Today, the SEC announced that an Atlanta-based company, BlueLinx Holdings, is settling charges that its severance agreements contained provisions that it in its view might impede employees from communicating directly with the SEC about possible securities law violations. The company has agreed to pay a $265,000 sanction and to engage in other corrective actions as described below.

The specific provision at issue provided:

• 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.)

With respect to this bounty waiver, the Commission stated that “by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.”

Although BlueLinx’ severance agreement had several other offending provisions according to the SEC, this case is the first time that the SEC has held that a provision that requires an employee to waive a monetary benefit after signing a severance and release agreement is not enforceable in the context of the Dodd-Frank bounty program.

Specifically, the SEC found that BlueLinx’s agreements violated Exchange Act Rule 21F-17, which provides that “[n]o 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.”

According to the SEC, BlueLinx also violated the Rule by including one or more of the following provisions in addition to the bounty waiver:

• Employee has not and in the future will not use or disclose to any third party Confidential Information, unless compelled by law and after notice to BlueLinx. * * * If the Employee has any question regarding what data or information would be considered by BlueLinx to be information subject to this provision, the Employee agrees to contact BlueLinx’s Legal Department in writing for written clarification.
• [The employee shall] hold in a fiduciary capacity for the benefit of the Company [ ] all Confidential Information….For a period of two years, following the [employee’s] Termination Date, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge Confidential Information.

The SEC determined that, by including the above clauses in its agreements, BlueLinx “raised impediments to participation by its employees in the SEC’s whistleblower program.” The Commission explained its position that “[b]y requiring departing employees to notify the company’s Legal Department prior to disclosing any financial or business information to any third parties without expressly exempting the Commission from the scope of this restriction, BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.”

Blessed Language For BlueLinx

In addition to the $265,000 penalty, pursuant to the settlement, BlueLinx has agreed going forward to include the following language in all of its severance and/or any other agreements with its employees that include prohibitions on the use or disclosure of confidential information relating to the company:

Protected Rights. Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint 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 federal, state or local governmental agency or commission (“Government Agencies”). Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.

Thus, it appears that this language will be considered by the SEC to be an acceptable carve-out provision for company severance and other agreements. However, the final sentence “This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies” in our view goes beyond applicable legal requirements with respect to the EEOC and companies should carefully consider whether this language should be adopted, or something more narrow.

BlueLinx has also agreed to make reasonable efforts to contact BlueLinx former employees who signed any of the Severance Agreements from August 12, 2011 to the present, provide them with an internet link to, or copy of, the Order and provide them with a statement that “BlueLinx does not prohibit former employees from (1) providing information to, or communicating with, Commission staff without notice to the Company; or (2) accepting a whistleblower award from the Commission pursuant to Section 21F of the Exchange Act.”

Immediate Action Items For Companies

Although it is possible that the bounty waiver finding in this case which is the result of a settlement would not withstand court scrutiny for the same reasons that waivers of monetary benefits under federal discrimination statutes have been approved by the courts, the SEC has made clear that it will be scrutinizing company severance and other agreements for language that it perceives as violating Rule 21F-17. To avoid getting on the SEC’s radar with respect to this issue, companies should immediately review their severance and other employee agreements that contain any provisions regarding confidentiality of company information, non-disparagement or similar provisions, to ensure they have a proper carve out for SEC reporting and that they do not contain a waiver of a bounty under Dodd-Frank’s whistleblower program.