October 20, 2016

KEEPING CURRENT: SEC Enforcement Expands Scope of Prohibited Provisions in Employment-Related Agreements

The U.S. Securities and Exchange Commission (SEC) announced two significant enforcement actions against an employer based on confidentiality and release provisions that the SEC asserts will discourage employees from participating in the SEC’s whistleblower program. These enforcement actions follow last year’s similar action against KBR, Inc. and expand the scope of prohibitions to certain waivers of remedies in employment separation agreements. Companies that have not evaluated the language in their agreements with current and former employees in light of these actions should consider doing so now. Those that have evaluated such agreements should consider whether the SEC’s recent enforcement action warrants making further changes.

The SEC recently entered into two cease-and-desist orders concerning confidentiality and release provisions in employment- and separation-related agreements. On August 10, 2016, the SEC announced that BlueLinx Holdings Inc., a publicly traded Atlanta-based building products distributor, had settled charges that it violated whistleblower protection rules adopted by the SEC under the Dodd-Frank Wall Street Reform and Consumer Protection Act. On August 16, 2016, the SEC announced that Health Net, Inc., a publicly traded California-based health insurance provider, had settled charges that it violated the same whistleblower protection rules.

In the BlueLinx and Health Net cases, the SEC alleged that each company violated SEC Rule 21F-17 by using confidentiality and release provisions that required outgoing employees to waive their rights to monetary recovery if they filed a charge or complaint with the SEC or another federal agency. As the Health Net order states, “[s]uch restrictions on accepting financial awards for providing information regarding possible securities law violations to the [SEC] undermine the purpose of Section 21F and Rule 21F-17(a).” Like the SEC action against KBR last year, there is no evidence that either BlueLinx or Health Net actually sought to enforce the relevant provisions. Rather, the SEC determined that the mere presence of such language is sufficient to constitute a violation.

In consenting to the SEC’s cease-and-desist order, BlueLinx agreed to do the following:

  • Amend all confidentiality and severance agreements to include explicit text that such agreements do not limit (i) the employees’ ability to report possible securities law violations to the SEC and other federal agencies without notice to the Company, and (ii) the employees’ right to receive any award for information provided to any government agencies;
  • Make reasonable efforts to contact former employees who had executed severance agreements after August 12, 2011 (the effective date of Rule 21F-17) to notify them that BlueLinx does not prohibit former employees from providing information to the SEC staff or from accepting SEC whistleblower awards; and
  • Pay a $265,000 penalty.

Health Net agreed to do the following in its cease-and-desist order:

  • Make reasonable efforts to contact affected former employees who had executed the relevant waiver and release agreements from August 12, 2011, to October 22, 2015, and notify them that Health Net does not prohibit former employees from seeking and obtaining a whistleblower award from the SEC; and
  • Pay a $340,000 penalty.

Background

BlueLinx. The SEC order states that BlueLinx had been requiring employees to enter into a variety of employment- or severance-related agreements, and that most of them contained some form of confidentiality provision prohibiting the employee from sharing with anyone confidential information concerning BlueLinx that the employee had learned while employed by BlueLinx, unless compelled to do so by law or legal process. These provisions also required employees either to provide written notice to BlueLinx or to obtain written consent from the company’s legal department prior to providing confidential information pursuant to any legal process. None of the BlueLinx confidentiality provisions contained an exemption permitting an employee to provide information voluntarily to the SEC or any other regulatory or law enforcement agency.

Health Net. According to the SEC order, until October 22, 2015, Health Net’s severance agreements included a waiver and release of claims provision that listed various potential claims against Health Net that a departing employee waived as a condition of receiving cash severance payments and receiving other voluntarily provided consideration from Health Net. During the period from August 2011 to June 2013, Health Net’s waiver and release provision specified that although the severance agreement did not prohibit a former employee from participating in a government investigation, it did prohibit the former employee from filing an application for, or accepting, a whistleblower award from the SEC. That provision was deleted in June 2013 as part of Health Net’s regular review of its agreements, but Health Net added another provision that “by signing this Release, [the Health Net] Employee, to the maximum extent permitted by law . . . waives any right to any individual monetary recovery . . . in any proceeding brought based on any communication by Employee to any federal, state or local government agency or department.”

SEC Position. The SEC’s position on these provisions, which the SEC made clear in KBR, Inc. and has now reiterated in the BlueLinx and Health Net enforcement actions, is that such clauses impede employees from engaging in protected whistleblower activity, and thus are prohibited by SEC whistleblower rules. In the case of the BlueLinx agreements, the SEC alleged that the company was forcing employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.

Further, in both BlueLinx and Health Net, the SEC targeted language that expressly acknowledged that although a departing employee could file charges with government agencies, including the SEC, the departing employee waived the right to any monetary recovery in connection with any such charge.

Rule 21F-17 prohibits companies from taking any action to “impede” communications with the SEC about possible securities law violations. The SEC took the position that, by requiring departing employees to forgo any monetary recovery in connection with information provided to the SEC, both of these companies impeded communications with the SEC. As the SEC stated in the BlueLinx order, these provisions removed “critically important financial incentives that are intended to encourage persons to communicate directly with the [SEC] staff about possible securities law violations.”

The Text Required by the SEC in BlueLinx and KBR

The specific language required by the SEC in the BlueLinx and KBR orders is set forth below. In comparing these examples, companies should note that the BlueLinx order involved confidentiality and release provisions in a variety of different documents and agreements. The KBR order involved only a confidentiality provision in a document used by KBR in connection with internal investigations. The Health Net order did not require Health Net to adopt any specific text.

The BlueLinx order required BlueLinx to adopt the following text in its future employment separation agreements:

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.

The KBR order required KBR to use the following text in a confidentiality statement that KBR required for employees who were interviewed in the course of internal investigations:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

What Companies Should Be Doing Now

In our April 2015 client alert discussing the KBR enforcement action, we recommended that:

Companies should review the provisions in their confidentiality agreements and any confidentiality language in their employment agreements, codes of conduct, employment policies, forms and handbooks, employee releases and termination and severance agreements to determine whether the company should amend any of these documents to ensure that, in the words of the SEC’s KBR press release, they do not “in word or deed stop their employees from reporting potential violations to the SEC.” The language that KBR and the SEC agreed upon in the order that settled the SEC enforcement action may provide a model for companies to use when reviewing their employment-related documents and policies. Although the SEC clearly approves of that language, companies should consult with counsel to determine the extent to which that language may serve as a suitable model for their own employment-related materials.

To the extent applicable, companies should also consider modifications to confidentiality agreements and other confidentiality language to reduce their exposure to possible challenges by the NLRB and the EEOC.

The suggestions in our earlier client alert remain advisable in light of the BlueLinx and Health Net enforcement orders. Effectively extending its reasoning in KBR, the SEC now appears to be taking the position that a company violates Rule 21F-17 if its release provisions expressly waive an employee’s recovery of remedies in connection with agency proceedings, even if the agreement expressly acknowledges that the employee may file charges with administrative agencies.

In light of BlueLinx and Health Net, companies should review the confidentiality and release provisions in their employment-related agreements to consider whether those provisions could be viewed as impeding protected whistleblower activities. As a company evaluates what action, if any, to take in light of the latest SEC enforcement action, it should consider, among other things, the specific language of its confidentiality and release provisions and the contexts in which it uses those provisions, which may include, among others, proprietary information agreements, employment agreements, employee severance agreements and even company codes of business conduct and similar policies.