Yesterday [August 16], the SEC announced the settlement of yet another action against a company over what is, apparently, the most critical issue facing investors and the U.S. securities markets, the provisions of employers’ release agreements. This follows on the heels of last week’s SEC enforcement action against BlueLinx, in which the company agreed to pay $256,000 and to: (1) amend its severance agreements to make clear that employees may report possible securities law violations to the SEC and other federal agencies without the company’s prior approval and without having to forfeit any resulting whistleblower award, and (2) make reasonable efforts to contact former employees who had executed severance agreements after August 2011 to notify them that the company does not prohibit former employees from providing information to the SEC staff or from accepting SEC whistleblower awards. According to yesterday’s announcement, Health Net agreed to pay a $340,000 penalty for “illegally using severance agreements requiring outgoing employees to waive their ability to obtain monetary awards from the SEC’s whistleblower program” and agreed to notify certain former employees.

We first blogged on this in April 2015 when the SEC announced its first enforcement action against a company for using improperly restrictive language in confidentiality agreements with the “potential to stifle the whistleblowing process” (see, SEC Enforcement Action Against Company Using Contract Language With the “Potential to Stifle the Whistleblowing Process”). Broc has blogged on these actions several times as well. The genesis of these actions was new Section 21F, “Whistleblower Incentives and Protection,” added to the Securities and Exchange Act of 1934 by the Dodd-Frank Wall Street Reform and Consumer Protection Act. In 2011, the SEC adopted Rule 21F-17, which provides in relevant part:

(a) No person may take any action to 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.

Rule 21F-17 became effective on August 12, 2011.

For decades, employers have required terminating employees to advise them of any facts of which the employee is aware that constitute or might constitute a violation of any ethical, legal, or contractual standards or obligations of the company. The following language is typical:

You represent that you have been given an adequate opportunity to advise the Company’s human resources, legal, or other relevant management division, and have so advised such division in writing, of any facts that you are aware of that constitute or might constitute a violation of any ethical, legal, or contractual standards or obligations of the Company or any subsidiary. You further represent that you are not aware of any existing or threatened claims, charges, or lawsuits that you have not disclosed to the Company.

The foregoing language still should be acceptable. Arguably, that was the employee’s fiduciary duty to the company during employment. However, where some employers seem to have gone too far by asking that the former employee not take part in or benefit from any litigation of governmental actions involving such matters. The following is the offending language from the BlueLinx action:

Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with…the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other administrative agency if applicable law requires that Employee be permitted to do so; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency. (Emphasis added by the SEC.)

It would be an excellent idea to double check the language of your severance, release, employment, confidentiality, and other agreement to ensure they do not contain this language.