SEC Enforcement Action Finds Confidentiality and Waiver Provisions in Severance Agreement Violate Dodd-Frank Whistleblower Protections

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SEC Enforcement Action Finds Confidentiality and Waiver Provisions in Severance Agreement Violate Dodd-Frank Whistleblower Protections

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The SEC has settled an enforcement action with a public company, finding that severance agreements containing a confidentiality provision and a waiver of the right to claim a whistleblower award violate the SEC rule which prohibits impeding whistleblower communications to the SEC. A copy of the order can be found here.

Background

Section 21F of the Dodd-Frank Wall Street Reform and Consumer Protection Act created a system of incentives for corporate whistleblowers to report possible violations of the securities laws to the SEC by providing financial bounties, prohibiting employment-related retaliation, and providing various confidentiality guarantees.  In order to support the purposes of Section 21F, the SEC adopted Rule 21F-17, which provides in part that:

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.

The Severance Agreements

BlueLinx Holdings Inc. entered into various forms of severance agreements with departing employees as a condition to the employees receiving certain severance benefits. The agreements prohibited employees from sharing with anyone confidential information concerning BlueLinx that the employee had learned while employed by the company, unless compelled to do so by law or legal process. The confidentiality provisions contained in the agreements also required employees either to provide written notice to the company or to obtain written consent from the company’s legal department prior to providing confidential information pursuant to such legal process. Certain of the agreements required that employees waive the right to receive whistleblower awards.

The Order

The SEC found that the confidentiality provisions violated Rule 21F-17, impeding participation in the whistleblower program by “forc[ing] … employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.” The SEC found the waiver provision undermined the purpose of Section 21F to encourage communications to the SEC, and also violated Rule 21F-17. The SEC made these findings without any corollary findings that BlueLinx had enforced, or threatened to enforce, the confidentiality or the waiver provisions.

As part of the settlement, BlueLinx will pay a $265,000 penalty and must inform all parties to the severance agreements that it does not prohibit former employees from: (1) providing information to, or communicating with, SEC staff without notice to BlueLinx; or (2) accepting a whistleblower award from the SEC pursuant to Section 21F.

BlueLinx also agreed that all future agreements with employees that restrict the use of confidential information would contain 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.”

Recommendations

While we suspect that confidentiality provisions are included in many employment and severance agreements with no intention of future enforcement in the context of a whistleblower complaint, inclusion of such a provision may, in and of itself, be deemed an impediment to asserting whistleblower rights, and hence a violation of Rule 21F-17. A waiver of a Section 21F bounty is likely a violation of Rule 21F-17.[1]

Accordingly, companies under the jurisdiction of the SEC should proceed with caution when entering into any employment related contract that contains restrictions on the use of confidential information, and should categorically avoid including waivers of whistleblower bounties.  Companies should strongly consider use of a carveout protecting communications to and complaints filed with the SEC, and disclaiming any limits on whistleblower awards.  However, such a carveout needs to be drafted carefully in order to preserve other legitimate uses of confidentiality provisions, and to preserve legitimate limits on recoveries under other statutes and regulations not resulting from whistleblowing.


[1] The SEC subsequently settled a similar enforcement action with Health Net, Inc. with respect to severance agreement language that waived the right to whistleblower bounties. A copy of the order can be found here.