The Securities and Exchange Commission (“SEC”) issued two Cease and Desist Orders that dramatically change the landscape for employee contractual confidentiality provisions, as well as for employee waiver and release agreements.

Public companies generally require their employees, including departing employees, to maintain the companies’ confidential information. Such confidentiality undertakings or covenants appear in a variety of forms, including corporate codes of conduct, employment contracts, severance or separation agreements, waivers and releases, and formal severance plans. These provisions often require the employee to ensure that company confidential information does not find its way to third parties, typically in sweeping language forbidding the employee from sharing corporate confidences with anyone without prior company approval. More nuanced provisions clarify that the duty to maintain corporate confidences does not extend to formal complaints made to a government entity, such as the SEC, EEOC, NLRB, DOL, DOJ, OSHA, etc. The SEC has joined various Department of Labor agencies in attacking confidentiality provisions that are deemed to be overly broad.

According to the SEC, publicly traded companies may not have employees sign agreements that make all corporate information and documents “confidential” and then prohibit any use or disclosure of the confidential information, even when the agreement allows disclosure required by subpoena. The SEC specifically identified contractual requirements that the employee inform a company’s legal department before any disclosure pursuant to subpoena. The SEC’s position is that these provisions “impede” employees from communicating with SEC staff concerning possible securities law violations.

Publicly traded companies also may not have employees waive the right to receive bounties for providing the SEC information concerning reported securities violations. The Dodd-Frank Act created incentive awards for whistleblowers, and the SEC maintains Congress intended the awards to be an important tool for promoting disclosure to the SEC. While many corporate waiver and release agreements specifically allow former employees to file charges and to participate in government investigations, notwithstanding the employees’ waiver of any and all legal claims, the agreements often state that the former employee cannot receive any monetary recovery related to those charges or investigations. This type of provision arguably removes a former employee’s incentive to initiate government investigations, and that is precisely why the SEC has found such provisions to violate its rules. The SEC requires that contractual confidentiality provisions and waiver and release agreements allow employees to provide information to the SEC voluntarily and allow employees to receive financial rewards from the SEC.

The two Orders at issue are BlueLinx Holdings Inc., Exchange Act Release No. 78528 (August 10, 2016) and Health Net Inc., Exchange Act Release No. 78590 (August 16, 2016). The Orders are based on SEC Rule 21F-17(a) which prohibits “any action to impede an individual from communicating directly with the Commission staff . . . including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.” 17 CFR §240.21F-17(a) (2011). In the Orders, the SEC effectively takes the position that the company’s intention in creating the confidentiality agreements and the release agreements is not relevant to a violation of the rule. Apparently the SEC also was not reacting to any actual threat to enforce a confidentiality agreement. Similarly, the SEC expressly notes that it does not require evidence that any person was in fact dissuaded or discouraged from communicating with the SEC. These Orders are based on the existence of the agreements alone.

The Orders require the companies to contact employees who executed the agreements in question and to correct any statement or implication that the employees cannot freely communicate with the SEC, without seeking the approval of the corporate law department, and that the employees cannot accept Dodd-Frank incentive awards. In addition, each company has to pay civil penalties amounting to hundreds of thousands of dollars.

In light of the SEC’s stance in these two Orders, and the civil penalties involved, publicly traded companies should consult counsel concerning revising employee waiver and release agreements and employee confidentiality agreements, as well as confidentiality provisions in employment agreements, codes of conducts, severance plans and/or agreements, policy manuals, employee handbooks, and other documents imposing confidentiality obligations on employees. Moreover, we can anticipate other agencies taking the same position vis-à-vis confidentiality. For more information, see Sherman & Howard’s blog post on August 11, 2016.

If you have questions about this advisory, please contact any member in our Labor & Employment Practice Group.

Sherman & Howard L.L.C. has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and does not create an attorney-client relationship between any reader and the Firm.

©2016 Sherman & Howard L.L.C.                                                                                 August 29, 2016