August 25, 2016
Securities Law Alert
The SEC recently fined a public company for using language in employment severance agreements that allegedly violated Dodd-Frank’s whistleblower protections, reminding regulated businesses that their confidentiality and employment-related agreements must comply with Section 21F of the Exchange Act. This alert discusses what businesses need to know.
The Securities and Exchange Commission (“SEC”) has been active in recent cases to ensure that employers do not, through their actions and agreements, prevent or impede employees from exercising their rights as whistleblowers under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The whistleblower provisions of Dodd-Frank were included in the 2010 Wall Street reform legislation, but they affect a wide swath of public companies and other regulated entities far from Wall Street. As an example, on August 10, 2016, the SEC fined BlueLinx Holdings Inc. (the “Company” or “BlueLinx”), an Atlanta-based building products provider, for using language in employment severance agreements that the SEC says violated Dodd-Frank’s whistleblower incentive and protection rules.
Dodd-Frank included amendments to the Securities Exchange Act known as the “Securities Whistleblower Incentives and Protection” rules, intended to provide financial incentives and protection from retaliation to whistleblowers. Section 21F of the Securities Exchange Act (the “Exchange Act”) provides that employers must not “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.” 17 CFR 240.21F-17(a).
With respect to BlueLinx, the SEC charged that many of the severance agreements, separation agreements and release agreements used by BlueLinx violated Section 21F. The majority of the BlueLinx contracts addressed by the SEC included a provision barring an employee from sharing any confidential Company information, unless they were compelled by law or legal process to do so. Furthermore, the agreements required employees to notify the Company in the event they were requested to provide information to any third party. To the SEC, this provision made it difficult for employees to voluntarily report securities fraud.
In June 2013, BlueLinx revised its severance agreements, but the new agreements included a provision that the employee “waiv[es] the right to any monetary recovery in connection with any such complaint or charge that the Employee may file with an administrative agency.” The SEC found that this requirement “undermine[d] the purpose of Section 21F” as it removed the well-known financial incentive to report fraud.
As part of the settlement agreement with the SEC, BlueLinx agreed to several undertakings, including the revision of their severance agreements to include a provision outlining the protected rights employees have to communicate with government agencies, including the right to file a complaint or charge and to participate in an investigation, without notice to the Company. Furthermore, BlueLinx agreed to make reasonable efforts to contact all former employees who signed severance agreements from August 12, 2011 (the date the law went into effect) through the date of the settlement. In addition to changing their severance agreements, BlueLinx also agreed to pay a substantial, six-figure fine to the SEC.
The SEC’s settlement with BlueLinx serves as an important reminder to public companies and other regulated entities that their employment-related agreements must not impede the whistleblower incentives and protections of Section 21F of the Exchange Act. Many employers include, in standard form severance agreements, general releases that expressly do not prohibit an employee from filing claims with state and federal agencies, but the employee agrees that he or she gives up the right to recover monetary damages resulting from such claims. These provisions, in the discrimination context—involving claims at the Equal Opportunity Employment Commission or similar state or local agencies—are appropriate and have been blessed by a number of courts. But broader language—referring to all federal, state and local agencies—is too sweeping. The over breadth problem is easily remedied by referring only to “anti-discrimination” agencies. Employers should be revising their standard form severance agreements to make this change.
The broader concern that the SEC has articulated—inhibiting or barring reporting to the SEC of suspected violations of federal securities laws—implicates more than just severance agreements. Confidentiality agreements or provisions, as well as non-disparagement provisions, which routinely appear in a variety of employment-related documents, must be examined and revised if they can be read to prohibit reporting Securities act violations. A catch-all provision, stating, in substance, that “Nothing in this agreement prohibits you from reporting possible violations of federal law or regulation to any governmental agency or regulatory authority, including but not limited to the SEC, or from making other disclosures that are protected under the whistleblower provisions of federal law or regulation,” should be added to these agreements to avoid the type of sanctions imposed by the SEC on BlueLinx.
Finally, the recently enacted federal Defense of Trade Secrets Act (DTSA) mandates that a more detailed notice of whistleblower rights be included in certain employment related agreements, if an employer wishes to take advantage of the benefits (federal jurisdiction and enhanced remedies, among others) provided by the DTSA in trade secrets actions. [Inclusion of this DTSA notice language should be considered as part of the revisions recommended in this alert.]
Nixon Peabody’s team is available to discuss this important issue and help businesses evaluate their separation agreements and other employment-related agreements for compliance with Dodd-Frank and other federal and state laws addressing employee whistleblower rights.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.