In two recently announced settlements, the U.S. Securities and Exchange Commission (SEC) adopted a strict interpretation of the whistleblower protections afforded under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). In doing so, the SEC imposed monetary sanctions on companies for including language in employment-related agreements that it asserts deters employees from reporting securities law violations to the SEC's Office of the Whistleblower (and other agencies). The companies also agreed to other remedial measures as part of their settlements with the SEC. Whether or not the SEC's asserted positions would ultimately prevail in court, in light of these settlements and the SEC's apparent enforcement position, employers should consider reviewing their policies, codes of conduct, and employee agreements to ensure that that they do not include provisions that the SEC may assert deter employees from coming forward with information about potential securities law violations. Even those companies not subject to the SEC's jurisdiction may wish to undertake such measures, as the SEC's stance is similar to that now taken by the National Labor Relations Board (NLRB) and the Equal Employment Opportunity Commission (EEOC) in their respective efforts to ensure that employers do not adopt or enforce policies that may deter employees from contacting or cooperating with those agencies.
SEC Strictly Construes Impediments to Whistleblowing Under Dodd-Frank
Like many employers, BlueLinx Holdings included in its separation agreements a provision prohibiting separating employees from disclosing the company's confidential or proprietary information to third parties without the company's permission, and required employees to give the company notice of any request or requirement to produce such information. BlueLinx's release agreements also included the somewhat common provision that while separating employees were not prohibited from filing a charge with government agencies or providing them relevant information, they were nevertheless prohibited from recovering monetary relief in connection with such actions. Many employers have adopted such a "no additional recovery" approach in light of the EEOC having previously condoned it (although it has now apparently abandoned this position).
In In The Matter of BlueLinx Holdings Inc., the SEC determined that the requirement that employees give notice to their employer and obtain the company's permission before disclosing confidential information "impeded" whistleblowing under Rule 21F-17 of Dodd-Frank where the company did not also expressly make clear that communications with the SEC were not subject to his requirement. Rule 21F-17 provides, in relevant part:
(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.
This position asserted by the SEC in BlueLinx follows its settlement of two other matters involving KBR in April 2015 and Merrill Lynch in June 2016. In each matter, the SEC disapproved of the company's use of agreements that it asserted restricted an employee's ability to disclose information to government agencies.
Regarding the "no additional recovery" provision in BlueLinx's release agreement, the SEC asserted that BlueLinx's restriction on the recovery of monetary awards forced employees leaving the company to waive possible whistleblower awards or risk losing their severance payments and other post-employment benefits. The SEC maintained that prohibiting employees from accepting awards "impedes" whistleblowing and therefore is contrary to the stated congressional purpose underlying Dodd-Frank's provisions "to encourage whistleblowers to report possible violations of the securities laws by providing financial incentives, prohibiting employment-related retaliation, and providing various confidentiality guarantees."
In addition to a $265,000 monetary penalty, as part of a settlement agreement with the SEC, BlueLinx agreed (1) to amend its severance agreements to make clear that employees may report possible securities law violations to the SEC and other federal agencies without BlueLinx's prior approval and without having to forfeit any resulting whistleblower award; and (2) to make reasonable efforts to contact former employees who had executed severance agreements in the last several years to notify them that BlueLinx does not prohibit former employees from providing information to the SEC staff or from accepting SEC whistleblower awards.
The SEC underscored its decision to impose stiff penalties on employers for violations of Rule 21F when, the week after issuing its decision in BlueLinx, it fined California-based health insurance provider Health Net $340,000 for entering into severance agreements requiring employees to waive their right to monetary recovery in any administrative proceeding. Health Net agreed to pay the penalty and take remedial action even though the severance agreements at issue explicitly informed employees of their right to communicate with the SEC and participate in any subsequent investigations. Health Net also agreed to advise former employees that had entered into the alleged impermissible agreements that the agreement did not prohibit them from seeking and obtaining a whistleblower award from the SEC.
Employers Should Review Their Employee Agreements and Policies
These recent decisions make clear that the SEC is aggressively pursuing companies that utilize provisions in agreements or policies that arguably discourage whistleblowers from volunteering information about possible securities law violations. As noted above, other federal agencies, including the EEOC and NLRB, are similarly pursuing corrective measures against employers. In response, employers should consider revising release agreements if they provide for the waiver of monetary relief in connection with employees' participation in administrative proceedings. Similarly, employers should review other employment-related documents, including company policies and other agreements with employees that include restrictions on the disclosure of company information, and revise them as needed. Any such revisions should be made thoughtfully to maintain the maximum protection of company confidential information. Also, in light of the SEC's imposition of penalties and pursuit of other remedial measures where it maintains companies have used offensive provisions, employers may wish to consider whether or not to address agreements already in place with employees—especially those companies subject to the SEC's jurisdiction.
While considering revisions to employee agreements in light of these SEC developments, employers also should consider adding language to address the recently enacted federal Defense of Trade Secrets Act (DTSA). As explained in our previous WSGR Alert, in order to be eligible to recover exemplary damages or attorneys' fees in a trade secrets misappropriation action under the DTSA, employers must have provided employees with notice that, in certain circumstances, the DTSA grants immunity from civil or criminal liability to individuals who confidentially disclose an employer's trade secrets. Finally, in light of very recent developments involving mandatory arbitration agreements that include class action waivers, employers should consult with counsel as to whether its forms and policies should be revised.
