02.10.2017 (Revised)

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Updates

The SEC’s recent enforcement actions addressing severance agreement language that may violate whistleblower protections under the federal securities laws were the subject of an article by Perkins Coie attorneys Luis Mejia, Stewart Landefeld, Eric DeJong and Ann Marie Painter. In the article published in Insights: The Corporate & Securities Law Advisor, 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. However, as we previously wrote, 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 full 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). 

 © 2017 Perkins Coie LLP


 

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