Company Settles with SEC for Violating Whistleblower Protection Rule in Severance Agreements | Practical Law

Company Settles with SEC for Violating Whistleblower Protection Rule in Severance Agreements | Practical Law

The SEC announced that BlueLinx Holdings Inc. has settled charges that it violated Rule 21F-17 under the Exchange Act by using severance agreements that required outgoing employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or other federal agencies.

Company Settles with SEC for Violating Whistleblower Protection Rule in Severance Agreements

by Practical Law Corporate & Securities
Published on 11 Aug 2016 • USA (National/Federal)
The SEC announced that BlueLinx Holdings Inc. has settled charges that it violated Rule 21F-17 under the Exchange Act by using severance agreements that required outgoing employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or other federal agencies.
On August 10, 2016, the SEC announced that BlueLinx Holdings Inc., an Atlanta-based building products distributor, has settled charges that it violated Rule 21F-17 under the Exchange Act by using severance agreements that required outgoing employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or other federal agencies. Rule 21F-17, one of a set of rules implementing the Dodd-Frank Act's whistleblower protections, prohibits any person from impeding an individual from reporting suspected wrongdoing to the SEC, including through enforcement or threatened enforcement of a confidentiality agreement.
The SEC's settlement order with BlueLinx stated that the company added the monetary recovery prohibition to all of its severance agreements in mid-2013, almost two years after the SEC adopted Rule 21F-17. Although the severance agreements permitted the employees to file a charge with various administrative agencies as otherwise allowed by law, the restrictive language in the severance agreements required departing employees to waive "the right to any monetary recovery in connection with any … complaint or charge" that the employee filed or risk losing their severance payments and other post-employment benefits. Administrative agencies were defined in the agreement to include the following:
  • EEOC.
  • NLRB.
  • OSHA.
  • SEC.
  • Any other administrative agency.
The agreements also restricted departing employees from sharing the company's confidential information or trade secrets unless compelled to do so by law and only after first notifying the company and obtaining the company's written consent.
As part of the settlement order, BlueLinx agreed to:
  • Pay a civil penalty of $265,000 to the SEC.
  • Amend its severance agreements to provide that employees may communicate with and participate in investigations or other proceedings by the SEC and other federal agencies without:
    • the company's prior approval; and
    • forfeiting any resulting whistleblower award.
  • Make reasonable efforts to contact BlueLinx employees who signed severance agreements after August 12, 2011 (the date Rule 21F-17 took effect) to provide them with an Internet link to the order and to notify them that the company does not prohibit former employees from:
    • providing information to the SEC staff; or
    • accepting SEC whistleblower awards.
  • Certify to Enforcement Division staff that it has complied with its undertakings.
  • Cease and desist from violating Rule 21F-17.
The following language was approved by the SEC as part of this settlement order:
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.
While not binding on any other party, the settlement serves as a reminder that companies should review all existing employment, confidentiality, severance, and settlement agreements to ensure there are no provisions that could be interpreted as impeding employees from reporting suspected wrongdoing to the SEC or prevent them from receiving whistleblower awards.
To learn more about whistleblower protections under the federal securities laws, see Practice Note, Whistleblower Protections Under Sarbanes-Oxley and the Dodd-Frank Act.