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C-Suite Severance Agreements and the SEC

On August 16, 2016, the U.S. Securities and Exchange Commission (SEC) issued a press release announcing the imposition of penalties against an employer for “illegally using severance agreements requiring outgoing employees to waive their ability to obtain monetary awards from the SEC whistleblower program.”  The statement indicated that Health Net Inc., had prevented departing employees from filing an application for SEC whistleblower awards if they wanted to receive their severance payments and post-employment benefits. The press release was issued only a few months after the National Law Review reported that the SEC would be issuing such penalties for violations of the Whistleblower Protection Rule.

For anyone who follows the SEC, the recent penalties were expected after the Office of the Whistleblower, which became effective in July 2010, announced that they would be seeking out employers with confidentiality, separation and employment agreements that prevented employees from contacting the SEC as a prerequisite to obtaining financial benefits.  Under the terms of the Whistleblower Program, a C-Suite executive or other individual who provides useful information to the SEC can receive 10-30 percent of any penalty that exceeds 1 million dollars. The penalties relate to Rule 21F-17 of the Dodd-Frank Wall Street Reform and Consumer Protection Act which encourages the reporting of potential unlawful conduct to the SEC by providing that “[n]o person may take any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.”

Although the SEC has not applied these same penalties to privately held companies, one could speculate that this may occur in the future based on the expansion of the whistleblower provisions of the Sarbanes-Oxley Act by the United States Supreme Court in the case of Lawson v. FMR, LLC, 134 S. Ct. 1158 (2014).  In Lawson, the Supreme Court determined that whistleblower protection applied to employees of private companies that contracted with public companies.

C Level Severance Agreements and Confidentiality Clauses

Most C-Suite severance agreements contain (or continue) some type of confidentiality clause which prevents senior level executives from disclosing confidential information without the company’s permission.  Such confidentiality clauses take on several forms including:

Vague Description

Boilerplate phrases such as “any and all confidential information” may be included in your severance agreement.  Unfortunately, the vague nature of such clauses does not accurately define what information a C-Suite executive is prevented from disclosing either to the SEC or to the public at large. This type of confidentiality clause may be so broad as to attract the attention of the SEC in light of their recent activity to protect whistleblowers.

Confidential Label

Where a severance agreement provides that documents labeled as confidential cannot be disclosed, there is little ambiguity.  Based on the recent SEC press release, however, such clauses may catch the attention of the Commission depending on the exact wording used.  An experienced executive employment attorney can review your agreement and confirm that appropriate waivers are included that allow you to contact the SEC, if necessary, without waiving your financial incentives.

Specific Items

Some confidentiality agreements refer to specific items such as trade secrets, patent information or product information.  The specificity of these clauses better identifies what is to be kept confidential by senior level executives, but there can still be concerns if the language is overly broad.

If you are a C-Suite Executive and you have not reviewed the terms of your confidentiality and/or severance agreements to confirm that they comply with SEC whistleblower rules, you should consider doing so with an experienced executive employment lawyer. Confidentiality clauses may prevent you from disclosing company information.  For your protection, the agreement should contain waivers specific to the SEC and you need the eyes of an employment attorney who can look at your agreement from the perspective of a litigator preparing for trial after the relationship between you and your former employer ended.

About the Author

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George Birnbaum

Since 1980, sophisticated business people have relied on George to apply the meticulous preparation, attention to detail, and devotion to his clients he learned from fabled trial lawyer Louis Nizer. A graduate of Harvard College and Harvard Law School, George has over 35 years of distinguished deal-making, litigation, mediation and arbitration experience which he has used to negotiate high-stakes agreements for senior executives and select business clients throughout the United States.