On the heels of the SEC's settlement last week with BlueLinx Holdings for an alleged violation of Dodd-Frank's whistleblower rules via its use of severance agreements that required outgoing employees to relinquish their rights to file complaints with the SEC or other federal agencies in order to receive their severance and other post-employment benefits (reported on here) comes another, similar SEC enforcement action - this time against CA-based health insurance provider Health Net, Inc.
Specifically, Health Net agreed to a $340K penalty for its use of severance agreements that restricted employees' ability to accept financial awards for providing information to the SEC or other federal (or more local) agencies regarding possible securities law violations. In addition to the monetary penalty - as was the case with BlueLinx, Health Net agreed to make reasonable efforts to inform former employees about the Order so that their communications with the SEC and other agencies are not impeded by the allegedly non-compliant severance agreement.
Holland & Hart's takeaways from the BlueLinx action are equally applicable here:
Takeaways
- Time will tell the full impact of the BlueLinx, and prior, cases. There are, however, several immediate noteworthy takeaways:
- The SEC views its whistleblower program as critical to its enforcement program, and it will aggressively punish what it views as attempts to hamper individuals’ ability or incentives to become SEC whistleblowers.
- These cases involved relatively modest civil penalties. Yet the adverse publicity, and the defense costs and proactive undertakings, increase the negative toll of the actions. Moreover, the SEC may feel compelled to ratchet up the sanctions in the next enforcement case, if it feels that companies are not heeding the message from these matters.
- The SEC did not allege that BlueLinx, KBR, or Merrill Lynch actually enforced the problematic provisions. Rather, the provisions’ mere existence constituted the violations.
- The logic of these cases appears to apply to all manner of employer-employee contracts, including employment agreements, confidentiality provisions, agreements signed during an internal investigation, severance agreements, and settlement agreements. Employers thus should be thorough when scouring existing agreements for potential issues.
- Although the companies involved in each of these cases are public companies (or subsidiaries of public companies), Rule 21F-17’s prohibitions are not so limited. Private companies thus should take note of the these cases as well.
- The SEC need not limit its review of agreement language to investigations involving other potential securities law issues. In the BlueLinx and KBR cases, for example, the agreement language alone resulted in SEC enforcement action. Indeed, whistleblowers could tip the SEC about problematic language in agreements. Once an issue does arise, it may be too late to identify and remediate potentially problematic contract language. Companies thus should be proactive in scrutinizing and revising their agreements.
In sum, companies should promptly undertake a legal review and update of existing employee agreements in light of these takeaways.
See also the SEC's release, and additional resources on our Whistleblowers topical page.