It is not a surprise that employees are routinely asked to sign confidentiality agreements at the beginning of their employment as well as separation agreements at the end. The problem is that sometimes such agreements limit the employees' rights in a way that violates the law.
Here, I am talking about the Dodd-Frank Act and the SEC Rule 21F-17. The Dodd-Frank Act granted financial incentives to whistleblowers (between 10% and 30% of the penalty that the SEC would collect if their information led to an SEC action). Rule 21F-17, which became effective in August 2011, prohibits the companies to interfere with the employees reporting potential securities law violations. It says: "(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."
NeuStar Inc., a public company, used a non-disparagement clause in its severance agreements that forbade former employees to engage in "any communication that disparages, denigrates, maligns or impugns" the company, including communications with accountants, reporters, investors, customers, and regulators. A breach of this clause could result in the loss of severance benefits. From August 12, 2011 to approximately May 21, 2015, at least 246 employees signed agreements with such clause, and the SEC order indicates that at least one of them wanted to talk to the SEC but could not because of the agreement. As a result of settlement, NeuStar amended its nondisparagement clause to exclude federal regulators and paid a penalty in the amount of $180,000.
This is not an isolated enforcement of this Rule. Earlier in 2015, the SEC brought an enforcement action against KBR, Inc., a public company. KBR required employees who acted as witnesses in certain internal investigations to sign a confidentiality clause that threatened disciplinary actions if such persons discussed the investigations with outside parties without the prior approval of KBR's legal department. These investigations included possible violations of securities laws. The company settled with the SEC by agreeing to amend the offending clause and paying a $130,000 penalty.
Yet another enforcement action was brought against BlueLinx, an Atlanta-based building products distributor, in August 2016. BlueLinx required all departing employees to waive their rights to whistleblower monetary awards should they file a charge or a complaint with the SEC or other federal agencies. BlueLinx settled with the SEC by agreeing to amend the clause and paying a $265,000 penalty.
The SEC has just brought another enforcement action for violation of Rule 21F-17, this time against Blackrock, Inc., for a clause in its separation agreements that removed the right to claim whistleblower awards from departing employees who chose to become whistleblowers. Blackrock actually voluntarily stopped using this clause in March 2016, but by then over 1,000 departing employees had already signed it. BlackRock's penalty was $340,000.
The lesson is an obvious one here: companies should review their separation and confidentiality agreements to ensure they do not violate the employees' rights to file complaints with the SEC and receive financial rewards for doing so.
This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga. Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of corporate, securities, and intellectual property law.