On September 9, 2024, the Securities and Exchange Commission (SEC) announced settlements with seven public companies relating to their use of separation agreements that the SEC says violate whistleblower protection rules by preventing the employees from claiming any monetary reward for future whistleblowing. The companies agreed to pay over $3 million combined to settle the SEC’s allegations.
The Agreements: Severing the Severed from Whistleblower Awards
While most of the employment and separation agreements at issue explicitly did not prevent the employees from reporting misconduct to the government, they prevented the employees from reaping any financial benefit from such reporting. The SEC took the position that these provisions impeded potential whistleblowers from reporting misconduct to the SEC.
The agreements generally allowed employees to participate in investigations or report misconduct to federal government. However, they also required employees to waive their rights to recover monetary awards for assisting with an investigation conducted by a federal agency. Examples of the offending language include:
Example 1 (emphasis added):
I further acknowledge that I am not waiving and am not being required to waive any right that cannot be waived under law (including, without limitation, the right to file an administrative charge or participate in an administrative investigation or proceeding); provided that I disclaim and waive any right to share or participate in any monetary award resulting from the prosecution of such charge or investigation or proceeding.
Example 2 (emphasis added):
Excluded from this waiver and release is any claim or right that cannot be waived by law, including all claims arising after the date of this Agreement and the right to file a charge with or participate in an investigation conducted by an administrative agency, including but not limited to, claims for worker’s compensation and unemployment insurance benefits. However, [employee] is releasing his right to recover any monetary or non-monetary relief (including but not limited to compensatory, liquidated, or punitive damages, attorney’s fees or costs) in connection with a charge and/or investigation filed or initiated by him, another individual, group of individuals, with any federal or state agency, for any claim or cause of action of any type arising at any time prior to the effective date of this Agreement.
Some of the offending agreements also included provisions that barred employees from any participation in government investigations. The SEC also found these agreements to violate the whistleblower protection rules.
The Rule: Whistleblower Incentives and Protection
The SEC charged the companies with violations of the SEC’s Rule 21F-17, which was added to the Exchange Act as part of Section 21F, “Whistleblower Incentives and Protection,” in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The SEC stated in its order against the companies that purpose underlying these provisions was “to encourage whistleblowers to report possible violations of the securities laws by providing financial incentives, prohibiting employment-related retaliation, and providing various confidentiality guarantees.”
Rule 21F-17, which became effective on August 12, 2011, reads 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.
The SEC acknowledged that none of the companies had taken action to enforce these monetary award waivers, nor had it seen any evidence that the affected individuals decided not to share information with the SEC due to the agreements. However, the SEC found that these agreements “created impediments to participation in the commission’s whistleblower program by having the employees forego the critically important financial incentives that are intended to encourage persons to communicate directly with the commission staff about possible securities law violations.”
Public Policy Concerns
Companies have long drafted the whistleblower provisions of their separation agreements such that they are not later found unenforceable as against public policy. The Supreme Court in Town of Newton v. Rumery, 480 U.S. 386, 392 (1987) held that “a promise is unenforceable if the interest in its enforcement is outweighed in the circumstances by a public policy harmed by the enforcement of the agreement.” Since the Rumery decision, some lower courts have evaluated such agreements by balancing “public interest in having information brought forward that the government could not otherwise obtain” with the public interest in “encouraging parties to settle disputes.” U.S. ex rel. Hall v. Teledyne Wah Chang Albany, 104 F.3d 230, 233 (9th Cir. 1997). Courts have found that provisions preventing individuals from pursuing whistleblower claims are unenforceable. See, e.g., U.S. ex rel. Longhi v. Lithium Power Tech., 575 F.3d 458, 474 (5th Cir. 2009) (“enforcing the release and indemnification clauses would encourage individuals guilty of defrauding the United States to insulate themselves from the reach of the FCA by simply forcing potential relators to sign general agreements invoking release and indemnification from future suit.”)
Crafting Severance Agreements
Companies seeking to craft severance or employment agreements should be careful not to run afoul of the SEC’s efforts to enforce Rule 21F-17. Severance and separation agreements are written to maximize releases and fully resolve any potential issues following an employee’s departure. To make sure the agreements are not found unenforceable as against public policy, companies often include a provision that makes clear that the agreement does not prevent the employee from reporting misconduct to the government or participating in a resulting investigation. Based on these new SEC enforcement actions, such language may not be enough to protect the company. If the agreement also stifles the employee’s incentives to report, the SEC may take the position that the agreement impedes its whistleblower program and violates the law.