rejected as lacking credibility and as lacking any representative character – i.e., being of no evidentiary value), the Court in Sav-On v. Superior Court (2004) 34 Cal.4th 319, and in denying review to Bell v. Farmers Ins. Exch. (2004) 115 Cal.App.4th 715 (2004) (Bell III), implicitly recognized that some degree of error is accepted – in Bell III, it was 9% - and urged that there are numerous mechanisms that courts can use to ensure due process, so that defendants’ aggregate liability is not greater than appropriate. Rubin reiterated Sav-On’s holding that classwide liability can be found where the challenged practice is “widespread but not uniform.” Where a common factor accounts for the (for example) 10% of the class to whom liability is not owed, that group can be segregated out of the class – e.g., a particular job title, or particular dates of employment. A second phase/bifurcated trial of damages, involving claim forms and surveys, could help assure that the correct overall extent of liability is paid by a corporate defendant.
Justice Liu questioned US Bank’s attorney as to whether the company was taking the position that courts could never find liability through statistical extrapolation. US Bank’s attorney indicated that the company was not making such an argument, and assured the justices that Sav-On (involving what he called “task misclassification”) would not be undermined by embracing the company’s position, which the company argued only applied when liability arose from individualized circumstances. Justice Liu noted that – notwithstanding US Bank’s protestations – the company was taking a “very categorical” position that in this kind of case (a misclassification involving outside sales) reliance on statistical evidence for a liability finding would violate the company’s due process.
Justice Liu addressed what he called the “overhang of uncertainty” that the company was arguing could not be dispelled by statistics, but only by unlimited live testimony. He pointedly asked defense counsel, “None of those inferences [created by statistics and other forms of common proof] can dispel any uncertainty, except to hear testimony straight from a person’s mouth?” Justice Liu then addressed the fallacy that an employee’s recollections – in a situation where neither he nor the company kept precise records – would necessarily be superior to other forms of class action proof. “Employees themselves are making estimates. These things are very imperfect,” he presciently observed. Justice Liu asked the defense counsel and his listening colleagues, "Why would we privilege that information – live testimony – which is all relying on inference and gap-filling – over evidence concerning policies and company expectations?”
Ultimately, as Wynne argued, defendants are entitled to due process, but not absolute process. Class actions are superior in many employment, consumer, and other matters where small individual damages or the threat of retaliation would tend to prevent wronged individuals from stepping forward to assert their rights, and where judicial economy would best be served by deciding a disputed legal question once: here, whether the BBO position was primarily an inside (non-exempt) or outside sales job. Though plaintiffs did not ultimately oppose a remand for a damages proceeding (the first damages finding was based upon data with a 43% margin of error), the Supreme Court should uphold class certification and the classwide liability finding in Duran, giving the trier of fact’s findings and the trial court’s handling of the proceedings over many years the due deference they deserve.
I hope the whole Court was listening to Justice Liu's questions and their answers from counsel. If he authors the final opinion, I am optimistic that it will be a fair result, for not only companies, but for workers and consumers around California.
Posted by Bryan Schwartz Law