Recent Whistleblower Protection Actions by SEC and Congress Add Risk to Severance Agreements

by Perkins Coie
Contact

Perkins Coie

Two recent SEC enforcement actions that describe how severance agreements may violate whistleblower protections under the federal securities laws if not properly drafted were the subject of a recent article by Perkins Coie attorneys Luis Mejia, Stewart Landefeld, Eric DeJong and Ann Marie Painter.[1] The authors suggest, and we provide in this update, language to address this and a related federal statutory development, the Defend Trade Secrets Act of 2016. With this suggested language, employers can draft severance agreements to address these concerns, yet protect privileged and confidential information.

SEC’s Enforcement Actions: BlueLinx and Health Net

When an employer provides an employee with a severance package, the employer typically requires a severance agreement with a waiver of the employee’s right to receive future payments. This waiver sometimes includes waiving payments from third parties, which could include government entities, such as the SEC. In two recent cases, the SEC found that the broad language of severance agreements, such as those described in BlueLinx and Health Net, goes too far and violates the SEC’s whistleblower protection rule, Rule 21F-17 (the rule generally prohibits interference with whistleblower communications to the SEC).        

Both severance agreements prohibited former employees from accepting a whistleblower award directly from government agencies. The company in BlueLinx also prohibited employees from disclosing confidential information or trade secrets unless “required to be disclosed by law, court, or other legal process,” provided the employee gave notice to the company.

The SEC alleged that these agreements violated Rule 21F-17, by removing financial incentives intended to encourage persons to communicate with the SEC about possible securities laws violations.

In both cases, the SEC found violations back to August 12, 2011, the date Rule 21F-17 was adopted. The companies agreed to contact former employees who signed the agreements from August 12, 2011 forward and provide them with certain information.

As in its 2015 enforcement action, In the Matter of KBR, Inc., the SEC charged the companies in Health Net and BlueLinx, even though there was no evidence that the companies took action to enforce the offending provisions or prevent an employee from communicating with the SEC.[2] However, these cases underscore the SEC’s position that restrictions may intimidate employees and thereby violate Rule 21F-17.

Remember that you can protect privileged information. The SEC, as it had in KBR, made a significant omission in its Health Net and BlueLinx orders in quoting the language of Rule 21F-17. In both cases, the SEC omitted the language in the rule that expressly permits companies to enforce confidentiality provisions relating to privileged communications. This omission, and the SEC’s mandated language in BlueLinx, may mislead employees by suggesting they are permitted to disclose privileged information to the SEC.

Both recent cases were brought by the same SEC enforcement group, suggesting a broader SEC review of severance agreements. According to news reports, plaintiffs’ lawyers are scrutinizing the severance agreements of several public companies.

Congress Enacts Whistleblower Protection for Disclosure of Trade Secrets

In a separate development, on May 11, 2016, the Defend Trade Secrets Act of 2016 (DTSA) became effective. The DTSA strongly discourages employers from seeking to enforce a confidentiality agreement prohibiting an employee from disclosing proprietary information to the government, if the disclosure is made in the context of reporting a suspected violation of law.

The DTSA, in part, provides immunity for whistleblowers, by shielding from criminal or civil liability an employee who discloses trade secrets to the government. The DTSA requires the employer to provide notice of this immunity in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” The DTSA does not appear to mandate the amendment of any pre-existing agreements, prior to the May 11, 2016 effective date. 

Do note that there is no penalty for not providing the required notice. However, employers who do not provide notice cannot recover punitive damages or attorneys’ fees in an action against an employee alleging violations of the new law.

Language for Companies to Use to Reduce Risks

As shared in our Insights article, we recommend a two-part approach to severance agreements: a “savings clause” and a carefully drafted waiver designed to ensure that an employee waives future payments from the employer, but not payments from governmental agencies such as the SEC. 

Savings Clause for Confidentiality Provisions. The “savings clause” BlueLinx agreed to include in its severance agreements to resolve the SEC’s charges is broader in its application than Rule 21F-17 requires. We continue to recommend the shorter version:   

Nothing in this agreement is intended to or will be used in any way to limit employees’ rights to communicate with a government agency, as provided for, protected under or warranted by applicable law.

Waiver for Severance Agreements. Severance agreements should also include waiver language designed not to violate Rule 21F-17’s prohibition on interference with SEC whistleblower activity:

Employee agrees to waive the right to receive future monetary recovery directly from Employer, including Employer payments that result from any complaints or charges that Employee files with any governmental agency or that are filed on Employee’s behalf.

Because this does not require an employee to waive the right to any future monetary recovery from the government in connection with any communication the employee may have with the SEC, there is no violation of Rule 21F-17. 

DTSA Language. To comply with the DTSA, we suggest this language in governing the use of trade secrets:

Employee may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding.

Alternatively, the company can provide a cross-reference in the agreement to a corporate policy that includes the information in the paragraph above. Companies should continue to have policies and agreements in place to protect the disclosure of trade secrets and confidential information to all others except in the circumstances covered by the DTSA.

The SEC’s BlueLinx and Health Net cases are useful reminders of the need to comply with Rule 21F-17. The DTSA adds an additional risk that companies should be mindful of with respect to the protection of trade secrets. Following the practical suggestions in our article, as outlined in this update, can help companies protect confidential and privileged information while complying with securities laws.

For further details, please refer to the article “Whistleblower Protection Action by the SEC and Congress Impact Severance Agreements” in the November 2016 issue of Insights: The Corporate & Securities Law Advisor (Volume 30, Number 11).

 

 

 

ENDNOTES

[1]Luis R. Mejia, Stewart M. Landefeld, Eric A. DeJong & Ann Marie Painter, Whistleblower Protection Actions Impact Severance Agreements, 30 Insights: Corp. & Sec. L. Advisor, no. 11, November 2016, at 3.  Available now to subscribers and available here February 2017.

[2]Stewart M. Landefeld, Luis R. Mejia, Eric A. DeJong & Ann Marie Painter, Whistleblowers, NDAs and SEC Enforcement Action, 29 Insights: Corp. & Sec. L. Advisor, no. 8, August 2015, at 17.

[View source.]

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.

© Perkins Coie | Attorney Advertising

Written by:

Perkins Coie
Contact
more
less

Perkins Coie on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.