SEC CONTINUES BRINGING ENFORCEMENT ACTIONS AGAINST COMPANIES FOR RESTRICTIVE LANGUAGE IN CONFIDENTIALITY AND SEVERANCE AGREEMENTS THAT COULD STIFLE WHISTLEBLOWERS
In separate actions on August 10, 2016 and August 16, 2016, the Securities and Exchange Commission (“Commission”) has again brought enforcement actions against companies for having confidentiality provisions in their agreements that in the Commission’s view violate the federal securities laws by stifling whistleblowers.
The August 10, 2016 announcement, which comes on the heels of the Commission’s enforcement action last year against KBR Inc., came in an action brought against BlueLinx Holdings Inc., a public company, for violating Rule 21F-17 enacted by the Commission effective August 12, 2011 pursuant to the Dodd-Frank Act. The Dodd-Frank Act includes provisions aimed at encouraging whistleblowers to report possible violations of the securities laws to the Commission through a combination of measures, including financial rewards, confidentiality protections and prohibitions on employer retaliation.
Rule 21F-17 provides in part, as follows:
“(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”
Even after the adoption of Rule 21F-17, BlueLinx had required employees who were to receive severance benefits to enter into a severance agreement that contained the following language:
“[The Employee shall not] disclose to any person or entity not expressly authorized by the Company any Confidential Information or Trade Secrets….Anything herein to the contrary notwithstanding, you shall not be restricted from disclosing or using Confidential Information or Trade Secrets that are required to be disclosed by law, court or other legal process; provided, however, that in the event disclosure is required by law, you shall provide the Company’s Legal Department with prompt written notice of such requirement in time to permit the Company to seek an appropriate protective order or other similar protection prior to any such disclosure by you… Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with…the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other administrative agency if applicable law requires that Employee be permitted to do so; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency. (Emphasis added.)
The Commission in its order instituting a settled administrative proceeding found that such language “raised impediments to participation by its employees in the [Commission’s] whistleblower program” because “by requiring departing employees to notify the company’s Legal Department prior to disclosing any financial or business information to any third parties without expressly exempting the Commission from the scope of this restriction, BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.” Moreover, the order indicated, “by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.”
Without admitting or denying the charges, BlueLinx agreed to pay a $265,000 civil money penalty to settle the charges and to amend its severance agreements and other applicable confidentiality agreements to include the following provision:
“Protected Rights. Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.”
BlueLinx also agreed to make reasonable efforts to contact former employees who entered into severance agreements after August 12, 2011 to notify them of the order, that BlueLinx will not prevent them from contacting or providing information to the Commission staff without notice to BlueLinx, and that they may accept a whistleblower award from the Commission.
In a second enforcement action brought on August 16, 2016, the Commission in its order instituting a settled administrative proceeding against Health Net, Inc., found that language in its severance agreements requiring employees to waive rights to whistleblower awards for information provided to the Commission violated Rule 21F-17. Without admitting or denying the charges, Health Net agreed to pay a $340,000 civil money penalty. Health Net also agreed to make reasonable efforts to contact former employees who entered into severance agreements after August 12, 2011 to notify them of the order and that Health Net will not prohibit them from seeking and obtaining a whistleblower award from the Commission.
In the BlueLinx and Health Net matters, as well as the KBR matter last year in which the Commission found a Rule 21F-17 violation for language in KBR’s confidentiality agreements that prevented employees from discussing witness interviews in internal investigations with anyone without advance authorization from the company’s general counsel, the Commission apparently was not aware of any instances in which the companies had attempted to enforce the offending provisions.
Although some may regard the Commission’s application of Rule 21-F as being extremely broad in scope, it should be noted that the Commission in recent years has publicly highlighted its concerns in this area and has now brought three enforcement actions. In light of the current environment, it is prudent for companies to review their agreements and practices to make sure that they do not prevent or restrict the ability of their employees to report possible securities or other federal law violations to the SEC or other governmental agencies and to collect whistleblower awards. It is also advisable for private companies (particularly those that contract with public companies) to focus on this issue.
This e-Bulletin was prepared by William Ross. Mr. Ross is of counsel to the law firm of Hirschfeld Kraemer LLP, and represents clients on business matters, including the formation, operation, acquisition, disposition and dissolution of business entities.