By Mark Wiletsky and Brian Hoffman
The U.S. Securities and Exchange Commission (SEC) is cracking down on severance agreements that prohibit former employees from contacting regulators or accepting whistleblower awards under threat of losing their severance payments or other post-employment benefits. More and more, the SEC’s Enforcement Division has announced new cases filed against, and settlements made with, companies which restrict former employers from blowing the whistle through severance agreement clauses. Many of the scrutinized companies are not in the securities industry, and the problematic contract language is not as obvious as you may think.
Dodd-Frank Act Established Whistleblower Programs
The 2010 Dodd-Frank Act established whistleblower programs for the SEC as well as the Commodity Futures Trading Commission. Under the SEC’s whistleblower program, eligible whistleblowers who provide unique and useful information about securities-law violations to the SEC can collect significant awards of 10-to-30 percent of a penalty that exceeds $1 million.
Essential to the program, however, are the anti-retaliation provisions, which prevent whistleblowers from suffering adverse actions as a result of their whistleblowing activities. In addition, an SEC rule, Rule 21F-17, prohibits any action that impedes an individual from communicating with the SEC about possible securities violations. Rule 21F(h)(1) of the Dodd-Frank Act prohibits employers from taking retaliatory actions against whistleblowers who make protected reports.
Award Waivers, Confidentiality, and Non-Disparagement Clauses
Severance agreements often contain boilerplate language, occasionally including clauses that restrict a former employee from disclosing any confidential company information and disparaging the company or its officers and managers. Agreements also sometimes require that a former employee agree to waive any awards or monetary recovery should he or she file a complaint with a governmental agency. These severance provisions are exactly the type of restrictive language that the SEC has been targeting.
In its first whistleblower protection case involving restrictive language, in 2015 the SEC charged a global technology and engineering firm with a violation of Rule 21F-17. The company had required witnesses involved in internal investigations to sign confidentiality agreements that stated that the employee could face discipline or termination if they discussed the matter with outside parties without the prior approval of the company’s legal department. Because the investigations could involve possible securities-law violations and the clause prohibited employees from reporting possible violations directly to the SEC, the SEC found that the restrictive language in the confidentiality agreements impeded whistleblowers. The company agreed to pay a $130,000 penalty to settle the charges and voluntarily amend its confidentiality statements to add language to inform employees that they may report possible violations to the SEC and other federal agencies without company approval or fear of retaliation.
Recent SEC Cases Targeting Severance Agreements
Additional whistleblower severance agreement cases highlight other clauses targeted by the SEC. In mid-2016, the SEC charged a building products company with using severance agreements that required former employees to waive their rights to a monetary recovery if they filed a complaint with the SEC or another government agency. The clause stated that the departing employee was required to waive possible whistleblower awards or risk losing their severance payments and other post-employment benefits. The company did not admit liability, but agreed to settle with the SEC for a $265,000 penalty.
Also in mid-2016, the SEC charged a financial services company for using language in agreements that restricted employees’ ability to disclose information to government agencies. Problematic wording included restricting any disclosure of confidential information, except when disclosure is required by law, in response to a subpoena, or with the company’s permission. (See also our prior client alert on the above three cases.)