Update: Another SEC Enforcement Action on Whistleblower Waivers and Releases

by Goodwin
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As summarized in our recent alert “SEC Enforcement Expands Scope of Prohibited Provisions in Employment-Related Agreements,” the SEC announced on August 10, 2016 that it had entered into a cease-and-desist order concerning confidentiality and release provisions in employment- and separation-related agreements with BlueLinx Holdings Inc. Less than a week later, the SEC announced that it had entered into a cease-and-desist order concerning substantially similar violations with Health Net, Inc., a publicly traded California-based health insurance provider.

In both the BlueLinx and Health Net enforcement orders, the SEC alleged that the 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 Health Net or BlueLinx actually sought to enforce the relevant provisions. Rather, the SEC determined that the mere presence of such language is sufficient to constitute a violation of the federal securities laws.

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

  • 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

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.” This provision was removed in October 2015.

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. The SEC’s position on these provisions is that such clauses impede employees from engaging in protected whistleblower activity, and thus are prohibited by SEC whistleblower rules.

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.”

What Companies Should be Doing Now

The suggestions in our earlier client alerts on BlueLinx and KBR remain advisable in light of the Health Net enforcement order. Companies should be aware that the SEC 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, is different than the position taken by some other federal agencies. This includes the Equal Employment Opportunity Commission and the National Labor Relations Board, neither of which have whistleblower programs comparable to the SEC whistleblower program.

The Health Net order, which follows less than a week after the SEC’s action against BlueLinx, reinforces our earlier suggestion that 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. This may include, among others, proprietary information agreements, employment agreements, employee severance agreements and even company codes of business conduct and similar policies.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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