The SEC Nixes Contractual Waivers of Whistleblower Recoveries

In April 2015, the SEC announced in a first-of-its-kind enforcement action that certain KBR, Inc. confidentiality agreements violated the whistleblower protections of the Dodd-Frank Act by requiring employees and former employees to first notify the company of a potential violation before contacting the SEC. (See this Doug’s Note.) In the past two weeks, the staff went a step further by bringing enforcement actions against BlueLinx Holdings, Inc. and against Health Net, Inc. for their respective requirements that departing employees contractually waive their rights to future whistleblower monetary recoveries.

What happened…

The SEC found that both BlueLinx and Health Net entered into agreements with departing employees that violated Rule 21F-17(a) under the Securities Exchange Act, which provides 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….”

Several provisions in various BlueLinx agreements were called into question, including the following:

“[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 (emphasis added).”

and

“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 improper Health Net provision read as follows:

“nothing in this Release precludes Employee from participating in any investigation or proceeding before any federal or state agency or governmental body . . .however, while Employee may file a charge, provide information, or participate in any investigation or proceeding, by signing this Release, 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.”

The staff concluded that these provisions violated Rule 21F-17(a) by removing critically important financial incentives that are intended to encourage persons to communicate directly with the SEC staff about possible securities law violations.

The penalties…

BlueLinx agreed to:

  • Include the following provision in similar agreements going forward:

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.”

  • Make reasonable efforts to contact all employees who signed such agreements in order to inform them of the revisions to the objectionable provisions; and
  • Pay a civil penalty in the amount of $265,000.

Health Net agreed to:

  • make reasonable efforts to contact former employees who signed the severance agreements in question and provide them with an Internet link to the SEC’s order and a statement that Health Net does not prohibit former employees from seeking and obtaining whistleblower award from the SEC,
  • provide the SEC with written, certified evidence of compliance with the foregoing, and
  • pay a civil penalty of $340,000.

Action steps…

The SEC seems determined to live up to the promise made by Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, back in 2015 following the KBR enforcement action to “vigorously enforce” Rule 21F-17(a). The rapid succession of the BlueLinx and Health Net enforcement actions, even where there is no evidence that a former employee was actually deterred from making a whistleblower claim, may indicate that more such enforcement actions are in the offing.

Therefore, companies should promptly:

  • Review, and modify as necessary, any existing confidentiality, employment, severance or similar agreements (and related internal processes) to comply with these recent enforcement actions by clearly permitting SEC reporting by whistleblowers and by deleting any waivers of whistleblower monetary recoveries.
  • Communicate these modifications to any persons currently bound by a revised agreement.
  • Educate all personnel and advisors regarding the prohibition of Rule 21F-17 (which is not limited to contract provisions), particularly in the event of an internal investigation regarding a potential violation.

All the best,

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